Bearish view persists amid lower inflation


Global fund managers are no longer apocalyptically bearish. Expectations that inflation and interest rate shocks are beginning to end seems to be gradually replacing the gloom and doom sentiment with hope. However, the bearish outlook remains.

Economic outlook and equity allocation improved in August from the dire low levels in July, according to the latest survey by BofA Securities. After hitting a record low in July, the proportion of those who expect a stronger economy rose in August. Also, a net 72% of those surveyed expect global profits to decline over the next month, compared with a 79% in July, which was the highest reading since October 2008.

Causing  discomfort

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Causing  discomfort

Even so, most respondents are of the view that current sentiment is still too bearish for an immediate reversal in the bear market rally and that they remain “patient bears”.

Inflation remains the top tail risk to fund manager portfolios followed by global recession and hawkish central banks. The net percentage of investors who think that the global economy will experience recession in the next 12 months continued to rise and was 58% in August.

Inflation in the US fell from a record high in June to 8.5% in July, but continues to be at a multi-year high. The concern is that despite this positive data there is not enough clarity on whether the US Federal Reserve will continue to raise rates or pause. As global central banks remain focused on tackling inflation, some economists are of the view that it may be too early to conclude that peak central bank hawkishness is a thing of the past.

Investors are gaining confidence amid a recovery in stock markets in recent weeks rather than feeling anxious about its sustainability against a worrying economic backdrop, explained Craig Erlam, senior market analyst, UK & EMEA, at broking house Oanda. “I wonder how long that can last even if US inflation shows further signs of pulling back from the peak. Recessions around the world are coming and inflation is not falling fast enough,” he cautioned in a note to clients dated 16 August.

In India as well, inflation measured via the consumer price index softened to 6.71% in July from 7.01% in June. However, it is hovering above the Reserve Bank of India’s (RBI) comfort level of 6%. Similarly, inflation measured using the wholesale price index, slipped to a five-month low of 13.93% in July. With global commodity prices on a downtrend, inflation is seen heading southward.

More reasons are emerging for India’s central bank to become less hawkish, according to Sahil Kapoor, head of products and market strategist at DSP Investment Managers. “RBI’s commentary on this, whether the quantum of rate hikes reduces or their stance becomes neutral, is a crucial near-term trigger for Indian equity markets,” he said.

In August, the RBI raised the repo rate by 50 basis points (bps) to 5.40%. In this calendar year so far, RBI has raised the key lending rate by 140 bps.

Apart from that, how corporate earnings pan out, especially in the context of falling inflation, is something that investors will keenly watch.

In Q1FY23, on an annualized basis, profit after tax grew 12% for Nifty50 companies, higher than the consensus estimate of 8%, Kapoor noted.

Meanwhile, India still commands premium valuations to Asian peers. The MSCI India index is trading at a one-year forward price-to-earnings multiple of around 20x, higher than MSCI Asia Ex-Japan and MSCI Emerging Markets Index, showed Bloomberg data. For this valuation multiple to justify, India Inc’s earnings have to improve, said analysts.

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