Market Musings 190425: Key Charts To Watch

19th Apr by Edmund Shing

5 comments 1191 reads

Market Musings 190425:
Key Charts to Watch

Podcast:
Investment Strategy Podcast
US recession is now consensus (but not for us)
Click on link above to listen

In this podcast, Edmund Shing, Global Chief Investment Officer, discusses the challenges of predicting recessions, the significance of the VIX volatility index, and investment recommendations for navigating uncertain economic times.

Macro Charts to Watch:
Interest rates, Employment, Inflation, Recession Risk

ECB: European Central Bank lowers interest rates again to 2.25%
Inflation is not an issue, and US import tariffs are likely to weigh on Euro area growth
Expect the ECB to continue to lower its key deposit rate to 2% or lower

US Federal Reserve not moving yet, but bond market says that they will soon
Inflation is more complicated in the US given the new tariffs. But growth will slow quickly soon…
2 year bond yields suggest that the Fed needs to cut rates by 0.5%

US Q1 GDP growth looks to be around 0%
The collapse in consumer and business confidence in the last few months is already weighing on the US economy

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FX: US dollar weakens against Euro and Pound Sterling

US dollar suffers from capital outflows, but the pound still has not recovered to its pre-Brexit referendum level

Global economic policy uncertainty at peak following tariff volatility
Trump’s tariff announcements have sent geopolitical uncertainty to a new high
But expect “trade deals” to be announced soon, allowing for some moderation of these shock tariff levels

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Gold: record geopolitical uncertainty, central bank buying and now retail interest boosts the gold price
Gold breaches $3300/ounce thanks to this combination of demand for true safe haven assets

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And US retail investors have sought safety in cash and money market funds
a good contrarian buying indicator

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Stocks: the correction seems to be steadying
Europe and China looks better placed than the US

US Stocks: Magnificent 7 tech stocks still look ugly
A weaker US economy will…

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ShoeShineBoy

20th Apr

Hi KevinS1,

Thanks for coming back on the India trusts. You have done well with Ashoka India Equity Investment Trust (LON:AIE) so I took a look at the last annual report for the year ended 30 June 2024 and performed a quick Google search on the current holdings listed on the HL web site. Admittedly, some of this will very rough but the Google search results are below:

ICICI Bank Ltd ADR PE of 20

Tata Consultancy Services PE of 26

State Bank of India PE of 10

Zomato PE of 286

HDFC Bank PE of 20

Bharti Airtel PE of 56

CG Power & Industrial Solutions PE of 100

Nestle India PE of 74

Cholamandalam Financial Holdings PE of 17

ICIC Bank Ltd PE of 20

The trust manager notes the following on page 11 of the annual report:

Valuations are at 22x one year forward earnings, as compared to the 10 year average of 20x for BSE Sensex. Although the market seems expensive, in the last 10 years, bar a few instances during market corrections between 2016 and 2020, India has consistently traded at a premium relative to other emerging markets. We never take a call on aggregate market valuations. What we are looking for are attractively valued businesses on a relative basis. Within the market, sectors or businesses trade at different valuations based on their respective risk-reward dynamics. It is the relative framework within which we identify investment opportunities. If a well governed, scalable business is able to generate superior returns on incremental capital, and if after factoring in a certain projected growth we see material upside from current stock price levels, then we will invest.

https://tinyurl.com/vkujar92
So the manager doesn't seem overly concerned about valuations so long as they view the shares they are buying as good quality. I'm not so sure hence my original question in my post yesterday about the possibility of buying an ETF. Maybe an equal weighted ETF that takes out some of the risk of buying some of the highly valued elements. I would hopefully still benefit from the demographics without the risk of high valuations. The downside of this approach is that I have been saying this about tech stocks for 10+ years!

fwiw, the following are my notes written at Mello from late 2023. Pretty much the pros and cons of buying India. I'm a fan but it's valuation that stops me from buying.

India Capital Growth

SSB: closed ended investment trust.

Ticker is ICG. there are 4 trusts available in the Indian sector, following is filtered by NAV performance over 10 years: https://tinyurl.com/5y7c27vx

Trust manager based in Mumbai. SSB: I am always surprised by the number of trust managers who are based in London but they are responsible for running money invested in a foreign country, makes no sense!Small + mid cap sector of the market growing much faster than the rest of the market.

India has 600m people < 25 years old.

India growing at 6%+ per annum.

Less debt per capita than UK (circa 15% v 80%).

India is just coming out of a period of painful reforms eg: tax, banking, resource etc which lead to a lot of businesses collapsing.

Corporates are generally in better shape as a result of the reforms.

Digital infrastructure “amongst best in the world”.

Recent digital reforms mean an identity number was generated for every person in the country ie: same as NI number in the UK. As a result, various financial reforms have been able to take place eg - 400m bank accounts opened in the space of 2 years. This has led to more transactions happening electronically and has also reduced fraud.

Indian government focused on growth with lots of infrastructure being built. As a result, manufacturing is growing eg: mobile phones assembled in India rather than imported.

Government tax revenues are rising.

Residential sales are now increasing after 10 flat years.

Income per capita is 1/6th of China so lots of growth to (hopefully) come.

Currency is now more stable and doesn’t collapse every time there is a global crisis.

So good background but what about the trust ?

Manager for 12 years.

Portfolio turnover is low @ 12% per annum.

Looking for quality mgt and businesses/products that will compound.

Trust is trying to buy leaders in each segment.

Poor US/China relations is opening up lots of opportunities in India. Consumption increasing on the domestic front.

Share prices are increasing more because of upgrades in earnings than the market applying higher multiples.

India trading at a premium to historical valuations which is the opposite of the rest if the world.
Investment flows show domestic investors are putting small amounts of money in (instead of traditional homes: gold and property) but foreign investors are pulling money out.

FX hedging: doesn’t happen because it is expensive.

Trusts focuses on buying good businesses rather than taking macro calls.

SSB

Market Musings 190425: Key Charts to Watch