Equities will show resilience going forward
Equities are showing resilience despite worries on economic growth sharply bringing down commodity prices. June 2012 saw oil prices drop close to 13% on weak economic data emanating from economies across the world. Poor job numbers in the US, slower manufacturing growth numbers from China to Eurozone and lower GDP growth numbers in India, China, Eurozone and US are giving rise to concerns on global growth prospects.
The sharp drop in oil and other commodity prices, with the Reuters CRB commodity index that tracks a basket of commodities closing down close to 3% in June on a month on month basis is reflecting growth concerns. The record low levels of bond yields of the US and other countries of Germany, UK and Japan are indicating low economic growth, expected fall in inflation and risk aversion by investors. Investors are moving away from bonds of indebted sovereign nations of Italy and Spain and are buying into record low yields of relatively safer sovereigns.
Equity markets have not followed the sharp drop in commodity prices and bond yields. Equity markets were better performers than commodity markets in June with most of the global equity indices closing marginally positive to negative. Outliers were China, which saw its benchmark equity index falling 8% and Germany whose equity index fell close to 4% in June. India saw good gains in its equity markets in June on the back of sorting out of issues of GAAR (General Anti Avoidance Rule) and on the back of expectations of easier monetary policy ahead.
Equities are in the fourth year of a bear run with most of the global indices showing negative returns over a four year period. The general perception on equities globally is that the markets are oversold and investors are underweight equities and overweight in gold and treasuries as seen by the strong performance of these assets (gold has doubled while treasury yields have decline by 300bps since 2007) and even if slow economic growth, Eurozone debt worries and hard landing in China and India can hurt equity markets, the fact is that investors do not want to go more underweight on equities. Hence equities are showing resilience in the face of adversity.
Will investors start increasing weights in equities? The sentiments are still negative with issues of inflation in India, slow growth in China, weak job market in the US, debt worries in the Eurozone and weak export outlook for South East Asian countries. India’s inflation is expected to remain sticky at over 7% levels leaving less room for aggressive rate cuts by the RBI. China’s GDP growth outlook is being revised down with growth for 2012 expected at 8% or below levels the slowest growth in over a decade. US job additions have been low at below 100,000 job additions in the month of April and May. Spain is coming under fire with its bond yields rising to Euro era record of over 7% making the country seek bailout funds for its banks. Economic growth worries in China and Eurozone is hurting export driven economies such as Japan and South Korea.
Investors will not start increasing equity weights in a hurry but they will not go further underweight equities. Equity markets will see resilience with sharp pullbacks from lows, though sustained upward trend will require more conviction.
Currency market movements were less volatile in June though the Indian Rupee fell to its lowest on record against the USD before pulling back. Euro and Yen movements were marginal on a month on month basis. Currency market movements are likely to be muted in July though the Euro will continue on its broad decline if ECB steps in to add liquidity into the system.