India Closes In On China As Largest Emerging Market

Economic

Summary:

Rise to almost a fifth of global stock benchmark quandary for fund managers concerned at high Indian valuations.

India is catching up on China’s spot as the largest country in a benchmark emerging-market index, underlining a quandary for global investors who are becoming increasingly exposed to its ebullient but expensive stock market.

Soaring share prices, stock sales and earnings growth by Indian companies have pushed India to just under a fifth of the MSCI emerging markets index while China has fallen to a quarter, from more than 40 per cent in 2020.

An MSCI index review scheduled for next month could elevate India to above 20 per cent, eclipsing Taiwan and putting India’s weighting directly behind China’s, investors say.

The narrowing gap has become of the biggest issues for investors in emerging markets this year, as they debate whether to put capital into an already red-hot Indian market, or into Chinese stocks that are relatively cheap, but are being hit by an economic slowdown.

“The two consensus trades in emerging markets today are ‘long India, short China’,” said Varun Laijawalla, emerging markets portfolio manager at NinetyOne, the asset manager. “The valuation spread between these two markets is as wide as it’s ever been,” he added.

Indian stocks are trading at 24 times their expected earnings next year, while China is at just 10 times.

The shift has also underlined the power of indices in emerging markets, whether by directing billions of dollars in index-tracking passive flows or leading active managers to calibrate their exposure relative to established benchmarks.

“Ten or 11 years ago, India was 6 to 7 per cent of the index. Now it’s close to 20 per cent,” said Kunjal Gala, head of global emerging markets at Federated Hermes. Because Indian shares are already relatively pricey, the index shift “poses an interesting dilemma for long-term investors like us, or investors who are more focused on ‘margin of safety’ valuations.”

“We are slightly underweight India at the moment, not because we don’t like India as a country from a top-down, macro perspective,” but because of that focus on margin of safety or trying to buy up stocks at prices much less than their intrinsic value, Gala said.

Domestic inflows into equity funds have been a critical factor. Average annual net domestic flow into equities was $12bn between 2016 and 2020. Between 2021-2023 these annual flows had swelled to $29bn, Laijawalla said.

India Closes In On China As Largest Emerging Market_1

Despite scepticism about the sustainability of these flows and valuations, part of the dilemma for investors is that it has been very costly in the past to miss out on Indian stocks.

India has been among the best-performing markets in the world in local currency terms and kept pace with US markets in dollar terms in recent decades.

It has also been the world’s best market for so-called “multi-baggers” or stocks that have risen at least ten-fold, according to Vikas Pershad, a portfolio manager at M&G Investments.

“One of the least relevant financial indicators anywhere, but especially in India, is the one-year forward price-to-earnings ratio,” Pershad said. “This is why, for 20 years, investors have missed out on returns in India.”

Consensus forward earnings per share estimates for Indian constituents in the MSCI emerging markets index are in the mid-teens for this year and next, according to Bloomberg data, similar to other emerging markets.

While Indian company earnings are climbing, the pace is not faster than other emerging markets. “The profit growth in India is actually ordinary,” said Sunil Tirumalai, global emerging markets strategist at UBS.

But while Chinese company valuations have deflated in the last couple of years, India’s have done the opposite, in part driven by a retail investment boom.

Many Indian households are pouring money into domestic equities to offset what are seen as low interest rates, which at best only equal official inflation.

Domestic buying, often via automated monthly transfers to funds run by large banks such as ICICI, has easily countered the shift away from India by foreign institutions. “Foreign ownership has fallen to a 11 year low,” according to Tirumalai.

“On an aggregate basis, global investors are still underweight India,” partly because of valuations, Vivian Lin Thurston, a portfolio manager at William Blair Investment Management, said. “As the Indian weight is increasing, it gets harder for them to find attractive value stocks in India, or they will need to rethink their valuation metrics.”

After the expansion of mainland listed companies in 2019, China’s weighting soared in the index soared the following year. Even then, mainland stocks are still not fully included.

