In
the backdrop of an equity markets rout witnessed in Q3’15, market participants must
have heaved a sigh of relief that the quarter has ended and it’s October1st!. With approximately $11 trillion of global
market cap wiped out, global equities have witnessed its worst quarter since
2011. Based on anecdotal evidence, September quarter has been the worst for
stocks and hopefully markets rebound from these levels.
The
epicenter of this ‘stockquake’ was China and concerns related to its slowing
economy which led to Shanghai stock index declining c28% in the quarter. The
continuing slump in commodity prices on the back of lower global demand has in fact
‘exported disinflation’ across the globe. China also depreciated yuan by
approximately 2% and has made its currency market linked (yuan has declined
2.5% vs. USD in Q3’15). The yuan depreciation spooked the Asian Emerging
Markets (EMs) due to unfounded fears that the countries could use depreciating
FX as a tool to gain competitive advantage in exports. This led to a sharp
sell-off in Asian EM currencies against USD. Asian stock markets posted the weakest
quarterly performance since 1998 due to decline in commodities prices and fears
of Chinese slowdown. MSCI Emerging Market index declined c17% YTD (-18.5% in
the quarter) while MSCI Frontier 100 index declined c16% YTD (-11.1% in the
quarter). The top 10 value destroyers (mcap>USD
20bn) were primarily Chinese stocks in Financials along with Petrobras.
Top
10 Value Destroyers in Asian/Emerging markets in Q3’15
Stocks having
mcap>USD 20bn as of 7/1/15
In
this EM turmoil, India was standing tall
with relative outperformance, Nifty was down 5%, with FIIs pulling out
approximately $5 billion out of Indian markets. The fall was stemmed due to
buying by DIIs (Domestic Institutions) which has seen a steady inflow of domestic
money from retail investors through Systematic Investment Plans (SIPs). However
in dollar terms, decline was >10%+ in the quarter due to approximately 5%
depreciation of INR vs. USD. The recent 50bps rate cut announced by India’s
Central Bank (RBI) would provide some respite. Furthermore, India’s
macroeconomic situation has been strongest ever in recent history due to slump
in crude oil prices (WTI Crude down 24% in Q3CY15; -16% YTD) and commodity
prices rout. India's current account deficit and fiscal deficit is expected to narrow
down to 1.2% and 4% of GDP respectively in FY15-16 (from CAD: 1.7%, Fiscal
deficit: 4.4% in FY14). Indian Central Bank also lowered its 2017 inflation
expectation to sub 5% despite two consecutive droughts; a positive for Indian
currency.
US equities also declined approximately 7-9%
(S&P 500/-6.9%, NASDAQ/-7.4%, NYSE/-9.3%) in Q3CY15; however they have
outperformed EM equities in dollar terms by about 10% YTD (20% in last two
years). There is one school of thought who believes that US market valuations
are not inexpensive in light of lack of earnings growth. US exporters and MNCs
have been hit by a strong dollar while energy and oil dependent sectors have
been hit hard by lower crude prices. The market is also apprehensive ahead of
the US presidential elections scheduled in 2016 and would be susceptible to
news flow in the build-up in the campaign trail. The case in point being the
sell-off witnessed in the biotechnology stocks in response to Secretary Clinton’s
tweet regarding high drug prices and a need to bring the prices down. The top 10 value destroyers in this quarter
were primarily stocks in Healthcare (Mylan NV), Energy, Information Technology
and Consumer Discretionary sectors.
Top 10 Value Destroyers in the US markets in
Q3’15
Stocks having
mcap>USD 20bn as of 7/1/15
The
global markets have been patiently waiting for the last few months for the
expected Federal Reserve (Fed) interest rate hike. Fed deferred the rate hike
in September citing global slowdown concerns due to China as one of the reasons
which has led to lower inflation rate as compared to its target rate. Hence
although employment and labor market supported a case for rate hike, lower than
expected inflation deterred Fed from pulling the trigger. This spooked the
markets as the Fed’s commentary regarding weak global growth which doubts
whether Fed knows something ‘nasty things’ about global economy which markets
have not already discounted. The overhang of a possible rate hike in Dec 2015
policy meeting still persists.
European equities declined approximately c7-12% (FTSE
100/-7%, CAC40/-7%, DAX/-11.7%) in Q3CY15. This was impacted by Greek debt
crisis which led to sharp YTD depreciation in euro versus dollar until the deal
was clinched in August 2015. The deal marked an end to more than six months of
turbulent negotiations between the Greek left-wing government and its
creditors, other euro zone countries and the International Monetary Fund, that
brought Europe’s currency union closer to the breakup. Europe also witnessed a ‘Black Swan’ event with Volkswagen (VW) episode
weighing down on automobile & automobile ancillary industries in month of
September. According to Fitch, the VW emissions scandal could prove a turning
point for the whole automotive industry around the world. More broadly, the
whole transportation sector could be affected if this emission test crisis fundamentally
affects consumers and regulators’ attitude towards cars, driving and pollution.
The top 10 value destroyers in this quarter were primarily from stocks in
Consumer Discretionary (VW, Renault), Materials (Glencore), Financials.
Top
10 Value Destroyers in European markets in Q3’15
Stocks having
mcap>USD 20bn as of 7/1/15
Outlook
Overall
equity markets are likely to face turbulent times in next 2-3 quarters due to
recalibration of Chinese economy, dislocation triggered by low crude oil & commodity
prices and impact due to pending rate hike. There could be contraction in
valuation multiples if the markets are not able to deliver commensurate
earnings growth to support the valuations. We believe there could be greater
interest in Indian equity markets over medium to long term as we expect India
to ride this ‘economic storm’ better due to an improved macroeconomic situation
and expected cyclical and structural earnings growth in FY17 driven by
initiatives and measures taken by Modi Government.
