“I can list a dozen of the very large companies in China, banks, petrochemicals, telecoms, etc, where the PE ratio is four, five, six times and the dividend yield is eight, nine, ten upwards of 10% and that is an important change. What it means for flows is that there will be less interest on a relative basis in India because China is coming back on a lot of people’s radar screen,” says Mark Matthews, MD, Julius Baer.
Exactly six weeks ago the headline was interest rates will remain high, the selloff in the global bond market was excruciating, the war had no clarity as to which way things would move and central bankers were nervous about inflation. The world has changed in six weeks. Are you delighted, are you surprised, are you happy?
I am all three of those things. To me, it was the CPI inflation reading for October that came out on Thursday which was the catalyst. It shows that for the fourth consecutive month, headline inflation is down but more importantly, it looks like core inflation is also rolling over and some of the core readings that the Fed looks at closely like the trimmed mean CPI and the median CPI that the Cleveland Federal Reserve run, those data series actually fell quite sharply on a month-on-month basis.
So the world has changed and it is because we are finally seeing what we knew all along. The many readings we were getting in the durable goods sectors and the commodity sector and in the services sector were showing that inflation was coming down but now it is starting to show up as a trend in the actual CPI inflation reading.
What are the chances that the financial markets are running ahead of themselves because it would take perhaps two or three months of back to back data to support the thesis that CPI has topped out and before that, Fed will not declare a victory against inflation. What happens in the interim where the Street would be divided on what could be the next course for the inflation print and also the Fed commentary?
I do not think we need the Federal Reserve to declare victory to be able to say that we can feel better about markets. By the time the Fed declares victory, the markets will be substantially higher than we are now. You were asking if the market is overbought? It depends on your time horizon, it is probably overbought just in the very short term but one thing I will say is that the S&P was up 5.5% on Thursday and that was the day the CPI number was reported and there have only been 24 other days since 1950 when that index rose 5% or more in one day.
If we look three months out, nine out of those 23 other times, the market was actually down but if we look 12 months out and only two out of the 23 it was down. So, three months out, I am confident we are going to be higher but if you look back historically, the odds are not very strongly in our favour but certainly 12 months out, the odds are strongly in our favour.
Read more at: https://economictimes.indiatimes.com/markets/expert-view/there-will-be-less-interest-in-india-in-2023-as-china-is-back-on-a-lot-of-peoples-radar-mark-matthews/articleshow/95526717.cms