Flows over fundamentals

Weekly update — 24 November 2020
Roller skates don’t mean you can cross the road with your eyes closed

Flows dictated the recent surge in equities — fundamentals, valuations, and even viruses take a backseat. We believe that liquidity that was sitting on the sidelines due to US elections played out along with positive vaccine news that pushed indices to all-time highs.

Inflows into global stocks in the last two weeks were about $71.4 bn, the biggest-ever — emerging market stocks got a sizeable $6.4 bn

India received $4.5 bn (off the above $6.4 bn) in equity flows from foreign investors in two weeks — a monthly-high, when we have another two weeks to go.

Global equity flows 25th November

MSCI Emerging Market index rejig

MSCI’s EM index increased weightage to India to 9%, from 8.1%. Hence, rebalance trades across foreign funds benchmarked to the index pushed additional flows to India.

Falling Global Risk Aversion

Citigroup’s Global Risk Aversion Index has fallen back below zero for the first time since the pandemic — market stress is now below its long-term historical average, despite concerns of stricter virus restrictions.

How much of the bad stuff is priced in?

This question is slowly losing relevance.

Earlier in the week, the IMF chief warned governments on premature withdrawal of economic support. Despite this, the US government decided not to extend many emergency lending facilities set up by the Federal Reserve (at the start of the pandemic). With limited fiscal stimulus and political consensus issues, there is a risk to global economic activity. But, as usual, we could see central banks do the heavy lifting.

We may even see another big bout of stimulus measures.

Uncertainties are down, but valuations are soaring. We are even noticing a modest pickup in economic activity across India.

Surge in spending

Retail inflation rose to a 6-year high of 7.61% in October on higher food prices — however, core inflation (excluding food and crude oil) came in lower at 5.47%

According to CRISIL, home sales in key markets have risen to pre-lockdown levels — the survey suggests a 35% improvement in home affordability driven by interest rate cuts, stamp duty waiver and government support as the key driver

According to a survey by McKinsey, Indian consumer optimism is back to pre-COVID levels as the intent to spend money has increased by 30%

The domestic unemployment rate rose to 6.98% in October from 6.67% last month — rural unemployment saw a spike of 1.04%, while the festive season reduced urban unemployment to 7.15%

Isolated reports point to a sharp increase in service sector recruitment — we could see a recovery in white-collar jobs

Improvements in business sentiment

The manufacturing PMI index rose by 3.7% in October, compared to the previous month — service sector PMI rose to 54.1, the highest since February

Nomura India Business Resumption Index reported an improvement to 87.1 for the week ending 22 November, from 84.4 in the week before — after a fall in labour participation and power demand last week, activity picked up in this week

Several firms across banking, IT and consumer goods segments are rolling back their salary cuts, and they have even offered bonuses during the festive season — we are yet to see this across travel, hospitality, and infrastructure companies

India’s exports grew by 22.47% in the first week of November, compared to last year — pharmaceuticals, gems, jewellery, and engineering goods were the main drivers

According to Credit Suisse, stressed debt across sectors dropped by 27% quarter-on-quarter, and the share of debt among loss-making companies reduced to 23%, compared to ~30% before the pandemic — this is a more a result of a business resumption and the weeding-out of low-performing firms

Allocation changes

Earnings across NIFTY companies is still down ~20%. The recent enthusiasm is the result of a clearer path to FY22 or FY23 earnings, but the latent risks to reach those earnings remain. We could see this trend continue till a year-end rebalance across global portfolios — this event could bring down the valuation gap. But, until then, we are not going to allocate unless we see a pickup in earnings or a fall in equity markets. Fixed income and gold allocations continue.

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