Monthly Presentation by SBI Funds Management Limited
Federal reserve cuts Fed funds rate by 50bps to 4.75-5.00% in September 2024
Summary of Economic Projections (SEP) projects US growth at 2% - in line with the run-rate observed in last eight quarters, unemployment rate to move up to 4.4% (from current 4.2% in August) and PCE inflation to moderate to an average of 2.3%, 2.1% and 2% by 2024, 2025 and 2026 respectively.
Market rate cut expectations align with dot plot; Fed guides cut to be staggered till 2026
Market has brought down its rate cut expectation in the recent wake of Job data. One cut is fully priced in over next two policy. However, uncertainty looms whether Fed will be able to deliver 2 cuts in 2024 as reflected in the dot plots.
Global equity markets rallied on the after effects of Fed rate cut
Led by the US, DM equities have done better this year, so far, with the MSCI World up ~17% YTD. MSCI EM has also caught up in recent months to deliver 10% gains YTD.
Chinese stimulus has driven the rally in EM equities
Though FIIs pulled money out of India, driving negative returns in Indian equities in October.
The yield on 10-year US treasuries has jumped by 60bp since mid-September
Multiple data suggest that our long-standing comfortable range of 10 UST at 3.5-5.5% still holds true
Reflationary thesis is on the rise again
Inflation eases close to target in most emerging and developed market economies; could rebound with monetary easing
Rupee stays highly range bound since 2023; Rupee to average at 84/US$ in FY25
* Rupee stays fairly stable; despite crossing 84/US$ this month, it has depreciated ~1% against US$ in one year and 2% is two years
* Macro stability and active RBI intervention drives lower volatility in rupee and lesser bouts of depreciation
Equity Outlook: Stick to investment discipline amidst volatile market
* Indian equity market corrected in October. NIFTY and SENSEX decreased by ~6% each m-o-m. All sectors showed negative returns on a m-o-m basis. Strongest fall visible in Oil & Gas (-14% m-o-m), followed by auto (-12%) and consumer durables (-10%).
* The extent of fall was almost similar across the market cap. FII’s pulling out of India is impacting large cap in the same breadth even as the valuation arguments are relatively in the favour of large cap over mid and small cap. There has been some moderation in mid cap valuations over the large cap, but its still elevated.
* FIIs turn net sellers in Oct’24 (sold a net of ~USD 10 billion in Oct’24 in equity segment vs. a purchase of USD 6 billion in Sep’24). DIIs remain net purchasers.
* Deeper cuts to FY25 earnings estimate in recent months. Given the unforgiving market response to earnings misses so far in Q2 and the likelihood of weak earnings and EPS cuts, we expect it to fall further. That said, we expect economic momentum to improve as fiscal spending rises.
* In India, growth has moderated recently, with public sector capex declining after a period of significant growth- a part of it is also due to weather and general election. Consumption indicators (auto retail sales, card spends) were also soft. This will likely adversely impact the Q2 FY25 results and GDP as well. Centre’s capex thrust is moderating. States capex is getting compromised by welfare spending compulsion.
Debt Outlook: Near-term fundamentals dictate neutral to marginally favorable outlook
* Developed market bonds worsened in October 2024. The yield on 10-year US treasuries jumped by 60bp since mid-September. The slump in bond prices is global, setting international bond markets up for an unprecedented third consecutive year of negative total returns. The underlying arguments for a recession are weaker now because central banks globally are cutting interest rates and will continue to cut next year regardless of inflation. Market has brought down its rate cut expectation in the recent wake of Job data. One cut is fully priced in over next two policy. However, uncertainty looms whether Fed will be able to deliver 2 cuts in 2024 as reflected in the dot plots.
* A range of recent developments suggests that the world economy is moving into a period of higher nominal growth and persistent price pressures. China is embracing a more concerted fiscal stimulus and, the US is likely to stay in expansionary mode. Further interest rate cuts are typically reflationary in nature. Hence reflationary cycle should be the base case rather than the deflationary risk.
* In absolute terms, INR has crossed Rs.84/US$ this month reaching an ‘all-time low’. Yet the rupee has been stable in recent months. The rupee is down less than 1% against the US Dollar over the past year. Rupee to average at 84/US$ in FY25.
* The CPI for September registered 5.5% print, surpassing expectation. That said, analysing recent inflation trends reveals a more benign outlook. Hence, monetary policy does not necessarily need to be restrictive (real rates: Repo rate less CPI inflation has been >1%).
* The Q2 FY25 GDP print would be critical to shape the monetary policy discourse. We suspect that the growth would underwhelm RBI’s expectation, perhaps driving a reassessment of growth inflation conundrum in India by the MPC members.
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