Global
The past month has seen central banks in Europe, UK, Australia raising interest rates followed by “hawkish” statements of more to come as inflation continues to be stickier than expected. Moreover, the Federal Reserve Chairman Powell reiterated that potentially two more rate hikes may be required this year. We would have thought that this hawkishness would mean delaying interest rate cuts by at least a quarter and a resultant pullback in markets globally. Nothing of the sort! The narrative has now moved to a soft landing in the US with inflation slowly heading South, a Goldilocks scenario. The VIX is showing no signs of heading higher and in our view “complacency” has taken hold across markets.
What will shake this complacency may come from China or Japan where both respective currencies are depreciating fast. For China this means the pick-up in the economy is way below estimates and hence a “big” stimulus package is coming. For Japan, all eyes are focussed on when they may reverse their monetary policy and increase interest rates (similar to what Turkey has just done). In our experience both the currency and bond markets are leading indicators of potential problems/positives ahead. Watch this space!
We are retaining our base case that the FED will cut rates later this year given our view that the last leg to fall (namely rents) will bring down inflation quickly over the oncoming months, and that the recession in Europe/UK will do the same. This leaves Asia in a sweet spot to lower interest rates quicker than the West and hence our overall positive view on the India economy and market. br>
For India, (see below) we have witnessed new highs for the indices over the past few weeks and if earnings hold up then as stated previously the next leg will be for earnings upgrades in the second half of the fiscal year as the multiplier affect of investments starts to work its way through the economy. This in our view will be the main catalyst for markets to move higher and justify the demanding valuations.
One final point is that the volatility we expected for markets globally has not materialised at all this year. Perhaps, all the known problems were priced in, but the positives such as AI were not. For the time being it does not pay to go against the consensus “goldilocks” bullishness, but the complacency does keep us up at night!
India
Q1FY24 Earnings : Overall we expect NIFTY50 to deliver a flat YoY growth with Financials and consumer staples leading the way and delivering upbeat growth. This will be offset by weak IT. Auto and Telecom expected to be stable. Overall if one were to look beyond June quarter, street expects next three quarters in FY24 will see strong recovery and end the FY24 with ~15% earnings growth.
Whilst monsoons are catching up quickly, we still remain concerned over El Nino. Historically, El Nino has led to a poor monsoon and weak farm output. Heightened El Nino risks along with disinflating food prices could hurt farm incomes. Besides, subdued rural consumption along with weak exports and deflating WPI could weigh on overall demand and above earnings optimism.