Moneycontrol Pro Panorama | Markets show signs of fatigue, traders and investors cautious

Looking at the cautious positions of mutual fund managers, short build-up by traders, it is better to tread carefully.

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A record short selling build-up in the derivatives segment by foreign portfolio investors was seen late last week as traders decided to take directional bets. The recent chain of events led by the Adani-Hindenburg issue, George Soros’s speech and Putin’s speech have all increased downside pressure on the markets.

However, this time around, the mutual fund players seem to have outsmarted traders. Reports say the average cash holding of the top 20 mutual fund houses by Asset Under Management (AUM) was at a 25-month high of 5.9 percent. A year ago, in February 2022, cash holding was 3.1 percent.

Mutual funds are not known to time the market as efficiently as traders do, but in the current scenario both traders and investors have shown caution, which is a cause for worry.

After a strong budget, markets have been rattled by the Adani issue and have failed to recover from it. Add to that a lower-than-expected earnings season which has kept the Indian market valuation high.

The one-year forward price-earnings (P/E) multiple of the Nifty 50 Index is 18, nearly 10 percent higher than the 10-year average P/E multiple of the index. Indian markets are trading at a 25 percent premium to other emerging markets compared to a historical premium of 15 percent.

The market depth displays structural weakness, with the mid-cap and small-cap stocks falling by as much as 25-30 percent even though the Nifty is only five percent from its peak. Some smaller stocks have fallen by 70 percent. More than 500 stocks have fallen by 50 percent in the past two years while another 500 are down by 30 percent. But for a few index heavyweights, most of the market is in a bear market.

Global markets are also showing signs of fatigue. The US markets on Tuesday posted their biggest fall in 2023 on the back of a strong flash PMI reading, which could force the Fed and other central banks in the advanced economies to hold interest rates higher for longer. As Ajay Bagga argues in his column, ''The no landing scenario is negative for markets because higher rates for longer increase the downside risks for equities, particularly for high debt companies that will see higher interest payments for longer.''

Another worry is retail participation in the Indian market. Though their participation has come down in the cash market, it has increased substantially in derivatives. According to a SEBI report, active traders have increased by 500 percent since 2019, but only one in 10 is profitable and less than one percent was able to beat FD rates.

Looking at the cautious positions of mutual fund managers, short build-up by traders, growing tension between the US and Russia and the falling global markets, it is better to tread carefully.

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Technical Picks: Hind Unilever, Bajaj Auto, Hindustan Aeronautics, NTPC and Turmeric (These are published every trading day before markets open and can be read on the app).

Shishir AsthanaMoneycontrol Pro