Global
In last month’s newsletter we highlighted that “complacency” had taken hold across
markets and that what might shake this could come from China (big economic
stimulus) or Japan (reversal of monetary policy). Whilst we still await news from
China, the Japanese central bank has moved the bond yield band from 0.5% to 1%
which is like an interest rate hike and should lead to the yen appreciating over the
next 6 months or so. Whether this will lead to Japanese investors moving out of US
treasuries back to higher yielding bonds at home may take time to unwind. But this
may have ramifications towards the “yen carry trade” and lead to unwinding of more
riskier asset classes, including emerging markets.
What has shaken complacency though has been the “out of the blue” downgrade of
US credit by Fitch from triple A to AA+. The principal reason given was the ongoing
fiscal deterioration over the next three years and general government debt. We
would have expected a more negative reaction to have played out through global
currencies and bond yields, but all seems to have been taken on board without
blinking an eye. That said the dollar has appreciated against most emerging market
currencies whilst the long-end of the US bond curve has risen (US10-year) leading to
a steepening of the bond curve and possibly explains the selloff in markets.
Our view is that the Fitch downgrade just highlighted all the problems we know about
in the US and thus a healthy fall in markets globally. Volatility may keep elevated for
some time , especially given data from the US continues to show a very robust
economy and unless this reverses soon will lead to the narrative towards a possible
interest rate hike by the FED in September, becoming a “consensus” view.
India, although in “overbought” zone had become the “most loved” market for both
domestic and foreign investors, the latter especially given the ongoing problems in
China. We noted Uday Kotak’s comment that their Japanese Small Cap fund was
now US$2.5bn and that US$500M came in only last month. We view this recent
correction in markets as just that and remain constructive given our view that
earnings will start to upgrades from the back of this year into 2024. The big risk to
this is both agri and commodity prices rising sharply and thus inflation spiking, ie
tailwinds becoming headwinds.
India
1QFY24 earnings season so far indicates domestic cyclical demand momentum
continues. Bank loan growth continues to be healthy, while NIM has seen
moderation due to an increase in the cost of deposits. Credit costs continue to
remain benign with no negative surprise on the asset quality front .Cap goods
companies delivered strong earnings backed by strong govt. infra push. Also,
discretionary consumption (auto, spirits, internet, real estate, leisure, etc.) have
provided in-line or better-than-expected results. The biggest drag on aggregate
earnings so far in Q1FY24 results is the commodity pack (metals, RIL, chemicals
etc), which has been impacted by lower realisations, however strong double-digit
domestic volume growth in steel and cement companies led by the strong capex
supported their earnings. IT firms are seeing weakness in discretionary spend across BFSI, technology, and communication verticals as enterprises are focusing more on
projects with better ROI and cost optimization. However, at the same time
companies are confident about the long-term demand given the emergence of
newer technologies.
Overall results have been in line with consensus estimates albeit that we have not
really witnessed many earning’s upgrades, in fact the opposite with IT taking the lead
with most downgrades.