September 23, 2020
September 23, 2020
- Positive signs of economic recovery in India, both in the wider economy and equity markets suggest this is a good time for long-term investment in India.
- Softness in the Eurozone’s PPI suggests ongoing struggles with deflationary pressures, while the ECB ponders scaling back its Pandemic Emergency Purchase Programme in favour of other options.
One Big Takeaway
While India remains one of the emerging markets worst affected by COVID-19, recording an extreme drop in the second quarter of the year and delivering the worst economic performance of the G20, a number of economic indicators now suggest signs of a recovery.
In August, the country’s Purchasing Managers’ Index registered its first expansion since March, a positive development for the manufacturing sector. Other encouraging signs include the improvement of mobility indicators, a rise in vehicle registrations and the growth of daily electricity usage. There is also no notable inflationary pressure as wholesale prices continue to contract despite rising retail prices and a drop in the speed of currency circulation. All of these developments paint a picture of an economic recovery, making the country attractive for long-term investment.
With the worst of global growth figures now likely behind us, international investor risk appetite has returned to Emerging Market Equities. Flows into Indian equities have already picked up, closing the gap to the major markets. This restoration of confidence has been fueled by the relaxation of ownership limits for foreign investors, which was put in place April 1st of this year, enabling the country to outperform all other emerging markets.
While the current price-earnings ratio sits at 27.9, driven by weak earnings over the past few quarters, analysts predict that in the next 12 months this will move to 23.1, an earnings growth of around 15%. This prediction is based on the expectation that the country's gross domestic product will recover by 7-10% by2021. Given the current signs of economic recovery this is a realistic assumption.
Though this market will remain volatile, it is expected to continue to perform well, particularly for investors buying into actively managed funds that pick and choose the right stocks.
Chart of the Week
Analyst ratings of the S&P500 companies for the final quarter of 2020 were broadly more optimistic than the start of the year.
Out of a total of 10,256 ratings on S&P stocks, 52.8% had Buy rating, 40.6%Hold, and 6.6% Sell. Healthcare, Communications Services and Energy are the sectors to receive the highest proportion of Buy ratings – despite the energy sector seeing the most significant decrease in Buy ratings. Utilities and healthcare are the sectors that have been most upgraded. Intriguingly, IT stocks are still concentrating a high proportion of buy recommendations even despite the appreciation of tech stocks this year.
Also of note is the elevated ratio of buy and sell ratings compared with the average of the past five years (51% Buys, 43.2% Holds, and 5.8% Sells), which reflects the continued volatility in the market.
Bank of Japan monetary policy remains unchanged for now
TheBoJ have kept their monetary policy setting unchanged, maintaining its policy rate and 10-year yields target at -0.10% and “around zero”, respectively. Their forward guidance is to “keep short and long-term interest rates… at their present or lower levels." This leaves ample room for asset purchases, despite keeping upper limit at JPY 12trn annually. If the situation were to deteriorate, with the job market still weak, we might yet see further interventions by the BoJ.
Fed sets out stall on next rate hike
At last week’s FOMC meeting, the US Federal Reserve indicated the next rate hike maybe years away, with maximum employment and an inflation rate at 2% first needed.Jay Powell remained tight-lipped on forward guidance, with few clues on the drivers for the pace of asset purchases. According to the Fed, quantitative easing has been successful in calming markets and supporting the flow of credit to households and businesses. But while purchases continue at their current pace, there is evidence – confirmed by Google searches for new homes – that mortgage applications have now peaked. With growth and jobs on the agenda, Powell will be hoping for a fiscal boost from politicians in Washington.
Data to Watch
- 30 Sept: The release of September’s eurozone inflation figures will indicate whether last month’s negative CPI were indeed, as Christine Lagarde claimed, ano utlier in part due to Germany’s VAT cut.
- 1 Oct: After maintaining interest rates at 4% in August, India’s RBI may introduce a small 25 basis point cut this time round to support the country’s stuttering recovery.