“Historically, whenever countries have hit a 25 per cent weight in the MSCI EM Index, they have tended to fall back from their highs,” said Jitania Kandhari, managing director on the emerging markets equity team at Morgan Stanley Investment Management.

Source:Financial Times

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Warren Takunda

Economic

This is according to a leading survey of economic activity, which revealed new business growth across the UK private sector jumped to a 15-month high.

The Pound to Euro exchange rate rose back to 1.19 after the S&P Global UK Composite PMI rose to 52.7 in July from 52.3 in June, beating expectations for 52.6.

By way of contrast, the Eurozone equivalent fell to 50.1 from 50.9, defying expectations for a rise to 51.1. A reading below 50 indicates contraction, suggesting the Eurozone's headline PMI figure headed in the wrong direction in July.

UK businesses reported a strengthening of employment growth at the start of the third quarter, as staffing numbers rose at a solid rate that was the fastest observed in just over a year.

This can maintain upward pressure on wages and will ensure the Bank of England retains a cautious approach to cutting interest rates.

If the Bank opts to cut next week, it will likely be a 'hawkish' cut, in which it warns further reductions in Bank Rate are highly uncertain.

Some members of the Bank's Monetary Policy Committee will have been encouraged by the revelation that prices charged inflation slowed to their weakest since February 2021 in July, driven by a softer increase in output charges at services companies.

Elevated services inflation is chief among the MPC's concerns. Members judge that headline inflation will rise over the coming months owing to the UK's elevated service inflation (5.7% y/y in June).

An initial cut could weigh on Pound Sterling, but weakness could be limited by ambiguity over further cuts.

Across the English Channel, the Eurozone economy is held back by an ongoing contraction in manufacturing activity (45.6 vs. 51.8 in the UK). This is largely centred on the region's biggest economy, Germany, where a manufacturing slump continues. Pound to Euro Higher After PMIs Show UK/Eurozone Economic Divergence_1

Pound to Euro Higher After PMIs Show UK/Eurozone Economic Divergence_1

Image courtesy of Berenberg.

"The UK is well ahead of the Eurozone," says Salomon Fiedler, an economist at Berenberg Bank. "Even the manufacturing sector seems to be participating in the upswing, with the index in expansion territory for the third consecutive month."

However, the Eurozone Services OMI (51.9) also disappointed, falling from 52.8 and undershooting estimates of 53.

"The eurozone manufacturing sector was again a key source of weakness. Production was down markedly in July, and to the largest extent in the year-to-date. As such, a rise in services activity stopped the overall private sector from falling into contraction. That said, the expansion in the service sector was only modest and the weakest since March," said S&P Global.

These data suggest a divergence in economic fortunes between the Eurozone and UK, which can continue to support the Pound relative to the Euro.

"EUR-GBP has room to fall, we believe," says Clyde Wardle, Senior EM FX Strategist at HSBC.

Source: Poundsterlinglive

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Cohen

Economic

British business activity picked up this month, bolstered by the fastest manufacturing growth in two years and the strongest inflow of new orders since April 2023, a major survey showed on Wednesday.

The figures may cheer Prime Minister Keir Starmer's new government - which is targeting faster growth to allow higher public spending - and the Bank of England too, as inflation pressures fell to their lowest in more than three years.

Although growth so far this year has exceeded most forecasters' expectations, Britain's economy has performed relatively poorly since the COVID-19 pandemic.

Among the Group of Seven rich economies, only Germany has done worse, as it took an even bigger hit than Britain from the surge in European natural gas prices which followed Russia's full-scale invasion of Ukraine in 2022.

July's S&P Global Flash Composite Purchasing Managers' Index rose to 52.7 from June's six-month low of 52.3, a shade higher than the 52.6 forecast in a Reuters poll of economists.

The services component rose slightly less than expected, while the smaller manufacturing sector beat expectations to hit its highest since July 2022.

"The first post-election business survey paints a welcoming picture for the new government, with companies operating across manufacturing and services having gained optimism about the future," S&P Chief Business Economist Chris Williamson said.

The future output component jumped from 70.4 to 74.7 in July, its second-highest reading since February 2022, helped in part by the fastest growth in export orders since March 2023.

