Five insights in five minutes
India’s pandemic crisis
When daily cases passed six figures in the first week of April (the peak number in wave one), it was clear a new surge was upon the world’s second most populous country. Infections have remained above 300,000 for the seventh consecutive day. Despite a second wave, however, there is less uncertainty around the outlook of India’s economy compared with last year as the central government is keen to avoid a national lockdown and is currently administering two million vaccine doses per day. Meanwhile, the equity market seems to be more sensitive to the country’s long-term growth prospects, as evidenced by the S&P Sensex index recording a positive month-to-date return of 0.5 per cent despite the tragic news flow. Looking at the experience of the first wave, investors should also note that Indian stocks remained largely flat until the peak in cases in late September, then resumed their previous upward trend (see chart).
Themes: India, equities
Stock market timing
For equity investors with a nervous persuasion, sell-signs are everywhere. Another S&P 500 all-time high this week. Record first quarter earnings for Hong Kong’s bourse on Wednesday, thanks to rampant trading and a nine-fold jump in initial public offerings. It’s the best beginning to a year for global listings too, with 50 per cent more firms going public than at the peak in 2000. We know what happens next, worriers fret. Sure, but after a fall is the bounce. Timing both is impossible – and those rebound days are critical to performance. Missing the ten best trading sessions in many equity markets over the past two decades (which tend to follow within days or weeks of a sell-off, just when investors are most scared) reduced total returns by up to a third. Meanwhile, Bloomberg data show that 15 of the 22 most popular US market timing indicators have lost money so far this year. All have underperformed a buy and hold strategy.
Themes: global equities
Hedged EM bonds
Credit funds may be sexier, but the profile of currency-hedged emerging market government debt has been attractive enough since the financial crisis – generating a return of 60 per cent over 13 years. That is almost 900 basis points better than Treasuries, and with twice the Sharpe ratio. Covid, however, depressed the yields and flattened the curves that some emerging market bond investors use to fund their hedging costs, making the strategy less desirable. But higher US rates have lifted the Bloomberg Barclays EM local currency government bond index yield by 65 basis points since January, while two versus five year spreads have widened in a dozen emerging markets. Hence the average yield pick-up on a dollar-hedged basis is more than one per cent again over five years. Push duration to a decade and the 3.3 per cent in Indonesia, 2.7 per cent in South Korea and 2.5 per cent in China are beginning to look desirable again indeed.
Themes: emerging market fixed income, Asia fixed income
President Biden’s plans to aggressively cut US carbon emissions have greenlit clean energy stocks. The S&P Global Clean Energy index has outperformed global equities by five per cent in the week since. Per the chart below, these new commitments bring America towards the top of the table for projected emissions cuts by 2030. The poor showings for China and India reflect their strong economic growth trajectories and accompanying carbon footprints. To be fair, the developed world has a larger debt to repay. Excluding land use and forestry, the US, Europe and UK accounted for over half of greenhouse gas emissions until the 1970s. Nonetheless, more cuts will be needed from everyone. G20 emissions are on track to rise 45 per cent from 2010 to 2030. With such tailwinds, a ten per cent premium to book value for clean energy stocks over global equities appears justified, especially considering their 30 per cent higher return on capital.
Themes: Climate change, clean energy, global equities
Political uncertainty and rising coronavirus infection rates have left the MSCI Brazil index a tad confused. It trails the broader emerging markets benchmark year to date but is ahead by three percentage points over the last three months. Brazilian stocks remain compelling. A forward price to earnings ratio of nine times compares with 15 times for EM equities overall. Brazil is also in the cheaper half of BRIC countries on a price to book basis. And let’s not forget, as we’ve mentioned before, that Brazil’s market cap versus the size of its economy is 60 per cent less than its Asian peers – so there’s plenty of upside. Lastly, with 28 per cent and a quarter of the MSCI Brazil index allocated to financials and basic material stocks respectively, investors would benefit from further rotations into cyclical sectors as the global economy recovers.
Themes: Brazil equities
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