World over, there have been murmurs of that word – “slow-down”. From whatever little high frequency data points that got published for Jun-19, composite PMI prints haven’t been rosy at least for Russia and U.K. Digging deeper, its subset, the Manufacturing PMI for the whole developed markets pack has now been in contraction since Mar-19 (i.e. 4 successive months of decline). Worryingly, the emerging market pack has also started showing cracks with manufacturing PMIs also slipping sub-50 level in Jun-19. Head-line numbers itself paint a bleak picture, so a deep-dive into country level manufacturing and services activities would most likely open up numbers akin to a can of worms.
GLOBAL MACRO – SHRINKING PMI
World over, there have been murmurs of that word – “slow-down”. From whatever little high frequency data points that got published for Jun-19, composite PMI prints haven’t been rosy at least for Russia and U.K. Digging deeper, its subset, the Manufacturing PMI for the whole developed markets pack has now been in contraction since Mar-19 (i.e. 4 successive months of decline). Worryingly, the emerging market pack has also started showing cracks with manufacturing PMIs also slipping sub-50 level in Jun-19. Head-line numbers itself paint a bleak picture, so a deep-dive into country level manufacturing and services activities would most likely open up numbers akin to a can of worms.
GLOBAL EQUITIES: EM & DM – CHOOSING A ROCK OR A HARD PLACE
Listed equities begged to differ from the weakening macro. Dow Jones, Euro Stoxx 50, Hang Seng – virtually almost any index that comes to mind – have all climbed handsomely in the last month and that too in both local currency as well as in USD terms.
Nevertheless, while OECD Lead Indicators (designed to provide early signals of turning points in business cycles) for EMs look slightly more promising than DMs, Earnings Revisions over the last quarter have been better for DMs and resultantly, their ROEs yet again command premiums to EMs. So nothing really sets apart EMs from DMs.
GLOBAL FIXED INCOME: A WEEK OF THE CENTRAL BANKS
Mirroring their equity cousins, sovereign bond yields all softened in Jun-19. Americas saw a -10 to -40 bps (Mexican yields dropped by -43bps) softening, EMEA saw a -17 to -80 bps softening (Greek bond investors saw their YTMs inching down to a mouth watering -82.5 bps) and APAC as well saw a -5 to -25 bps compression.
Jun-19 was busy for the Central Banks with the US Fed and Bank of England both meeting simultaneously in one week. Simultaneously, they both kept much of their respective monetary policies unchanged.
GLOBAL COMMODITIES: GOLD IN UPTREND
Crude had a roller coaster ride in Jun-19. Brent reached an intra-month low of $59.8/bbl into the second week of the month and then reached a high of $66.7/bbl. Unfazed, OPEC+ nevertheless decided to prolong supply cuts, but funny as all markets are – be it equities or commodities – brent crashed towards the end of the month as fear-mongers latched on to memories of that central bank laden week wherein global demand growth was questioned by one and all. Bank of England Governor Mark Carney warned of dangers from rising protectionism around the globe, citing a “widespread slowdown” that may require a major policy response. The U.S.-Saudi-Iran triumvirate should continue dominating the Oil (news) flows in times to come with Saudi again bringing up Aramco IPO, Iran playing the miscreant in the Strait of Hormutz, Trump recently announcing his re-election campaign and global echoes of Iran being Iraq 2.0 for Trump starting to resound. Other commodities were a mixed bag, with Soybean volatility continuing, ravaged by the uncertainty of weakened demand from Chinese pigs suffering from African swine flu (reflected momentarily in our NIFTY50 agrochemical company as well). But, the crop ended the month in the green. Natural Gas attractiveness over fossil fuels continued to pump it higher and iron ore also ended the month on a high note helped by favourable global supply demand.
Anemic Global Composite PMIs
Source: Bloomberg
OECD Lead Indicators continue to point to slowing growth momentum in most DMs vs stable growth in EMs
Source: Bloomberg
DM ROEs are higher than EMs
Source: Bloomberg
Inflation Hedge of Gold: Falling TIPS boosts Gold
Source: Bloomberg
Gold has given a breakout on our technical MACD (moving average convergence divergence) charts and looking at the fall in TIPS i.e. real U.S. yields i.e. a rising inflation profile, the purchasing power of the USD has eroded and consequently the inflation hedging power of Gold surfaces and investors flock to the yellow metal.
