Tuesday, August 2, 2016

RISK REWARD RATIO INCREASES...STAY IN CASH

The global equity markets are swelling up their levels and technical are revealing very clearly that markets across the globe are entering into over brought zone. The markets across the globe have entered into a uncharted territory where global indices are mostly in the high levels and the risk reward is hardly measurable. Fundamentals are also away from the numbers of the indices which has created a wide gap. Moving ahead looking at the profitability numbers of the companies across the global index it’s quite surprising that markets are driven by liquidity and that liquidity doesn’t have any fundamental back up. Lets make the search little narrow where we find out Global 500—Fortune’s Total revenue shrank from $31.2 trillion in fiscal 2014 to $27.6 trillion in 2015, or a fall of 11.5%. Profits dropped by 11.2%, to $1.48 trillion. So profits are not getting printed. By back of shares has manipulated the market and fooled the economic growth.  U.S. companies have spent a stunning $2.1 trillion on share buybacks over the past five years.  So Buy backs are playing their games.  

 There are many reasons to worry as profits will decline more as China economy is going through slowdown phase, Brexit might have little affects now but later on banking industries profits wall take a major hit. Sharp depreciation of the dollar has made corporate profit to suffer for US companies. Japan is struggling with its stimulus package followed with problems to low crude prices affecting the other major countries. In between the US economic growth is also very low as compared to the expectation to boost the climate of investments.  US corporate investments have also declined due to the sharp depreciation of dollar and also low demand of energy segment creates immense threat for long term investments in the economy.

The absence of real reason for the global indexes to climb is the matter of trillion dollar thought.  Everyone is looking towards the stimulus package to drive the stock markets up but that’s going to be a short term story and this is the place where the investor will get into the trap. It’s already a trap and investors are being provoked that new highs of the global indices are on the anvil. But from where this growth will come is being hardly taken into account. Getting into cash is the most prudent decision as risk reward ratio has increased and its being more being ignored.

 Equities are getting into risky zone and Bond buyers appetite across the globe is growing stupendously. Foreign buyers are poised to push their record 40 percent share of the U.S. corporate-bond market even higher as they seek to escape negative yields in other part of the market. 24 countries, including Russia and India, that could drive future demand for U.S. corporate debt, based on the proportion of corporate holdings compared with U.S. Treasuries. If those countries switch 10 percent of their Treasury holdings to corporate credit, the move would spur more than $380 billion of corporate-bond buying. Hence the bond market is growing and negative yields and zero interest rates of Euro-zone will push up the demand for the US bond market.

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