Rate Cuts Begin – Indian Breather – US/UK Summer Bounce?

Fri 07 Jun 2024

By Brian Dennehy

Access Level | public

Market commentary


quoteWhen you get this I should already be on a plane to Greece, and there will be no note next Friday, unless there is an extreme occurrence, and then my colleagues will step into the breach.

This week I wanted to catch up with some fascinating events on one side of markets, but which are very impactful. Plus there was some fundamental news from China in mid-May which was largely unreported in the West, yet it might just mark a significant inflection point.

First, the ECB rate cut yesterday. Though well anticipated, it certainly helps the mood. This was aided and abetted by poor economic stats out of the US earlier in the week, increasing the likelihood of US rate cuts sooner than November. The US numbers have been getting tentatively weaker for some time. Watch this space, because where the US goes it will be difficult for the UK to resist.

For now, assuming that central banks stay ahead of the recession risk, and stress less about inflation, stock markets and government bonds could respond positively for a while yet.

The global news of the week was around three big elections in Mexico, South Africa, and the Indian juggernaut, resulting in considerable local market volatility.

In Mexico the result was not unexpected, but it seems that the scale of the win worried investors as it threatens a degree of unhealthy dominance by one leader and one party. Their stock market rapidly fell 10%. It has since recovered a tad, and the next few days will be telling. That this will prove to be an overreaction will not be a surprise. 

In India the opposite occurred. The unhealthy dominance by one leader and one party is well and truly broken, and the market tanked about 8%. Can a more conciliarity Mr Modi still do his magic in the eyes of investors? His mettle will be tested.

More significant is that the Indian market is very expensive, more expensive than the US bubble measured by CAPE, and this stock market has invariably looked expensive for the last decade or so. It was overdue a breather, and some investors used the excuse of the election result to take handsome profits. We have long been fans (e.g. our Trade for the Decade in 2009), but we didn’t get back on board after the pandemic, which was a mistake. Beyond the valuation negative, the reasons to buy India on a multi-decade view are as sound now as in 2009, arguably clearer, and there is certainly a huge amount still to be done in the economy, which will drive economic growth for many years.

Every big bull market has an occasional breather. It’s healthy. And if it doesn’t do so, it becomes dangerous and bubbly. Looking at the S&P BSE 100 index, it fell 8% from the recent peak. There is clear support in the 16000-19000 area, a minimum of 20% below where we are today. That is not a prediction. Merely an observation. 

If the stop-loss has already been triggered on your Indian funds, that’s fine. You should have a plan to buy back in 30 days. The reality is that in 30 days you still might be feeling a bit nervous about buying back – perfectly understandable, and this is a behavioural problem not an investment one. To calm your nerves you could buy back half in 30 days and half in 60 days. Or it could be 30,60 and 90 days – from an investment perspective it doesn’t matter unduly providing that you are a long-term India investor. It is also a great opportunity to practice your complete stop-loss process, from selling to buying back.

Turning to China, on 17th May an announcement by the Chinese Vice Premier He Lifeng announced reforms to deal with the troubled property market, and these were in a tone and scale indicating a significant change of course. This pragmatic change of direction is in the style of Xi’s predecessors – not just an acknowledgement of the problem, but also a clear set of solutions e.g. buying up unsold properties for affordable housing, making the mortgage market more competitive, and reducing the deposit needed for purchases. This is all about restoring domestic confidence. That won’t happen overnight, but it feels like an inflection point. Look out for more announcements at the time of the leadership meeting in July.

Lastly the US and UK. The US stock market had a decent day on Wednesday, spurred by Nvidia and hopes for interest rate cuts. The S&P 500 rose to 5354, near as damn it at our previously calculated upside target of 5361. In the UK, the FTSE 250 is also more or less at a similar calculated target (see November Teleconference). Nonetheless, the shape of the journey to both these points, from Autumn 2023, does not look like a significant peak is at hand. At the moment our central case would be, as mentioned back in March, that after the Spring breather the US index in particular would keep moving ahead over the Summer. Perhaps a classic Autumn peak? We will see.

Remember there is no note next Friday, unless something extreme occurs.


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