Global fund managers are no longer apocalyptic bearish. The hope that inflation and interest rate shocks are beginning to fade, seems to be slowly replacing the gloom and doom with hope. However, the potential for a slowdown remains.
According to the latest survey by BofA Securities, the economic outlook and equity allocation have improved in August from the lows of July. The proportion of those expecting a strong economy rose in August after hitting a record low in July. In addition, a net 72% of those surveyed expect a decline in global profits next month, compared to 79% in July, the highest reading since October 2008.
Nevertheless, the majority of respondents are of the view that the current sentiment is still too bearish for an immediate reversal in the bear rally and they remain a “patient bear”.
Inflation remains the top tail risk for manager portfolios following the global recession and aggressive central banks. The net percentage of investors who experienced a slowdown in the global economy over the next 12 months continued to rise and stood at 58% in August.
Inflation in the US fell from a record high in June to 8.5% in July, but remains at a multi-year high. Worryingly, despite this positive data, there is not enough clarity on whether the US Federal Reserve will continue or stop raising rates. As global central banks focus on tackling inflation, some economists believe it may be too early to conclude that extreme central bank dogma is a thing of the past.
Instead of feeling worried about its stability against the worrying economic backdrop, investor confidence is rising amid a recovery in stock markets in recent weeks, said Craig Erlam, senior market analyst for UK and EMEA at broking house Oanda. “I wonder how long this can last, even if US inflation shows further signs of retreating from peak. Recession is coming around the world and inflation is not falling so fast,” he warned in a note to customers on 16 August.
In India too, inflation as measured through the Consumer Price Index softened to 6.71% in July, from 7.01% in June. However, it is hovering above the Reserve Bank of India’s (RBI) comfort level of 6%. Similarly, inflation as measured using the Wholesale Price Index slipped to a five-month low of 13.93% in July. With the fall in global commodity prices, inflation is heading south.
According to Sahil Kapoor, head of products and market strategist, DSP Investment Managers, there are other reasons why India’s central bank is less aggressive. “RBI’s comments on this, whether the quantum of rate hikes reduce or their stance becomes neutral, is an important short-term trigger for the Indian equity markets,” he said.
In August, the RBI raised the repo rate by 50 basis points (bps) to 5.40%. So far in this calendar year, the RBI has increased the prime lending rate by 140 bps.
Moreover, how corporate earnings rise, especially in the context of falling inflation, is something that investors will be keenly watching.
Kapoor said that in Q1FY23, on an annualized basis, profit after tax for Nifty 50 companies rose 12%, higher than the consensus estimate of 8%.
Meanwhile, India still commands a premium valuation for its Asian peers. Data from Bloomberg shows the MSCI India index is trading at nearly 20x the one-year forward price-to-earnings multiple, which is higher than the MSCI Asia ex-Japan and MSCI Emerging Markets indices. Analysts say that to justify this valuation multiple, India Inc’s earnings will have to improve.
catch all business News, market news, today’s fresh news events and breaking news Updates on Live Mint. download mint news app To get daily market updates.