Equity rally has stopped for now
Head of Equity Strategy
Summary: In today's equity update we highlight that macro numbers are doing the best this year against expectations and that it could support equities. Once again we highlight DAX and Nikkei futures as the markets with most momentum as these markets are high beta plays on the global economy. India has been a darling for years but recently growth has come under severe pressure and we highlight the fact that India's equity valuations seem disconnected from macro reality. Finally we focus on Ford Motor that had its debt downgraded to junk status by Moody's.
The equity rally seems to have stopped as equities did not extend gains in Asia session. It seems investors are waiting for the important ECB meeting on Thursday before adding more risk. Recent macro developments do not warrant risk-off here, so our short-term view remains that equities are bid, but longer term our forecast is that the global economy is likely to slip into a recession unless we massive stimulus from both monetary and fiscal policies on top of some US-China trade deal.
Economic surprise index is likely turning positive
The entire year has been a one-way street on bad macro numbers against expectations but luckily for investors that has not spilled into bad returns. Centrals banks made a historic U-turn back in January and February which has elevated risky assets and now macro numbers are no longer disappointing against expectations as measured by the Citi Economic Surprise Index on the G10 countries. The index is likely to push into positive territory very soon and the macro momentum is strong relative to expectations. This could extend the rally in equities.
Nikkei futures still look the strongest on JPY flow
As we have been highlighting the since late last week the DAX and Nikkei futures look the strongest on price momentum. Both equity markets are high beta plays on the macro economy so if risk-on continues these two markets would likely see further momentum. In today’s session Nikkei futures looked relatively strong against a backdrop of more mixed equity markets in Asia. The move is partly currency flows weakening the JPY but also rising sentiment on the macro economy.
Is India a train wreck about to happen?
For years investors have been in love with India. The world’s largest democracy had positive demographics and a low urbanization rate setting the country up for decades of super growth. Everyone piled into the country’s equities getting good returns in both local and foreign currency. But recently the growth engine as been sputtering with news yesterday that car sales in India had it worst ever fall in August down 24%.
On top of that, India’s banking sector has eclipsed Italy as the world’s worst bad-debt pile. We are potentially watching a credit crunch in the making. More strangely is it to see equity valuations in India with MSCI India Index valued at 1.5% dividend yield which makes Indian equities much more expensive than US equities which are already expensive in a developed market context.
Stocks to watch
Ford Motor is in focus as Moody’s downgraded the carmaker’s credit rating to junk status as cash flows and operating margins are expected to remain weak the next two years. It obviously bad for Ford Motor which has been struggling with a weak share price the past five years. The downgrade means higher financing costs which come at a bad time as the economy may slip into a recession within the next 12 months and the car industry is seeing increasing capital expenditures to fund the transition to electric vehicle technology. The company’s debt has a current credit default swap price of 183 basis points which is in line with Bloomberg’s default model. The 1-year default probability is 0.29% which at levels not seen since 2012.
Apple will announce at 17:00 GMT its 13th iteration of the iPhone which is seeing slowing demand. The company is getting around 50% of its revenue from the iPhone so it’s an important event for Apple investors to watch. But Apple understands future growth is not coming from the iPhone but its Services segment (essentially digital sales) and its streaming business in TV and music.
Latest Market Insights
Q4 Outlook 2022: Winter is coming
- Winter is coming to the financial markets as central banks are tightening their grip. How spring will look is still a question.
European energy crisis: it will get worse before it gets betterThe winter in Europe will be tough, but whether the result is political chaos or sustainable, innovative solutions is still undecided.
A difficult and volatile quarter awaitsAs the year draws to an end, commodities continue to be at centre stage of the world with growth pockets political uncertainty.
The bright side: crises drive innovationThe positive spin on crises is that they come with solutions. It is worrisome that deglobalisation may be a response to this crisis.
Green transformation in China: renewable energy and beyondGoing green, China needs to span numerous energy sources to ensure stability, as every source comes with a challenge.
Asia: Intermittent solutions, but a faster renewable adoption curveAsian energy supply is being squeezed. This and the adoption of renewables may change the investment sentiment in the region.
FX: A Fed thaw needed to deliver a sustained USD turn lowerThe US Dollar can keep momentum when the Federal Reserve continues to tighten, leaving the rest to play to their drum.
Autumn can become ugly for equities and bond holders. Comfort for Dollar longsTechnical analysis suggests that equities could face a tough Q4 as could fixed income. US Dollar positions could provide some upside.
The next stock market sector to watch, with stocks going nuclearAs the world scrambles to find affordable, sustainable energy, nuclear is getting attention from politicians and investors alike.
The crypto space is getting cold when the hype disappearsCryptocurrencies face a winter of their own as retail investors and governments are asking tough questions.