Global
Our “non-consensus” view of global GDP slowing, resulting in earnings growth being negatively impacted increasingly became a factor that markets started to worry about. Indeed, at one point US 10-year bond yields fell below 1.2% before consolidating around 1.24%. Maybe the soothing words of the Federal Reserve Chairman that he still needs to see economic and job growth pick up before looking to tighten/taper eased concerns with ample liquidity pushing markets to new highs again. We may have some time to wait as recent second quarter GDP growth and jobs data fell short of expectations. Our view remains that the Jackson Hole meeting of finance ministers will be a pivotal event as to direction for interest rates/tightening. We can say with certainty though that any tapering by the FED would be no earlier than December 2021.
The big news came from China where the clampdown on the tech sector reverberated across the world. No doubt these moves are towards social equality (i.e labour), not necessary absolute equality, whilst reducing the power of tech corporates. Its tough to calculate the possible fallout from this but in some ways, China seems to be a step ahead of other countries in trying to tackle the increasing social divide. All of this led to outflows in Emerging Market Funds where China exposure is high. Till the messaging from China government becomes loud and clear we may see EM outflows. The good news is that this comes at a time when the number of tech IPOs in India is rising rapidly and in our view we could see foreign flows moving to India to capture the growth potential.
We think markets will continue to run hot in August and even if our concerns over global growth do start to materialise, we think markets will see the positive side of lower interest rates/no tightening for longer and hence push markets higher. Thereafter would we see markets trying to factor in lower earnings and possible pullback in global equity valuations.
India
Covid worry is abated but not yet over as few states are still struggling with high positivity rate. Other Asian countries have also seen sudden surge in cases. While the vaccination is happening but still far from herd immunity.
Corporate commentary on post covid economic recovery is positive but majority of them were qualifying guidance with possible third wave risk. Hence, we find the pent-up demand or recovery to be less swift than we noticed post first wave given more risk averse corporates, esp financiers.
Inflation risk to earnings was visible in Q1 and we noticed marginal cuts in FY22 earnings. Interestingly, FY23 earning is still largely intact implying that market is considering the current disruption as transitory.
While global growth is slowing but recent monthly print by India on PMI, E-way bills, tax collections, government capex and corporate earnings are indicating growth revival post lifting lockdown in June. We expect growth trend to sustain as we have busy festive season approaching, albeit with some caution around third wave.
Portfolio stance
Overarching theme of lower for longer interest rate, higher liquidity and opening of economies will keep market buoyant in near to medium term. However, we would be watchful of the events unfolding in China, global growth scare gaining more prominence and signal around liquidity unwinding.
Given the above backdrop, we continue to focus on bottom-up portfolio for each sector.