Introduction
November 2024 has been a pivotal month in global financial markets, with significant developments shaping investment strategies and economic forecasts. From fluctuating U.S. yields influenced by robust macroeconomic indicators to sectoral shifts in the Indian equity markets, investors face both opportunities and risks. Here’s an in-depth look at key global and Indian financial trends based on the latest insights from Sundaram Asset Management.
1. U.S. Bond Yields and Volatility
U.S. yields have experienced substantial volatility since mid-September, especially around the 10-year benchmark. A surprise 50 basis points rate cut by the Federal Reserve in September led to a brief dip in yields, only to see them rebound as strong labor and inflation data came in. U.S. bond markets reacted to factors such as:
- Strengthening U.S. Macroeconomic Data: Indicators in labor, retail, and consumer sentiment pointed towards economic resilience.
- Federal Reserve’s Rate Commentary: While rate cuts were implemented, subsequent moderate guidance prevented a substantial drop in yields.
- Political Dynamics: Anti-incumbency sentiments ahead of the U.S. elections are anticipated to increase tariffs and fiscal spending, affecting bond market stability.
2. Oil Prices and Yield Movements
A correlation has emerged between U.S. 10-year yields and crude oil prices. As crude oil prices impact inflation through energy costs (a 7% weight in CPI), a rise in crude prices can increase U.S. inflation, which in turn influences yields. Fed Chair Powell’s guidance implies that a $10 per barrel increase in crude oil could push inflation by 0.2%, potentially impacting U.S. GDP growth by 0.1%.
3. Indian Market Dynamics
Indian bond yields have mirrored movements in U.S. yields, with an added sensitivity to crude prices due to India’s high oil import dependency. For Indian investors, U.S. yield trends are critical, as they indirectly affect domestic monetary policies and fiscal projections.
4. Global Equity Market Performance
October proved to be challenging for equity markets worldwide, with notable declines across the board. However, on a three-month basis, markets like Hong Kong, China, and Indonesia showed resilience, outperforming others. Among developed economies, U.S. equities experienced heightened volatility, largely due to elevated bond yields.
5. Foreign Institutional Investor (FII) Outflows
India faced a significant FII exodus, with $10.4 billion in net equity outflows from January to October 2024. Possible reasons for this shift include:
- Chinese Market Appeal: Higher stimulus expectations in China and favorable valuations diverted flows from India to China.
- U.S. Election Concerns: Anti-incumbency sentiments have spurred concerns around the policy impact of U.S. political shifts, adding another layer of uncertainty.
6. Sectoral Winners and Losers
In India’s sectoral landscape, October saw auto, energy, and consumption stocks underperform, whereas public sector banks and financials experienced gains. Such sectoral rotations are typical amid FII shifts and broader market repricing.
7. Earnings Yield vs. Bond Yield
The gap between the earnings yield of Indian equities (NIFTY 1-year forward) and the 10-year government bond yield has shifted, a crucial valuation metric for Indian investors. A negative gap indicates potential overvaluation in equity markets relative to bond yields, which could suggest caution for equity investors at current price levels.
Conclusion
November 2024 underscores a complex global and domestic financial environment. Rising bond yields in the U.S., driven by resilient economic indicators, and fluctuations in oil prices continue to ripple across markets, including India. With FII outflows and evolving sectoral trends, Indian investors need to stay vigilant, balancing equity exposure with fixed-income opportunities that align with macroeconomic shifts.
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