In today’s briefing:
- How the World Cup Almost Unraveled China
- “Second Time Lucky”, Or “Fooled Me Twice”?
- Efforts to Preserve Operating Margins Produce Inflation and US Equity Valuation Concerns
- India: Investment-Led Growth Crowded-In as Government’s Fiscal Deficit Is Contained
- You Think The Labor Market Is Hot? Think Again
How the World Cup Almost Unraveled China
- How should investors think about the current protests in China?
- How risk appetite reacts to events such as the unrest in China depends on how they are perceived.
- We offer three templates to consider: A case of political instability; a case of financial or economic instability; and business as usual.
“Second Time Lucky”, Or “Fooled Me Twice”?
- A previous “can’t miss” breadth thrust indicator of a new bull market just flashed a buy signal. Though the last signal in August failed badly.
- Is the latest signal is a case of “second time lucky”, or “fooled me twice, shame on me”?
- We believe that much like the August buy signal, unfavourable top-down macro conditions argue against a sustainable advance in stock prices and the start of a new bull market.
Efforts to Preserve Operating Margins Produce Inflation and US Equity Valuation Concerns
- Rising US inflation since 2021 H2 has not produced the same prolific P/E multiple compression witnessed in the 1970s, based on the premise that higher inflation will not be protracted.
- Since the end of the last recession, companies have resorted to price increases to preserve operating margins, thereby generating economy-wide inflation and some downward pressure on P/E multiples.
- Sticky US inflation raises the spectre of equity returns being earnings-driven, while only those companies enjoying positive real earnings growth will be considered for higher valuations.
India: Investment-Led Growth Crowded-In as Government’s Fiscal Deficit Is Contained
- After 9.7%YoY growth in 1HFY23, we expect real GDP growth of 7.5% for the full FY23, led by investment spending, which is being crowded-in as the fiscal deficit stays contained.
- Nominal GDP grew 16.2%YoY in 2QFY23, bolstering government revenue and corporate earnings. The fiscal deficit in Apr-Oct’22 was 45.6% of the FY23 target, having already exceeded budget targets in Apr-Oct’19&’18.
- With Brent crude prices falling below US$85/bbl, CPI inflation is likely to be below 6% YoY in Jan-Mar’23. We expect 7.3% real GDP growth in FY24 despite the OECD recession.
You Think The Labor Market Is Hot? Think Again
- Especially at turning points, looking beyond the main headlines in macro data can make the difference in understanding where do we really stand in the macro cycle.
- The last US payroll report was tagged as very strong – but if you look deeper you realize the current state of the US labor market is far from ‘‘hot’’.
- Job creation is clearly trending down, alternative real-time and forward-looking labor market indicators point to a sharp deterioration ahead and statistical inconsistencies are artificially boosting non-farm payrolls to the point the US government reached out to ask if I could help them look into it.
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