A risk-on environment

Fortnightly update — 11 November 2020

We now have a split government in the US — a Democratic House and a Republican Senate. The outcome explains the strong gains logged by equity markets in the US and across the globe during the past few trading sessions, as we could see lesser tensions with China, with limited changes to the prevailing tax regime.

With lesser fiscal stimulus (due to a split government) and lesser uncertainty, fixed-income yields were lower as well. Gold, on the other hand, was down ~10% as vaccine news reduced safety haven interest.

When you look at valuations, we are reaching new highs across CAPE, Market Cap to GDP and PE (trailing and forward PE)

The US and the Indian equity markets are overvalued. The US election results were a trigger to break away from sideways-consolidation in the last few weeks, and the momentum is on the positive side — the NIFTY and SENSEX are set to make a move to uncharted territories.

Favourable conditions, compared to other countries, are working for India

After a period of subdued flows, we noticed a major pickup in November with over $2.5 bn in equity flows in 10 days — driven by a decline in coronavirus cases, better macro-economic data, robust rural demand and better-than-expected quarterly earnings compared to other EM peers. There is a lot of positive expectation that the market has already captured (or factored-in).

Future earnings growth

There is a broad pickup in business sentiment, but we continue to see a contraction in core output. The recent spike in demand could be the result of pent-up demand and/or a festival push, rather than a sustainable increase.

Vaccine rollout

Pfizer came out with positive news this week, but a complete vaccine roll-out could take a couple of years — several sectors will still be subdued till then.

Another stimulus

This looks likely across the US and India. We could get a disproportionate size of the flows (given better relative metrics).

There are fewer uncertainties now, but we are baking in all the positives (and not the negatives) — at current prices, we are buying the next two years of equity gains

So, we will not restart equity flows now. But, we are implementing some changes to allocations over the course of the week.