Equities are standing at the edge; Apple’s bet on India is seismic

Equities 8 minutes to read
Peter Garnry

Chief Investment Strategist

Summary:  Equities are currently at edge with market sentiment and the VIX curve signalling that either the market extends into a meltdown or stabilises in order to likely stage a rebound. In today's equity note we also reflect on hedging amid high volatility and Apple's decision to put manufacturing in India which sends a strong signal that global supply chains are changing fast these years amid rising geopolitical tensions.


It is either meltdown or big bounce from here

Yesterday’s price action was brutal with S&P 500 futures closing at a new record low for the current drawdown cycle but still above the intraday lows from June. The VIX Index pushed higher together with the USD and long-term US bond yields, and the VIX forward curve inverted to levels just at the edge of when it becomes a kick starter for a market meltdown. This morning S&P 500 futures are attempting to rebound up 0.9% reflecting a technical move as no new news has come out. As we have highlighted in recent equity notes, sentiment among investors is extremely bearish and with determined and hawkish central banks we might have the right setup for a meltdown of 5-6% in a short timespan should S&P 500 futures break below the 3,640 level which was the intraday low back in June. The USD Index will dictate where we go from here and should the market retreat across yields, volatility, and the USD, then S&P 500 futures could easily rebound to the 3,800 level.

S&P 500 weekly prices | Source: Saxo Group

A quick reflection on options at elevated volatility

In many of our client conversations we hear talk about hedging the downside and for many a simple strategy of buying puts on the market seems like a good strategy. The outstanding number of put options on US equities has also exploded recently reflecting the demand for puts. One thing to keep in mind is that with the high realized and implied volatility and inverted VIX curve, options have become expensive. It is like buying a fire insurance when the fire has just started. The option market is already pricing in significant moves from here so that at-the-money puts on S&P 500 with expiration on 16 December cost around 5% in premium. That means that the put options only become a hedge in the event of a significant market meltdown. How likely is a move beyond -5% over the next 57 trading sessions (the time to expiry)? Using daily returns since 1 January 1950 on the S&P 500 it happens in 13.5% of the time.

However, at this point in the game it would likely be better to do a delta-one hedging (meaning instruments that moves 1-to-1 with the underlying) using CFD Index trackers or futures. This form of hedging gives immediate protection but also caps the upside on a rebound depending on how much of your portfolio you are hedging, but paying 5% in premium for a put option also subtracts from the total return.

Apple is sending big signal with manufacturing in India

Apple announced yesterday that it will manufacture a portion of its iPhone 14 in India signalling a shift in its supply chain structure. Apple has previously depended on China but with the tensions between the US and China, and the recent US CHIPS Act the US government is telling US companies to reduce their exposure to China. During the Trump period US companies adopted a China + 1 strategy which meant most of production in China and a little in some other country, often in Vietnam. With the war in Ukraine and sanctions against Russia, multinational companies are rethinking their supply chains and the associated risks. These considerations combined with the many lockdowns in China due to Covid are causing companies to move manufacturing to India, Vietnam, and Indonesia. This trend leans well into an FT article yesterday by Ruchir Sharma on the so-called seven economic wonders of a worried world highlighting that the seven countries Japan, Vietnam, India, Indonesia, Saudi Arabia, Greece, and Portugal are all doing much better than the rest in terms of inflation and stock market performance.

In any case, we have long talked about India as one of the biggest beneficiaries of the rivalry between the US and China, and the equity market is constantly valuing the India equity market at the highest earnings multiples of any country in emerging markets reflecting the high expectations. Among our equity theme baskets our India theme basket is the fourth best performing basket this year down only 11.4% compared to a decline of 24.5% for the MSCI World. Another theme basket which we expect to benefit from this outsourcing of production from China is the logistics industry because the change in supply chains will make them more complex and fragmented which will benefit profitability longer term for the industry.

Quarterly Outlook 2024 Q4

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Head of FX Strategy

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Head of FX Strategy

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.