"Companies often commented on an improvement in market confidence and the securing of new contracts, following some reports of a pause in client spending decisions prior to the general election," S&P said.

Businesses raised prices by the least since February 2021 - driven by moderation in the services sector - and they reported one of the smallest increases in costs since January 2021.

The BoE will publish new inflation forecasts on Aug. 1, but investors have scaled back bets that it will cut interest rates from their 16-year high of 5.25% after data last week showed services price inflation and wage growth remained high.

Source:Reuters

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Warren Takunda

Economic

The US dollar was mixed against its major trading partners early Wednesday — up versus the euro and Canadian dollar, down versus the pound and yen — before a busy day of data releases, starting with advance trade data for June at 8:30 am ET.

S&P Global's flash estimates for manufacturing and services conditions for July are due to be released at 9:45 am ET, followed by new home sales for June at 10:00 am ET and weekly petroleum stocks data at 10:30 am ET.

The Atlanta Federal Reserve is expected to publish its final Nowcast estimate of Q2 gross domestic product growth around midday.

Earlier Wednesday, the Mortgage Bankers Association said that mortgage applications, particularly for new purchases, fell despite a decline in mortgage rates.

Federal Reserve officials remain in their 'quiet period' leading up to the July 30-31 Federal Open Market Committee meeting, so prerecorded opening remarks from Fed Governor Michelle Bowman at 4:05 pm ET are expected to include no comments on the economy or monetary policy.

A quick summary of foreign exchange activity heading into Wednesday:

USDEUR fell to 1.0844 from 1.0851 at the Tuesday US close and 1.0858 at the same time Tuesday morning. The Eurozone's manufacturing purchasing managers' index fell slightly in July to indicate a faster pace of contraction while services PMI slipped as well but remained above the breakeven point, data released earlier Wednesday showed. The next European Central Bank meeting is scheduled for Sept. 12. ECB policy board member Philip Lane is due to speak at 8:00 am ET.

GBPUSD was little changed at 1.2904 from 1.2903 at the Tuesday US close and 1.2902 at the same time Tuesday morning. UK manufacturing PMI and services both improved modestly in July to indicate faster growth, according to data released earlier Wednesday. The next Bank of England meeting is scheduled for Aug. 1.

USDJPY fell to 154.5373 from 155.6428 at the Tuesday US close and 156.1624 at the same time Tuesday morning. Japanese manufacturing PMI slipped below the breakeven point in July while the services reading jumped back into expansion territory, data released overnight showed. The next Bank of Japan meeting is scheduled for July 30-31.

USDCAD rose to 1.3786 from 1.3779 at the Tuesday US close and 1.3755 at the same time Tuesday morning. The Bank of Canada is expected to lower interest rates by 25 basis points to 4.50% at its meeting Wednesday, with an announcement due at 9:45 am ET, followed by a press conference at 10:30 am ET. Prior to that, data on Canadian home prices and wholesale sales are set to be released at 8:30 am ET.

Source: MTNewswires

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Warren Takunda

Economic

Stocks

European shares opened lower on Wednesday, with luxury stocks under the pump as LVMH second-quarter sales growth missed consensus estimates and eurozone service and manufacturing surveys showing weaker readings.

The pan-European Stoxx 600 index was down 0.4% at 513.42 with most major regional bourses lower. Sentiment was also hit by disappointing corporate earnings from Wall Street heavyweights overnight.

In after-hours trade in the US, Tesla shares fell sharply after the electric carmaker said net profits fell 45% in the second quarter, while Google parent Alphabet disappointed with slowing ad sales growth. In other news, Visa, UPS and GM also underwhelmed investors with their latest numbers.

"As such, two of the Magnificent 7 stocks failed to create euphoria when they reported their Q2 results yesterday. The less-than-ideal set of earnings comes at a time when investors are questioning whether the AI rally has gotten ahead of itself," said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

In economic news, The eurozone composite purchasing managers index fell 0.8pts to 50.1 - its second consecutive monthly decline. Both services and manufacturing output saw weaker readings,

Consumer sentiment in Germany rose to its highest level in more than two years, according to a closely watched survey from GfK and the Nuremberg Institute for Market Decisions, as income expectations and the economic outlook improved significantly.

