Talking Points This Week: The Route From The Rout
In ‘Talking Points This Week’, Niraj Shah studies how top business leaders and market makers are navigating the pandemic-altered financial landscape.
From an equity investor’s perspective, the storm has arrived, and it is potent. The U.S. Federal Reserve Chairman Jerome Powell sounded decidedly hawkish (more on that later), Brent Crude topped $90/barrel for the first time since 2014, volatility is back with a bang, and to top it all the global geopolitical scenario has not posed a more clear and present danger in some time.
In India, traders and investors go into the next week with the uncertainty of what the Union Budget brings, and state elections to contend with. That is in addition to an earnings season that has been patchy at best and the future outlook is uncertain at the very least. In this piece, we discuss whether this dip gets bought into, can India and emerging markets do well even if the U.S. markets don’t, and study the technology stock rout and the selloff in Bitcoin.
Powell Put No Longer A Given
If 2021 was characterised by a ‘buy-on-any-dip market’ which seemed to believe that Jerome Powell’s version of ‘The Fed Put’ was firmly in place, 2022 has started differently. The Fed has teed up a March rate hike at this week's meeting. Powell’s press conference was much more hawkish than expected as he repeatedly appeared to differentiate the upcoming hiking cycle from the last time the Fed normalised its policy rate at a roughly quarterly pace. It seems the Federal Open Market Committee is beginning to come around to agree to a more front-loaded policy rate response to elevated inflation and labour market expectations.
Twitter was full of comments and predictions of even a 50 basis points hike in the March meeting itself. Analysts at Nomura too say that they have adjusted their expectation for Fed rate hikes, expecting a 50 bps rate hike at the March meeting, followed by three consecutive 25 bps hikes in May, June, and July. Nomura is not alone in this view. Some even say the cycle might be a prolonged one, with additional 25 bps rate hikes likely in December 2022, June 2023, and December 2023, before reaching a terminal rate of 2.00-2.25%.
Ditch America Vs The World: Difficult Call
Once in a while, markets find themselves amidst a potent cocktail of events, like those described earlier in this piece, and maybe that explains why foreign investors have sold over Rs 25,000 crore worth of secondary market securities in January, and how that selling has gotten accentuated at lower levels. Is someone looking to buy this dip so far? Nah.
The U.S. markets actually look even more expensive compared to the rest of the world to find value. The MSCI World ex-U.S. index is trading at under 15-times forward earnings, compared to over 20x for its U.S. peer. The rest-of-the-world gauge has a lot of catching up to do should the American exodus gain momentum. U.S. shares have gained in each of the last three years, and have more than tripled since late 2007, while the composite set of international peers has not given anything close to that kind of gains.
The key question in the minds of Indian investors would be whether emerging markets in general and India, in particular, can really outperform if the U.S. markets go into a slumber after three years of strong gains?
Tech Forever... Not Quite
Picture this. With revenues twice over those clocked in June 2018, to net income now over 5x, Netflix is back to trading at the same market capitalisation as of that period. The corrective moves don’t seem to be over, in the U.S. or India. Amazon is down 17% in the past month, Microsoft is down 12% despite a strong quarter, and the less spoken about the Netflix stock, the better. Even in IT services, Accenture is down over 15% since posting strong results on Dec. 16. In India, the Nifty IT index is down 6.5% from its January highs, with stocks like HCL Tech down 20% from highs, Infosys down 13%, and Wipro correcting by 24%.
All that talk of a tech-first world may have led investors to believe that these stocks can do no wrong. But just as trees don’t grow to the sky, so also we have had a bit of a gravity check for the IT services stocks. The bull argument though, is that with earnings growth being very patchy elsewhere in corporate India, investors will flock back to the tech names for the near-certainty in earnings growth that they may exhibit. The outsourcing and the tech-first narratives may have lost some sheen, but are alive and kicking.
฿ = Digital Gold? Nah!
The argument for Bitcoin as a form of ‘digital gold’ or hedge against other things fiat is crumbling. The world’s largest cryptocurrency slipped to $38,000 last week, its lowest level since August, before resuming its decline in tandem with risk assets such as tech stocks, clocking in new lows of nearly $33,000. The events over the last three months have cast a shadow on what was a long-touted similarity to gold, albeit mostly by Bitcoin afficionados.
Betting On Emerging Markets Sans-China
Would it be possible to take China out of an emerging-market stock portfolio? It’s not a very new argument, you’d hear it very sporadically in the past, but now seems to be getting mainstream. In October 2021, Lyxor’s emerging markets exchange-traded fund that excludes China saw over $100 million inflows in one day. This may have been a sign that investors were already becoming increasingly concerned about the level of state intervention in the world’s second-largest economy.
“Based on our conversations, many investors are contemplating whether to separate China from the rest of their emerging-market equity allocation,” Goldman Sachs’ strategists wrote in a note in the same month. There is a valid argument in the point that club China with economies like Poland and Pakistan is doing injustice to all. However, what caught our eye was a Bloomberg story about how ex-China is the latest craze on Wall Street. It had one of asset manager GMO's biggest clients in early 2021 asking if it would be possible to take China out of an emerging market stock portfolio. The GMO client had invested in funds dedicated to China and didn’t want more exposure from its emerging market funds. Hence, the reasons and instances may vary, but can we see an ‘EM-ex China’ term getting coined, the way ‘Asia ex-Japan’ was?
Niraj Shah is Markets Editor at BloombergQuint.