Bulls beware! Top 4 risks that investors should watch out for in October

FII Outflows:

Foreign institutional investors pulled out more than Rs 10,000 cr from the cash segment of Indian equity markets in September while DIIs were also net sellers to the tune of Rs 300 cr, as of data collected on September 29 from Moneycontrol.com.

"The decline in the domestic equity market ahead of the September expiry series was primarily led by FIIs selloff to the tune of more than Rs. 10,000 crores. An increase in the US dollar index for an extended period as foreign investors sought refuge from the risk posed by pandemic saw a dollar outflow from the emerging markets," Dinesh Rohira - Founder, CEO - 5nance.com told Moneycontrol.

"Further, the investors preferred safe-haven assets like the US Treasury after an aggressive run-up in the equity market despite a contrasting economic data with a grim outlook," he said.

US Presidential Election:

The next big challenge for Indian equity markets is to deal with volatility in the run-up to the US Presidential elections, along with domestic State elections. The volatility is not just in equity markets but also in the Yellow metal space.

“US Fed will not meet again until after elections (November 5th is next FOMC), and that its 18-month policy review of AIT delivered no new measures such as negative policy rates, yield caps, a faster pace of balance sheet expansion or a shift in existing purchases from Treasuries/MBS to Credit,” Edelweiss Professional Investor Research said in a note.

“Fiscal cliff, uncertainty on US elections, Covid19 resurfacing, Brexit etc. will remain key uncertain issues. QE can contain volatility spikes and market drawdowns, but it doesn't prevent them,” it said.

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The market has been volatile lately with significant corrections seen in the US markets. However, the bounce-back also has been very sharp in the market. The factors concerning the market are upcoming US elections,” Naveen Kulkarni, Chief Investment Officer, Axis Securities told Moneycontrol.

A rise in COVID cases:

The world tally of COVID-related cases has crossed more than 33 million cases worldwide while for India the figure is slightly above 6 million. The rise in COVID-related cases has also increased the possibility of another round of lockdowns especially in Europe which could delay the global economic recovery.

“Corrections are a part of the bull market and it is difficult to time them. The equity market has rallied sharply post March 2020 as investors moved from panic to optimism,” Nimesh Chandan, Head of Equities, Canara Robeco Mutual Fund told Moneycontrol.

“Currently, equity investors globally are worried about the second wave of Covid-19 in many countries,” he said.

Market Valuations:

After rallying over 50 percent from the March lows, Indian market took a breather in September. The recovery in the market was largely on the back of liquidity, and expectations of a rebound in the economy both domestic and global which made valuations slightly expensive as earnings have more or less remained the same.

“The markets had rallied strongly after the post-COVID collapse on the back of higher liquidity and the gradual unlock which led to a steady improvement in economic activity. It was inevitable that there would be a pause for breath and September was largely that,” Hiren Ved, Director, and CIO, Alchemy Capital Management told Moneycontrol.

“The near term outlook for the market will be driven by the pace at which the economy opens up, the trend in aggregate consumer demand, the overall liquidity situation and the earnings announcements and management commentary in the Q2 results,” he said.

Indian equity markets have been trading at cyclically expensive valuations reflecting a quick road to normalcy. At a recent swing high of 11,800 Nifty traded at a PE of more than 19.2 times of FY22 EPS.

That leaves little room for gains which we have continually highlighted in our high-frequency data sets and communication, Edelweiss Professional Investor Research said in a note.

Chandan of Canara Robeco Mutual Fund said that valuations have moved up significantly from what they were 6 months back and are factoring a better growth trajectory from next year.

“If the incoming data points challenge these assumptions, that could trigger a correction,” he said.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.