The GfK Consumer Climate index for August increased to -18.4, up from a revised -21.6 in July and ahead of the -21.0 expected by economists. This was the highest reading since April 2022.

On the equities front Deutsche Bank shares fell after reporting a loss in the second quarter, higher-than-expected provisions. and revealed that a second share buyback was off the table this year.

Luxury stocks were all down after the LVMH numbers with Hugo Boss, Christian Dior and Kering all lower. Hugo Boss was also hit by a downgrade from Exane BNP Paribas to 'underperform' from 'outperform' citing slower topline momentum and pressure on margins.

Shares in Nexans surged after the cable and optical fibre group posted better-than-expected first half results and raised its annual guidance.

French planemaker Dassault Aviation was also flying higher after it on Tuesday reported higher first half adjusted net sales.

Defence firm Rheinmetall gained after it reported second-quarter sales and operating results above expectations.

Budget airline easyJet soared after it lifted its holiday forecast following a 16% rise in profit.

Source: ShareCast

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Samantha Luan

Economic

Having boomed its way through 2023, the US economy is coming back to earth.

Companies are hiring fewer workers. Consumers are spending less. The housing market is all but paralyzed by the highest interest rates in decades. Manufacturing is struggling, with the exception of sectors benefiting from government incentives, such as semiconductors and electric vehicles. And even as inflation slows, business and households continue to complain of a sting from high prices.

Yet unlike most slowdowns, this one is playing out as a textbook soft landing—the rare and difficult feat of slowing the economy without causing a recession. Inflation has cooled without a huge increase in unemployment, retail spending has cooled but not collapsed, and the economy continues to grow. In Bloomberg’s latest survey, economists see a 30% chance of a downturn in the next 12 months, compared with 60% in the survey a year ago.

Figures due out Thursday are expected to show the economy grew 2% in the second quarter. After the 1.4% growth of the previous quarter, that would be the slowest consecutive quarters of growth since 2022.

The question now is how much will the economy decelerate and for how long?

“Right now we are still on a path for a gradual moderation,” says Sarah House, senior economist at Wells Fargo & Co. “But there are still a lot of questions around, do things change more quickly than expected?”

The shift in conditions is evident on Main Street and on factory floors. Suresh Krishna, who runs Northern Tool + Equipment, a family-owned company in Burnsville, Minnesota, which makes and sells products that include compressors, pressure washers, water pumps and assorted gear, says business remains good. But he has also noticed that customers have become more discerning.

“Whether it be a trade professional or a consumer, they are watching their wallet,” Krishna says. That’s especially evident for bigger ticket items that retail for more than $500. “They are kicking the tires a lot more than they have in the past.”

In New York, Avremy Scheinfeld, who runs Abe’s Corner, a kosher restaurant and bar in Brooklyn, is having to trim staff hours because high interest rates on his credit card debt are biting into his bottom line.

“The economy is rough right now, everything is expensive,” Scheinfeld says. “If I increase prices, it will push away my clients. It’s hard.”

Observations such as those are in sync with recent data that show a clear softening trend.

Hiring and wage growth stepped down in June while the unemployment rate rose to the highest since late 2021 (though it remains historically low). “When one looks at unemployment, that clearly shows things have cooled considerably,” says Bloomberg Economics’ Anna Wong, who expects the jobless rate to tick up from 4.1% to 4.5% by yearend.

The US Economy Is Slowing, Which Is Just Fine With the Fed_1

Also in June, economic activity in the services sector by one measure contracted at the fastest pace in four years. Data released July 12 showed consumer sentiment diving to the lowest level in eight months as high prices continued to weigh on Americans’ views of their finances and the economy.

In the housing market, mortgage rates have been hovering around 7%—more than double what they were three years ago—holding back construction of single-family homes and keeping prices high.

The US Economy Is Slowing, Which Is Just Fine With the Fed_2

In the Federal Reserve’s latest Beige Book, a collection of anecdotes and commentary on business conditions, almost half of the 12 Fed districts cited flat or declining activity.

