18 February 2019 Issue 796
Global Market Commentary
- US: San Francisco Fed President Mary Daly told the Wall Street Journal in an interview that the Federal Reserve probably would not need to raise U.S. interest rates this year. For the entire week, the Dow rose by 3.09 % to 25,883.25. The S&P 500 index rose by 2.50 % to 2,775.60. The Nasdaq rose by 2.39 % to 7,472.41.
- Europe: Theresa May urging all 317 Tory MPs to unite behind a Brexit deal. May would persuade the EU to agree changes to the “backstop” plan. Over the week, the UK’s FTSE 100 index rose by 2.34 %, the German DAX index rose by 3.60 %, and the French CAC40 index rose by 3.86 %. The STOXX 600 index rose by 3.04% to 368.94.
- Asia: Asia The Japanese government announced that the fourth quarter of 2018 gross domestic product (GDP) rose by 1.4% year-on-year, in line with market expectations. Over the week, the Nikkei 225 index rose by 2.79% to 20,900.63 points. The MSCI Asia Pacific Index rose by 0.46 % to 155.60.
- US: The University of Michigan on Friday reported that the Index of Consumer Sentiment in February improved to 95.5, surpassing the market expectation of 93. For the whole week, the US 10-year bond yield fell by 3 basis points to 2.663 %
- Europe: The European Union’s trade surplus with the U.S. jumped 17 percent last year, hitting record high. The surplus is 139.7 billion euro. For the whole week, the German 10-year bond yield fell by 2 basis points to 0.101%.
- Oil: In 2019, OECD world oil demand growth was revised lower, as a result of downward revisions to the economic outlook for major economies. Over the week, New York oil futures rose by 5.44 % to close at $55.59 a barrel.
- US dollar: President Donald Trump signed a national emergency declaration in order to create a pool of $8 billion to use for barriers. For the whole week, the Dollar Index fell by 0.276% to 96.904.
- China: China inflation weakened in January, and the PPI slowed for seven consecutive months, aggravating the economic slowdown. For the whole week, the yuan rose by 0.397% against the US dollar at 6.772.
- US: Presidents of China and the United States both indicated that trade negotiations have made progress, and Trump said it may postpone the deadline for raising tariffs on China.
- U.S: Trump signed a spending bill on Friday to avoid government shutdown and announced state of emergency in order to gain more funds for border wall construction.
- U.S: US Treasury data showed that the US Treasury that held by China reached US$1.12 trillion, decreased by 5.2% year-on-year.
- U.S: According to Fed data, manufacturing output value fell by 0.9% in January, which is the biggest drop with the last eight months.
- Euro-zone: Eurostat data shows that the EU’s trade surplus with the United States in 2018 was 139.7 billion euros, a 17% year-on-year increase. And the bilateral tariff negotiations may be at risk.
- Euro-zone: British Prime Minister Theresa May issued an urgent pleading to the Conservative Party members, calling them to unite and support her Brexit agreement plan that EU leaders may accept.
- Euro-zone: European Central Bank Executive Coeure believes that the euro has become more important in the world, and it may help the European Central Bank to pass the monetary policy in the euro zone’s financial markets more efficiently.
- Japan: The Cabinet Office of Japan announced that the cumulative annual growth of Japan’s real GDP has slowed down to 0.7% in 2018, which is much lower than the 1.9% growth in 2017.
- Japan: According to data from the Bank of Japan, Japan’s domestic corporate commodity goods price index (CGPI) fell by 0.6% monthly in January 2019, which is higher than the market expectations of 0.2%.
- India: According to the data from the Indian Ministry of Industry and Commerce, India’s trade deficit in January 2019 was narrowed by 6% to US$14.73 billion, but it was still higher than the market forecast of US$13.8 billion and the trade deficit level in December.
|China Market Commentary|
|• In the China Economic 50 Forum, Liu Shijin, a member of the China Central Bank’s Monetary Policy Committee, said that China’s economic growth rate will be between 5% to 6% after 2020.
• The State Administration of Foreign Exchange announced that the China’s current account surplus was 377.6 billion yuan, and the capital and financial account deficit was 377.6 billion yuan in the fourth quarter of 2018.
Is it a good timing to re-enter the India market now?
As what we expected earlier, emerging markets (EMs) equities have bounced back strongly in 2019 on low valuations, increasingly dovish outlook from most of central banks as well as a weaker USD this year. However, India was an exception so far, which has underperformed considerably in the region with MSCI India dropped by 1.2% YTD vs. +7.x% for MSCI Asia during the same period.
In fact, such underperformance was not a surprise to us as we mentioned in early October last year that India has been facing multiple macro headwinds, including deteriorating current account deficit (CAD), weakening Indian Rupee (INR), higher crude oil price, higher central bank policy rate and tighter liquidity environment in India. For now, the big question for most investors is, whether if such underperformance will continue and when will be the good timing for foreign investors to re-enter the market?
Fundamentals have been slightly changed for India, in particular, a surprise interest-rate cut at the Reserve Bank of India (RBI) on Feb 7th has indicated the beginning of monetary policy shift into loosening. The action is braced by falling inflation pressure on favourable food prices together with a moderation in fuel and electricity prices in India. With benign inflation level that is expected to stay within the RBI’s inflation target band of 4% -/+ 2%, India still has ample room to lower the interest rate for supporting the country’s growth in the next 6-12 months if necessary. However, current consensus forecast looks a bit too cautious that expects no rate cut for the next three quarters. Besides, the tight liquidity environment in India has improved and turned into surplus in February, with the weighted average call rate trading below the policy rate. Another positive change for India is that with current crude oil price is much lower than in 2H18, a further deteriorating CAD risk is less of a concern this year.
On the other hand, current underperformance of Indian stock market could be a mix of different reasons. First and the most likely concern from investors was the risks related to the upcoming general election that are due to be held between April and May this year. The battle for Prime Minister Narendra Modi’s re-election bid is closer than anticipated, which could result to Modi’s Bharatiya Janata Party (BJP) to fall short of a majority and the worst-case scenario may come if the government has to be formed from an alliance of many small and regional parties, meaning falling political stability and less investment-friendly business environment if compared to the current BJP-majority government. Secondly, a series of corporate governance issues (e.g., DHFL group, Essel Group and Vedanta) and a bankruptcy filing by Anil Ambani’s wireless carrier have soothed the market sentiment. Thirdly, the high real interest rate in India (almost 3%) relative to the rest of the world (negative or below 1% real rates) have dampened investment in India. Last but not least, the valuation gap between India and EM was still too large due to India’s outperformance in 2018, which has led to more flows into other markets.
Historical evidence has shown that stock markets generally perform well in election year, especially post-election irrespective of the disposition at the Centre (Figure 1), therefore it would not be a surprise to see a rally for India’s equities when we are approaching to the election or post-election. However, election itself generally only boost or hurt sentiment depending on the news flow, while it won’t necessary change the underlying earnings and growth of the country – the key determinants of the stock market over the long term. With current valuation of India’s stock market remain high on absolute and comparable basis, the country’s may need more evidences to reverse its underperformance.
Figure 1. Stock markets perform well around election date
Source: iFund/Noble Apex, Bloomberg
Figure 2. India’s valuation remain unattractive
Source: iFund/Noble Apex, Bloomberg