In January, BoA-Merrill Lynch had warned that the high levels of risk appetite presaged a correction, which is exactly what happened. It, however, advises investors not to jump back into the markets just yet. That’s because, it says February sentiment is cautious enough to steady markets but not yet pessimistic enough for an unambiguous contrarian buy signal.

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What kind of trades should contrarian investors initiate? The firm suggests that contrarian investors “should be positioned for the following: US dollar depreciation, yen or euro appreciation, global bank outperformance, tech sector underperformance, UK equity outperformance, lower bond yields". It also says that investors looking to buy emerging market stocks should wait for more bullish price action from Chinese equities and the US dollar.

A net 59% of global emerging market fund managers are underweight in the Indian market. Although steep valuation is the reason for this, it does increase the odds of a rally should the finance minister spring a pleasant surprise in the Union Budget.