The global equity markets may worry themselves silly about the phantom drags on the world’s largest economy, but American bulls haven’t heard of it.
MUMBAI: The global equity markets may worry themselves silly about the phantom drags on the world’s largest economy, but American bulls haven’t heard of it.
The Dow Jones Industrial racked up a sixth straight week of gains last Friday, its longest winning streak in 3 years. There are reasons for the ebullience:
1. More than two-thirds (67%) of the 444 S&P 500 companies that have declared their fourth-quarter results have beaten analyst estimates, Bloomberg data said.
2. Also, average quarterly earnings of these companies have climbed 12.5%, over four times analyst projections made just a month ago.
3. US inflation remains flattish
4. A flurry of power-buyouts by private equity players.
Which begs the question, if the US bulls are pumping it in, will it mean a liquidity outflow for emerging markets? Citigroup equity strategist Tobias M Levkovich, Lorraine M Schmitt and Daniel C Kaskawits, in a report on Saturday, said that is a possibility. “As the US market grinds upwards, a reversal of money flows towards the US may occur, leading to a melt-up rather than a feared meltdown,” Levkovich & Co said. A melt-up happens when the retail investor, who is generally the last to rush in, tries to ride the rising rally, driven by regret of having not done so earlier.
This exponentially increases the bullishness in a market and can cause bust-ups. Ketan Karani, V-P, research, Kotak Securities, agrees.
“Emerging markets thrive on liquidity. If there is a flow reversal, it can lead to a correction in the local markets.” But A Balasubramanian, CIO of Birla Sunlife Mutual Fund, doesn’t see US bullishness affecting flows into India.
“Local results have been very good, the confidence in domestic markets fairly high, reflected in portfolio flows of over $3 billion this fiscal. I see portfolio inflows increasing, rather than decreasing.”
Another flank that has opened up, and could be beneficial for local shares, is the opening up overseas markets to Chinese investors.
Theoretically, there is about $120 billion or Rs 100,000 crore of Chinese money waiting to be poured into the global markets over the next 18 months. Richard Cookson and Wesley Fogel of HSBC Global Research, in a report on Friday, said emerging economies are far less sensitive to the the US or global economic cycle than they used to be. This is due to large current-account surpluses, bumper foreign-exchange reserves and generally more sensible economic policies, they said.
Yes, there is a definite slowdown in US housing and construction sectors affecting the economy. But the impact of this on corporate profits has been limited as over 48% of revenue of S&P companies comes from outside US. This, along with a depreciating dollar and cheaper financing is driving M&As. Citigroup’s Levkovich & Co said the M&As would create a situation where investors would get cash from deals that have to be redeployed into fewer available stocks. Thus, supply shrinks and demand is at least constant, pushing share prices up.
That is the situation now, which favours equities going forward.
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