 "Yen carry trade, US recession threat: How brokerages interpret developments")
Global financial markets have been on a rollercoaster ride in the last few days, driven by fears of a recession in the US and worries that the US Federal Reserve may be too late in cutting rates to salvage the situation. That apart, the hike in rates by the Bank of Japan (BoJ) also rattled investors amid reports of unwinding of the Yen carry trade. Rising geopolitical tensions are also a spot of bother for the global financial markets.
Most brokerages, however, remain optimistic on the road ahead for equities from a medium-to-long term perspective, but do caution against the near-term volatility.
India, they believe, remains in a relatively better position amid strong fundamentals. Though valuations remain a concern, investors can use the dip in the markets to buy quality stocks from a long-term perspective, analysts said.
“Even a complete unwinding of India’s carry trade exposure is unlikely to significantly impact the Indian equity market over the long term. Any meaningful short-term fall in the Indian equity market should be seen as an opportunity to increase exposure to equity,” wrote Sujan Hajra, chief economist and executive director at Anand Rathi in a recent coauthored report with Raj Singh and Kaitav Shah.
Here's how leading brokerages have interpreted the recent global stock markets developments.
Jefferies
Interest rate cuts are not necessarily positive for US equities. What they are much more positive for, in our view, is Asian and emerging market stock markets, whose central banks will have much more room to ease domestically if the Fed is cutting and the US dollar is weakening.
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The Indian stock market is much more resilient in the face of a US downturn and related Wall Street sell-off than the likes of Japan. This is mainly because India’s stock market has been driven by domestic money, whereas the opposite remains the case in Japan.
HSBC
Worries about growth in the US are negative for export-orientated markets like Taiwan and relatively positive for domestically-oriented markets such as India, Indonesia and mainland China. Asia-specific risks include the possibility of AI rally fizzling out; skewed investor positions in Taiwan (TSMC); and earnings disappointments in mainland China. We remain overweight mainland China but accept that there is no near-term catalyst for equities. We also like India despite its expensive valuations. We are underweight in Taiwan.
UBS
India and Indonesia have been bigger beneficiaries of overseas equities investments from Japan over the last three years and seem most at risk of reversals. In the context of multiple global macro risks emerging recently, we see China as a relative defensive, especially since many of the country specific risks appear to have been priced in already.
On an index weighted basis, MSCI Poland, Thailand and Mexico topline growth tend to be more sensitive to US economic momentum, while China has least sensitivity. Korea, South Africa markets have been most sensitive to US real rate declines in the past.
EM funds are overweight Brazil, Mexico and to an extent Indonesia and South Africa. They are underweight Taiwan and China, as well as Saudi and Korea. Active positions in Taiwan and India are at their lowest level in the last five years, while the largest overweight markets are also at their five-year peaks.
Nomura
After the weak employment report, we expect three 25 basis point (bp) Fed rate cuts this year (from 2x25bp earlier), with the risk of a 50bp cut, if job losses continue to trend higher or financial conditions tighten significantly. Markets have already reacted, with a sharp drop in US 2-year and 10-year yields, a steeper curve, a weaker Dollar index, lower equities and tighter financial conditions.
In Asia, Indonesia, Korea and the Philippines have been more sensitive to Fed and FX-related risks. Other Asian central banks – the Reserve Bank of India (RBI), and Bank of Taiwan (BOT) – are less influenced by the Fed, and more by domestic factors. We still expect the first RBI rate cut in October, ahead of consensus, with 75bp in cumulative cuts in this cycle. Risks are skewed towards deeper cuts.
Kotak Institutional Equities
The spate of recent negative news (US slowdown, Israel-Iran tensions, Yen appreciation) may or may not be enough to dent the confidence of non-institutional investors. They have weathered more. The narrow market indices may appear fair from the perspective of historical multiples and bond yields, but most of the non-financial Nifty-50 constituents currently trade at expensive multiples, relative to their own history. Downside risks to earnings from change in growth outlook are hardly built in.