“It’s an unusual slowdown,” says Gregory Daco, chief economist at EY, the accounting and consulting firm. He says employers appear less inclined to reduce head count because worker shortages are still fresh in their minds. He thinks that could change quickly, though, especially if interest rates stay high. “Could this turn into something worse? That’s certainly a risk. We’re navigating uncharted waters when it comes to the post-pandemic labor market.”

The US Economy Is Slowing, Which Is Just Fine With the Fed_3

In a hint of what’s ahead, Fed Chair Jerome Powell on July 15 said second-quarter economic data have provided greater confidence that inflation is heading back to the central bank’s 2% goal, possibly paving the way for interest-rate cuts.

“The US economy has performed really remarkably well,” Powell said during a July 15 appearance at the Economic Club of Washington DC. Wall Street traders have responded to the softening data by ramping up their bets for three rates cuts this year instead of the two they had been expecting.

Red flags are popping up here and there. Households have added $3.4 trillion in debt since the pandemic, and some are struggling to make payments. “Credit card delinquency is on an upward trend, and the rate at which auto loans are transitioning into delinquency is at a 13-year high,” Fed Governor Lisa Cook said June 25 at a speech in New York. “These rates are not yet concerning for the overall economy but bear watching.”

At Florida-based Blue Compass RV, expectations for several rate cuts this year had stoked hopes for a revival in recreational vehicle demand ahead of the spring and summer driving season, says Jon Ferrando, founder and chief executive officer of Blue Compass. Instead, an unexpected burst of inflation in the first months of the year led the Fed to keep rates steady.

“Right now we are in a slowdown period. We have been in it for two years, and I don’t see us coming out of it in 2024,” says Ferrando. “I don’t necessarily see significant Fed rate cuts, and if we have a divisive political election that will weigh on consumer sentiment.”

Some liken the current moment to the mid-1990s, another period when the Fed managed to nail a soft landing, despite traditional harbingers of a recession—such as a contraction in the money supply and persistently weak readings on manufacturing orders. The economy kept growing for another five years, until the dot-com bubble burst. In a research note titled Breaking the Rules, Morgan Stanley’s chief global economist Seth Carpenter questioned whether the signs of a slowdown in the economy are anything more than that.

“I don’t know that we have a half-decade of expansion to go,” he wrote. “But for now, we need to see other indicators to change our minds.”

Source:Bloomberg

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Data Interpretation

The S&P PMI for July was released on 24 July (UTC):

S&P Flash UK Manufacturing PMI for July at 51.8 (Expected: 51.1, June: 50.9), a three-month low.

S&P Flash UK Services PMI for July at 52.4 (Expected: 52.5, June: 52.1), a four-month low.

S&P Flash UK Composite PMI for July at 52.7 (Expected: 52.6, June: 52.3), a three-month low.

S&P Flash UK Manufacturing Output Index for July at 54.4 (June: 53.3), a nine-month low.

Private sector activity in the UK expanded at a solid and faster pace in July, the latest PMI report said, with the PMI Composite Output Index rising to 52.7 in July from 52.3 in June, mainly due to an increase in new orders and a rebound in business confidence. To date, the average of this index is 53 in 2024.

After a prolonged downturn, manufacturing activity increased sharply again, with the production level rising for the third consecutive month to its highest level since February 2022. Meanwhile, growth in service sector activity also accelerated slightly, with total new orders rising by the most since April 2023.

Employment growth strengthened at the beginning of the third quarter, with a solid increase in the number of employees. Importantly, employment at manufacturing companies remained stable, ending a 21-month downward trend.

Although input cost inflation in the services sector eased further in the face of weakening wage pressures, inflationary price growth slowed to its lowest level since February 2021. However, inflation remains above its long-term trend as businesses continue to pass on higher costs to customers.

Business confidence across the UK rebounded in July amid expectations of improving demand conditions, stronger business investment, interest rate cuts, and political stability. Manufacturing and services firms were alike in showing greater optimism towards future business activity.