Macro & Markets - Global markets rally on liquidity boost :: Edelweiss

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Global equities recorded the best-ever January since 1994 after showing a weak performance for a while. Emerging markets broadly outperformed developed markets, with Russia, India and Brazil leading the charge. A combination of expansion in global liquidity (ECB’s LTRO) and improvement in macro data (e.g. US) led to a turnaround in market sentiments. The US labour market improved materially, although there is still a long way to go. The PMI indices climbed globally, with India PMI rising sharply from 51.0 to 57.5 in just two months. However, one needs to monitor real indicators - cred it growth, auto sales, cement dispatches etc., before reaching a conclusion on economic turnaround. Meanwhile, in the earnings season so far, numbers have surpassed our estimates. 

US economy: Gaining ground, but still not out of the woods  

The US economy has gained ground in recent months led by marked improvement in employment data, buoyancy in consumer spending and pick up in manufacturing. This surely reduces the risks of another recession. However, sluggish real incomes and depressed housing market do not augur well for household spending. Also, external conditions are also not particularly robust given problems in Europe. Therefore, it may be too early to conclude that the US economy is out of the woods.

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Indian economy: PMI improves, but caution warranted

India’s PMIs (both manufacturing and services) have improved markedly recently, defying expectations. The rise was quite sharp, with manufacturing PMI moving from 51.0 to 57.5 in just two months. Importantly, forward looking new orders index, also accelerated, which augurs well for economic activity. However, one should wait for more signals from real indicators like credit growth, exports growth, cement despatches, auto sales etc., before reaching any conclusion on economic turnaround.

RBI: CRR cut marks turn in monetary cycle

The RBI in its monetary policy review cut CRR by 50bps but left repo rate unchanged as structural pressures on liquidity mounted and downside risks to growth increased. Ergo, liquidity improved somewhat (from avg. ‾INR1.5tn earlier to ‾INR1.25tn recently). Despite this improvement, liquidity deficit is elevated and given its structural nature, RBI will continue with OMOs and may even go for another CRR cut.

January rally: Best since 1994; earnings surprise on the upside

Global equities recorded best-ever January since 1994 led by ECB’s actions (LTRO) and improving macros. Indian equities were among top performers, with cyclicals outperforming defensives. Earnings (5.6% YoY) have so far managed to surprise on the upside, aided by a strong top line growth (25.6% YoY), but pulled back by declining margins (17.4% in Q3FY12 vs. 21.2% in Q3FY11). With more th an 50% companies having reported so far, we may see another quarter of sub‐10% earnings growth.