Analysts turn cautious on Asian markets; India remains an outlier

The 55 basis point (bps) spike in the US 10-year bond yield, triggered by a combination of FOMC’s hawkish commentary and BOJ’s relaxation of the yield control curve (YCC) has made analysts cautious on Asian equities and expect them to trade sideways in the short-to-medium term.

Commentaries during the August 24-26 Jackson Hole meetings and the September FOMC meeting are the two most important events, analysts said, will be the trend-deciding factors for the markets in the very short-term.

That said, Indian markets, they believe, are an outlier and can still justify expensive valuations amid a likely recovery in corporate earnings going ahead.

“The gap between Asian earnings yield and the US bond yield is near its lowest – implying a likely period of lackluster drift in the former.

"A sharp slowdown in Chinese economic momentum, continuing trouble for the leveraged frontline property developers and underwhelming policy stimuli are not helping either.

"The only silver linings are the recent earnings per share (EPS)-estimate recoveries in Korea, India and pockets of ASEAN,” wrote Manishi Raychaudhuri, Asia Pacific Equity Strategist at BNP Paribas in a recent note.

Thus far in calendar year 2023 (CY23), the S&P BSE Sensex and the Nifty50 have rallied around 7.3 per cent each.

The gains in the mid-and small-caps have been sharper, with the S&P BSE Midcap and the S&P BSE Smallcap indices surging 21.5 per cent and 24 per cent, respectively during this period.

India’s recent outperformance is, Raychaudhuri believes, is underpinned by strong economic and corporate top-line growth, a policy-driven recovery in investments, expectations of a manufacturing surge driven by global supply chain de-risking and the stability provided by robust domestic flows to stock market liquidity.

“Valuations remain expensive, but the relative lack of risks should sustain them for now.

"Our overweights on Hong Kong/China and India continue, though slightly more so on the latter,” he said.

Bond yields

Meanwhile, the US 10-year yield hit a 17-year high of 4.5 per cent in the past week, which analysts at Nomura believe is partly driven by a still strong/resilient US economy adding support for the higher-for-longer rates narrative.

While a strong economy, Nomura said, should not be a bad outcome for stocks, concerns around likely much higher borrowing costs for companies appear to be offsetting any potential positive feed-through on corporate earnings from a still resilient US economy.

"Asian stocks will likely remain under some pressure now, unless we see some stabilisation in US bond yields (in a scenario of softer economic data), and/or China announces some major support for the economy/financial markets and/or NVDA results/guidance beats market expectations, giving another fillip to the AI thematic," wrote analysts at Nomura in a coauthored note.

Erratic monsoon, El Nino and its impact on crops and thus inflation, dim probability of a further cut in rates by the Reserve Bank of India (RBI) with some possibility of a hike in rates in the second half of the fiscal 2024, and election heavy election calendar that will begin in November and end with the general elections in May 2024, according to Amnish Aggarwal, head of research at Prabhudas Lilladher is likely to keep the market rally in check.

India, he said, seems well poised for growth in the longer term; however, coming months will be a real test for the economy and markets.

“We cut Nifty target to 20,735 given cut in earnings (impact of floods and late Diwali in Q2FY24) and expect the markets to consolidate ahead of 2024 elections.

"We advise stock specific approach and avoiding sectors / companies with weak fundamentals and lack of business moats,” he said.

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