Rising interest rates in all eventuality can apply the brakes on a rising stock market. Of late, returns from market indices, especially mid- and small-cap indices have dwindled. "Interest rates act like gravity on valuations; higher the interest rates in a country, lower are the equity valuations. It is an inverse correlation
Reasons such as rise in oil prices, faltering health of public sector banks, increasing inflation among others may lead to the equity market finding new lows in the near future. The offset is that corporate earnings have been robust this quarter (top and bottom lines) for a substantial portion of the market. The question is what level will crude become an impediment to earnings, and we think we are already at levels that will result in a dampening of consumer willingness to spend.
That has repercussions for equities and continued rise in crude is likely to impact markets negatively
What to do: These macro economic factors should not deter a long term investor in equities and equity mutual funds. We would point out though, that the macro conditions can change quickly, so investors need to work within an asset allocation framework and stick to a plan that takes advantages of moves in the market, rather than letting these moves shake them out of a long term investment plan
After the recent reclassification of mutual funds, tracking the performance by investors may become easier. Going forward, investors will benefit by focusing on their fund's relative performance against its benchmark as well as the peer group during different timeframes
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