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Talking Points This Week: Fed, Equity Markets And Geopolitics

Every week, Niraj Shah studies how top business leaders and market makers are navigating the fast-changing financial landscape.

<div class="paragraphs"><p>Federal Reserve Chair Jerome Powell. (Source: Federal Reserve/Twitter)</p></div>
Federal Reserve Chair Jerome Powell. (Source: Federal Reserve/Twitter)

The much-expected backing off from the hawkish stance was belied in the FOMC statement this week with the Fed continuing to remain emphatic on its commitment to bring inflation down to the target 2%. Thus, with the 25 bps hike in the target Fed fund rate to 4.75-5.0%, there has been a forceful pushback to the recent resurfacing of market expectations of the Fed turning dovish.

In effect, the Fed has told the market YET AGAIN to follow what the Fed says and NOT what the market thinks the Fed will say or do. Was there some mention of relenting in the event of relevant data points emerging? Yes. But, if the SVB issue did not make the Fed blink on its stance of rate hikes, then most other things won't.

It is a strange world that we live in because it is quite evident that risk assets the world over would be hoping for signs of recession in the U.S. to get a breather from higher rates. And until then, unless the Fed communicates otherwise, let there be no doubt about the trajectory. Some of this was mentioned by Maneesh Dangi in his conversation with us here. Worth listening to his prognosis.

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Geopolitical Issues Front And Centre

China and Russia are deepening cooperation on a key atomic technology that has Pentagon planners on edge because of its potential to upset the global balance of nuclear weapons.

Russian President Vladimir Putin and Chinese counterpart Xi Jinping announced a long-term deal to continue developing so-called fast neutron reactors. As a result of all of this, the U.S. policymakers are a worried lot.

Bloomberg reported that Pentagon officials are seriously worried about the ramifications of such ties between the two nations. Even on the peace plan for the conflict, U.S. officials have publicly expressed deep skepticism about the Chinese idea, saying its call for a ceasefire would reward Moscow’s invasion by cementing its territorial gains.

A Bloomberg story says that the meetings and the proposal have provoked a sense of unease within the U.S. administration, leading in turn to questions about the broader U.S. approach to the two countries.

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Risk Assets

Risk assets would be on the backburner in the wake of what the central banks have just done. While investors may see fundamental value in Asia ex-Japan stocks when looking toward the end of this year, most remain concerned about a possible pullback in U.S. stocks assuming U.S. data deteriorates in the months ahead.

Steve Brice of Standard Chartered mentions that in a normal scenario of U.S. recession, the U.S. markets might still do better than the rest of the world, but currently he is constructive on China versus U.S. And that while they are not UW India, they still do not think India will be a rank outperformer. Chetan Seth of Nomura writes the following:

"At 17.5x forward P/E for S&P vs a post-2014 average of 17.8x, we do not particularly see compelling risk-reward for US stocks given lurking risks (a US recession in 2H23; ongoing credit/liquidity stress). If US stocks are softer, Asian stocks will be impacted too–although we are of the view that positive local factors and relatively lower equity valuations/investors positioning offer some buffer against external headwinds. Overall, we are not inclined to chase risk at this stage given an uncertain economic outlook and risk of a slowdown ahead."

Suffice to say, risk assets might remain on the backburner, save for technical reasons, like a sentiment indicator of CLSA which indicates that this might be a great time to buy Indian equities. Time will tell who is right.

IT Services—Long Winter Ahead?

On a non-deal roadshow by Jefferies, the management of HCL Technologies Ltd. mentioned that the company has no exposure to regional banks in the U.S., with 99%+ of its BFSI revenues coming from large banks and insurance companies, and that the company expects outlook for BFSI to be strong in the next few quarters led by a ramp-up of a couple of recently closed large deals.

There are arguments made by Ajay Tyagi of UTI AMC that the slowdown is already factored in, and because the market discounts the future, the fund house is constructive on IT services as a theme.

The counter is provided by Ankur Rudra of JP Morgan, in his conversation with BQ Prime. Rudra is of the belief that the uncertainty of spending budgets of BFSI companies as well the liquidity issues for other sectors, which would be clients of IT firms, leads him to be underweight for majority of the sector.

Ace investor Samir Arora, too, expressed skepticism for the near-term, asserting that BFSI clients would be unable to give clarity around budgets to Indian IT companies in the wake of the SVB scenario and that should be a problem area for the companies come the upcoming earnings season.

Na (No) To China?

Vanguard Group, the U.S. asset management giant, has decided to shutter its remaining business in China after a retreat two years ago, according to people familiar with the matter, abandoning a 27 trillion yuan ($3.9 trillion) fund market that global competitors are embracing, according to Bloomberg.

In November 2022, long-time China investor Tiger Global Management hit the pause on investing in Chinese equities, as per WSJ, as the firm reassessed its exposure then to the world’s second-largest economy after President Xi Jinping cemented his control over the country.

Various large asset management companies are taking this stand after corporates have also diversified away from China in recent months, as was evident in conversations that emanated out of the WEF at Davos in January 2023.

A leading daily in India reported how Walmart is looking at Indian manufacturers to source white label electronic products like IT hardware, mobile accessories and wearables to sell in the U.S. We might just see more of such newsflow in times to come.

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Niraj Shah is Executive Editor at BQ Prime.