INDIA MACRO: FAVOURABLY POISED OR DELICATELY BALANCED?
Reflecting the global doom, India’s services PMI has contracted alarmingly in Jun-19 – the first decline in about a year! Composite PMI though remains gasping above 50 thanks to Manufacturing. Apr-May-19 indicators for investment related growth – agreed, these are lagging and hind-sighted – all look like a young child’s report scorecard hidden under the bed away from his parents. Capital formation, GFCF, 8-core industrial growth, IIP and now the fresh blow in Services PMI are hardly symptomatic of an economy growing at the erstwhile golden period real growth rates of 8%+.
What’s worse, recent high frequency indicators of Consumption are also now sagging. RBI’s MPC minutes unwaveringly focuses on growth concerns.
INDIA EQUITIES: STAYING THE COURSE WITH MIDCAPS, NEUTRAL VS BONDS
Overall valuations of equities are not cheap, aggregate earnings momentum continues to be subdued and we can expect this to continue at least for another two quarters owing to compressed demand, ongoing negative spell in macro variables and delayed sowing in current monsoon season. FPI and domestic investor flows have been holding healthy owing to easing global monetary policy outlook as well TINA effect (There is No Alternative). For now, focus would likely shift to implementation and execution path of the Government after the Budget and the panning out of corporate earnings.
INDIA FIXED INCOME: LIKE HIGH QUALITY CORPORATE AND SHORT END
Along global cues mentioned above, India’s sovereign bonds were not to be left out. Falling in-line with APAC peers, India 10Y G-Secs softened -15bps in the month driven by strong FII flows to the tune of INR 8,000 Cr. In comparison, Equity net inflows by FIIs were only one-eighth of that. The intra-month fall in Crude added “fuel” to the fire and the party in G-Secs was on. Dynamic bond fund managers not to feel left out, started bulking on long duration, though with 30% of their portfolios locked in illiquid corporate structured obligations – a steep entry charge for a party already at its peak.
Corporate bonds on the other hand do exhibit certain pockets of high quality attractiveness. However, the nearly INR 60k Cr. of NBFC debt coming up for redemption by Sep-19 end does leave a churning feel in the gut. The biggest name doing the rounds in this round of re-financing is Indiabulls Housing Finance which (thankfully?) recently announced an INR 2,700 Cr. buyback of its bonds – too little too late, but better late than never. The (DHFL + WGC) and Edelweiss groups are the other two behemoths staring at a mountain of debt coming up just around the corner. It would be interesting to see how such large and established corporate groups handle this balance sheet crisis.
CURRENCY OUTLOOK: NEUTRAL
The de-escalation of trade talks between U.S. and China at the G-20 summit (implying better trade seen also in a recovering Baltic Dry Index, better exports and so a weakening INR), Crude oil volatility (typically rising Crude hits INR), the noises coming from the Bimal Jalan committee for determining the windfall gain amount the Government should receive from RBI's ECF (Economic Capital Framework) (more the surplus, likely stronger the INR), the upcoming potential fiscal stimulus in the Budget (a better fiscal entails a stronger INR) and the Fed staying put with U.S. rates helped the INR. Net-net, a myriad of events attributed to the strengthening of the INR in Jun-19. But not looking myopically, it was actually the foreign currencies, in particular the Euro (surprise! – the region has not exactly been in the best of macroeconomic shape with Draghi calling for easing every other week and him now handing over the mantle to IMF’s Lagarde) and the Yen have relatively beaten most other global currencies – INR and USD included. We remain neutral between INR and USD.
India’s Services PMI contracted after almost a year!
Source: Bloomberg
GFCF as % of GDP has crashed, albeit a lagging indicator
Source: Bloomberg
Month-wise, NBFC Bonds Maturing the Most in Sep-19
Source: Bloomberg
Major Corporate Groups’ Bonds Outstanding
Source: Bloomberg
Baltic Dry Index: Trade activity well on path to recovery after the G-20 summit in Japan and agreement on US China pause on duties
Source: Bloomberg
TAA VIEWS & PERFORMANCE
Source: Bloomberg. Assuming a 6% annualized yield for cash.
GLOBAL ASSET PERFORMANCE SNAPSHOT
Source: Bloomberg Equity/Fixed Income Returns/Yields in local currencies. Commodities in USD. Numbers for Fixed Income are Yields. As of 30-Oct-19.
ROUTES TO MARKETS: MODEL ALLOCATIONS
