Still Strong

Here are some of the biggest stories from last week:

• The US economy grew by more than expected last quarter.
• Indian equity issuance hit a record high in the first half.
• Sovereign wealth funds are turning very bullish on emerging markets.
• A trade-weighted index of the British pound hit its highest level since the 2016 EU referendum.

Dig deeper into these stories in this week’s review.

Macro

The world’s biggest economy continued to flex its muscles, with new data last week showing US GDP growing at a 2.8% annualized rate last quarter from the one before – above forecasts of 2% and a marked jump from the first quarter’s 1.4% pace. That strong showing was driven by the economy’s main growth engine, personal spending, which increased by a better-than-expected 2.3%. The report will likely further support the view that the Fed has successfully pulled off a soft landing – that dream scenario where its rate hikes slow the economy just enough to tamp down inflation, while avoiding a recession. The latest inflation data, after all, showed the annual pace of consumer price gains easing more than expected to just 3% in June – the lowest level in over three years.

Stocks

With the fervor for Indian stocks showing no signs of slowing, the nation’s companies are rushing to take advantage of the bull market to issue record amounts of shares. Almost $30 billion was raised in India’s equity markets during the first six months of 2024, setting a new half-year record. That also marked a near tripling from the same period last year – a sharp contrast to the rest of Asia (excluding Japan), where issuance dropped by 32% over the same timeframe.

Investors have been more than happy to snap up the new supply, and it’s not entirely hard to understand why. Buying into Indian stocks allows them to invest in the world’s fastest-growing major economy – forecast by the International Monetary Fund to expand by 6.8% this year. Further helping demand is the millions of Indians who are increasingly choosing to put their savings in stocks, rather than traditional stores of wealth such as gold or real estate. Foreign investors are also rushing into Indian stocks, attracted by the country’s stable currency, strong corporate earnings, and better returns compared to China. In fact, the MSCI India index has outperformed its Chinese counterpart by more than 100% over the past three years.

However, some investors have started to balk at India’s lofty valuations. The MSCI India’s forward P/E ratio is currently 22.6x, or 18% higher than its ten-year average. That also marks a 82% premium on top of the MSCI Emerging Market index’s forward P/E ratio of 12.4x – well higher than the ten-year average of 61%.

Others are concerned about the sheer amount of equity hitting the market, as well as the relatively poor performance of many new issues. Indian initial public offerings (IPOs) have, on average, gained 25% on their first day of trading, according to Dealogic, compared with the global average of 52%. Meanwhile, follow-on public offers, where additional shares are sold post-IPO, gained about 2% on average in India, compared with 10% globally.

Emerging Markets

Geopolitical tensions, often seen as a source of uncertainty and risk, are paradoxically expected to benefit emerging markets (EMs) in the coming years. That’s according to an annual survey by Invesco, which gathered insights from 83 sovereign wealth funds that collectively oversee tens of trillions of dollars in assets.

More specifically, nearly three-quarters of the respondents expect EM returns to match or beat those from developed markets over the next three years. They believe that rising tensions between the US and China will help developing nations as international companies, seeking to avoid trade barriers between the world’s two biggest economies, start shifting their supply chains away from China and toward other EMs. That, in turn, will bring more business, investment, and economic growth to these regions.

It’s worth noting that the sovereign wealth funds aren’t treating developing markets as a homogeneous bloc, with 83% of the respondents picking emerging Asian countries, excluding China, as their top investment priority in the coming years. When it comes to EM debt, which more than half of the firms use to invest in developing nations, India has become a top pick, with 88% of respondents expressing interest in allocating more money to the country’s bonds – up from 66% in 2022. Indonesia is also getting more interest with 47% looking to increase exposure to its debt, up from 27% in 2022, while China saw a decline to 35% from 71%.

Overall, the improving positive sentiment from the latest survey could add to the bull case for investing in developing countries. EM stocks are cheap and would, along with EM bonds, benefit from rate cuts expected later this year. On top of that, EM currencies are strengthening, boosting the returns for international investors when converted back into their home currency. What’s more, EM governments are adopting investor-pleasing economic policies, and are seeing their economies grow faster than advanced ones.

FX

The British pound has been the best-performing G10 currency this year, climbing nearly 2% against a strong dollar and almost 3% against the euro. That’s sent sterling against a basket of currencies from the UK's trading partners to its strongest level since the 2016 EU referendum. The gains have been fuelled by better-than-expected economic growth in the UK and the view that the Bank of England will cut interest rates less than other central banks. What’s more, the Labour Party’s landslide election victory earlier this month has raised optimism among investors of an end to political instability and a potentially more constructive relationship between the UK and EU, post-Brexit. This newfound calm contrasts with dramatic twists and turns in US politics ahead of the presidential election and an ongoing political crisis in France.

Investment banks are now betting that the pound will extend its winning streak. Analysts at JPMorgan forecast that sterling will reach $1.35 by March next year, while Goldman Sachs expects it to climb to that level on a long-term view. Citi strategists said they were bullish on the pound against the euro, forecasting the UK currency to strengthen to €1.22 for the first time since Brexit. But others are warning that the optimism has gone too far, which could make the pound vulnerable to a near-term correction. Case in point: speculative traders have pushed their net long position on sterling in the futures market to an all-time high, according to Commodity Futures Trading Commission data going back to 1999.

Next week

• Monday: UK M4 money supply (June). Earnings: McDonald’s.
• Tuesday: Japan unemployment rate (June), eurozone GDP (Q2), US consumer confidence (July), US job openings and labor turnover survey (June), eurozone economic sentiment (July). Earnings: Microsoft, AMD, PayPal, Merck, Pfizer, Procter & Gamble, Mondelez, Starbucks.
• Wednesday: China PMIs (July), Japan industrial production and retail sales (June), Bank of Japan interest rate announcement, Fed interest rate announcement, eurozone inflation (July). Earnings: Meta, ARM Holdings, Qualcomm, Mastercard, Boeing.
• Thursday: Eurozone unemployment rate (June), Bank of England interest rate announcement. Earnings: Apple, Amazon, Coinbase, Intel.
• Friday: US labor market report (July). Earnings: Chevron, Exxon Mobil.