Main financial assets discussed: Emerging market stocks, Indian stocks, iShares MSCI India ETF (INDA), iShares MSCI India Small-Cap ETF (SMIN), WisdomTree India Earnings Fund ETF (EPI)
Top 3 key points:
1. Emerging markets have outperformed all other global sectors, including the United States, since the late 1980s.
2. Emerging markets are currently undervalued compared to the U.S. market, making them an attractive investment opportunity.
3. India is a particularly promising emerging market due to its balanced economy, improving standards of living, and strong demographic advantages.
Recommended actions: **Buy** India Small Caps (SMIN) ETF.
### Summary
India's retail inflation in July rose to 7.44%, higher than market expectations, and is expected to remain elevated in Q3. The global currency market is experiencing significant turbulence, with the USD appreciating despite economic weaknesses. Heightened inflation and volatility in the currency market pose risks to the Indian market.
### Facts
- India's retail inflation in July was 7.44%, exceeding market expectations.
- Elevated inflation is expected to continue in Q3.
- The global currency market is experiencing turmoil, with the USD appreciating despite economic frailty.
- FII outflows have increased, but India's equity market is performing better than other emerging markets.
- The RBI has revised its inflation forecast upward and expects inflation to decrease to 5.7% in Q3.
- High interest rates and inflation are expected to impact corporate earnings growth and valuation.
- India's one-year forward P/E valuation has decreased from 20x to 18.5x.
- Bond yields have increased, leading to a divestment of equities and acquisition of bonds.
- The domestic market is supported by restrained FII divestment, robust purchasing by DIIs and retail participants, and outperformance compared to other emerging markets.
- Selling in global equities has increased due to concerns of deflation and defaults in China's realty and finance sectors.
- The author expects the selling from FIIs to continue in the short-term due to elevated global bond yields, US credit downgrade, and slowdown in emerging markets, but India will continue to outperform.
- In the last month, the MSCI World index was down 4.2% compared to MSCI India's 1.85% decrease.
China's stock market has experienced a bearish performance recently, with the benchmark stock index reaching a 9-month low, and there are concerns about the longer-term equilibrium interest rate highlighted by Fed Chair Powell's remarks at the upcoming Jackson Hole Economic Symposium.
India stocks are expected to trade only slightly higher by year-end, with analysts predicting a potential correction due to tightening global financial conditions.
Oil India Ltd. has seen a significant increase in market capitalization, outperforming its peers in the oil and gas industry and the benchmark index, due to a surge in its stock and positive earnings reports, as global oil prices are expected to rise.
India's sovereign credit rating, currently at the lowest investment grade, should be upgraded due to its status as the fastest-growing economy and its potential to become the third largest economy in the world, according to Madan Sabnavis, Chief Economist at Bank of Baroda. He highlights the importance of a good credit rating and emphasizes that India is an attractive destination for foreign investors. Sabnavis believes India deserves an upgrade to at least an A rating.
The stock market could reach record highs by the end of the year, as historical data suggests positive returns when stocks are up 10%-20% heading into September, according to Bank of America.
India's positive structural factors, including economic growth translation, supply chain dynamics, and a youthful demographic, make it a top investment choice for HSBC and Morgan Stanley.
Stock prices in Asia were mostly higher as investors awaited updates on U.S. inflation and China's economic data, while concerns about rising oil prices and possible higher interest rates weighed on markets.
Summary: High valuations in the US stock market suggest lower future returns, making diversification into other markets such as Japan, India, and Brazil a viable option for investors looking for above-average returns in the next decade.
India's stock market has seen a rally as strong macroeconomic fundamentals and China's economic slowdown keep foreign investors invested in Indian stocks, while a surge in retail investor interest continues to drive the market.
India's main indexes Nifty 50 and Sensex hit record highs due to the likelihood of a pause in the Federal Reserve's rate hikes, led by metals and real estate stocks.
China's macroeconomic challenges, including deflationary pressures, yuan depreciation, and a struggling property sector, could have broader implications beyond its borders, impacting global metal exporters, trade deals, and global inflation; however, investing in China's stocks may offer compelling valuations despite the current downturn.
UBS Investment Bank suggests that the stock slump in China is almost over and investors should be more optimistic about the market outlook, as economic fundamentals have improved and technical signals indicate a potential market rebound.
India could be one of the fastest-growing markets for JPMorgan in the Asia Pacific region next year, as companies look to diversify their supply chains beyond China and take advantage of India's scale and potential for high-end manufacturing.
Indian banks are becoming increasingly attractive to global investors due to higher credit growth, improved margins, and stable asset quality, with a significant rise in the total market value of foreign institutional investors' holdings in Indian banks. The country's economic growth prospects, solid performance of lenders, and the growth and profitability enabled by digitalization are driving this investor interest.
The U.S. stock market has seen a sharp rise in 2023, but the gains have been driven by a small number of technology companies, while the overall market performance has been lackluster compared to previous years, indicating a potential risk for investors.
The U.S. stock market is currently trading at an attractive discount, with growth stocks moving from underweight to market weight and the real estate sector overtaking communication services as the most undervalued sector.
India's inclusion in JPMorgan's emerging market bond index signals major changes in the global capital markets, boosting capital inflows by $20-25 billion and improving liquidity for Indian assets and the rupee, ultimately attracting more investment. India's rise in the global economy will have significant consequences, positioning it as a nonaligned player and surpassing China in certain measures, while ongoing disputes with Pakistan and China continue to shape its geopolitical landscape.
Equity markets are prone to boom-and-bust cycles, and a recent study suggests that valuations, macroeconomic factors, and technical variables can help predict large drawdowns in these markets, with the US acting as a fundamental driver of global equity market fragility. The research also highlights the importance of expensive valuations in predicting lower future returns and increased market fragility, indicating the need for caution among investors. Increasing allocations to international equities and small-value stocks may help mitigate these risks. However, it's important to approach forecasts with skepticism and consider a wide range of potential outcomes.
Despite challenges such as surging Treasury yields and Federal Reserve hawkishness, the equity-investing landscape has shown resilience, with the S&P 500 posting modest gains and the Nasdaq 100 up for the week. Investors remain optimistic about the economy's ability to withstand higher borrowing costs and anticipate positive revenue and earnings growth. Credit markets have remained stable, while volatility has remained muted and profit strength in Corporate America is expected to drive stocks.
