Is the worst over for the stock markets? Here's what analysts think

Stock market outlook: The S&P BSE Sensex and the Nifty50 have been mostly resilient - as compared to their global peers - amid this uncertain phase

The stock market correction seen earlier this week triggered by an unexpected rise in interest rates by Bank of Japan (BoJ) that led to Yen carry trades, and economic data from the United States (US) that stoked fears of one of the world’s largest economies slipping into recession, seems to have stabilized for now.

Most global frontline benchmarks have recovered some ground since then. Back home, the S&P BSE Sensex and the Nifty50 have been mostly resilient – as compared to their global peers – amid this uncertain phase.

That said, analysts at Jefferies and Julius Baer suggest that the recent stock market correction was more to do with technical factors and fund flows rather than fundamental reasons, and the worst may not be over just yet.

The hike coinciding with the weak US employment data is certainly unfortunate, wrote Christopher Wood, global head of equity strategy at Jefferies in his weekly note to investors, GREED & fear, given Japanese Prime Minister Fumio Kishida’s sensible policy of trying to encourage domestic investors to invest into equities.

“The reality is that this has been a correction driven by technical factors, the selling of leveraged positions, rather than anything fundamental. The longer BoJ takes to normalise monetary policy, the bigger will be the carry trade and the greater will be the ultimate disruption. Unfortunately, listed securities are now in danger of another wave of forced selling from investors over exposed to illiquid investments,” Wood cautioned.

In the last few days, most global markets suffered losses, with the Nikkei 225 index slipping the most (over 9 per cent), followed by Straits Times, KOSPI, Taiwan Weighted, Shanghai Composite and Nifty50 that shed between 2 per cent and 7 per cent, data shows.

FTSE, CAC 40 and the DAX also lost up to 2.2 per cent during this period. In the US, the S&P 500 and the NASDAQ slipped up to 1 per cent this week.

While markets are likely to remain highly choppy in the near term, analysts at Julius Baer believe that there is no reason to panic, as they see few signs for an impending recession in the US.

The recent market action, they also said, has little to do with fundamentals, and much to do with market technicals and flows, which have become increasingly stretched in recent weeks and months.

The current consolidation phase in the stock markets across the globe, they said, is both healthy and necessary, as there has been too much enthusiasm, reflected by overextended investor positioning.

“We do not see any significant changes in fundamentals for Japanese stocks. Fundamentally, the US economy is cooling, but there are few signs of the vicious circle that would lead to a recession. The US Federal Reserve is expected to cut their interest rates gradually over the coming months. In this backdrop, investors are advised not to panic," wrote Mark Matthews, head of research for Asia, Julius Baer in a recent coauthored note.

In this backdrop, Matthews suggests investors can start putting together an ‘equity shopping list’, i.e. a list of desired stocks that have not yet been bought due to valuations or uncertainties about the economic or geopolitical environment. Equities, he said, have become more attractive again.

Wood, on the other hand, has become ‘tactically cautious’ on Indian stocks and said that he would look to put in one-third of his investible surplus in India at the current levels. From a long-term perspective though, he remains bullish on Indian equities, and has 26 per cent of global long-only in Indian stocks.