Talking Points This Week: Will Equity Markets Be 'Fed' Up Soon?

The world was the same, despite expectations that it will be different. Russia continued to warn of consequences, U.S. and China continued to spar, central banks continued to stay hawkish and equities continued to stay volatile. And considering the fact that the Fed seems intent on pushing the economy in a recession to tame inflation, it seems to be a matter of time before equities catch cold, even though they have been relatively resilient thus far.

The following sum up the talking points for the week gone by.

It's not just the Fed which sounded 'not dovish'. The ECB said ‘significant’ rate increases are still to come. The Swiss central bank lifted interest rates again to counter ‘further spread of inflation’. Essentially, while inflation may have peaked, until it is firmly buried, central banks may not quite take the foot off the pedal, it seems.

And as Dhananjay Sinha of Systematix summarised in his note, one cannot fail but notice the similarities between the three monetary policy outcomes: 1) Sticky core inflation persisting for a considerable period, 2) Tightness in the labour market, 3) Management of an extraordinarily high balance sheet, 4) Rising concerns for a recession, and 5) given the pervasive hawkishness, there is no CB pivot in the foreseeable future, contrary to what is being priced in by the markets.

To my mind, for the bulls, before the Fed pivots, there will be a recession to contend with.

The U.S. plans to push for more transparency around the terms of debts that African nations owe to China as they struggle to make repayments, a senior government official said.

Washington will also “try and figure out how these countries can get out of a crushing debt that oppresses their people”. Separately, the Biden administration said Thursday it was “severely” restricting dozens of mostly Chinese organizations, including at least one chipmaker, over their efforts to use advanced technologies to help modernise China’s military.

There is merit in thinking about investing ideas for 2023. From an Indian standpoint, the view seems to be pretty clear. The impending recession in the west, or the beliefs of it, would mean that any global commodity or export-oriented sector should be an avoid. That places metals and IT firmly in the bracket, even if the margin pressures would ease significantly for both in 2023. And voices like Neelkanth Mishra has unequivocally stated that metals are an underweight for them. Domestic-oriented sectors could be the ones to bet on. Input cost pressures would ease for FMCG, autos and cement, and since these do not have a very large global exposure, they would be apt pockets to bet on, especially if the rural consumer comes back with inflationary pressures ebbing. Investing is usually not so simple, but sometimes the simplest views stand to give the best returns.

This week also saw Elon Musk losing the World’s Richest title to Bernard Arnault, with the kind of unwinding that Tesla has seen. Not much is known about Bernard Arnault, the French tycoon behind luxury goods powerhouse LVMH, as this week marked the first time he’s topped the list of the wealthiest people. Never before has anyone from France— or Europe as a whole—laid claim to having the largest fortune on the planet. Though LVMH Moet Hennessy Louis Vuitton SE oozes extravagance, with 75 labels ranging from Dom Perignon to Christian Dior to Tiffany & Co., he’s sought a low profile. It will be interesting to see if all the attention grabbing around Twitter and Tesla investors seeking Musk's attention on the car company results in Musk reviving Tesla fortunes.

This is the last piece for this year as I will be on leave starting next week, and its only apt to take a moment to thank the few but regular readers of the Talking Point piece, for it is the constant feedback we receive that keeps us going.

Wishing everyone a great holiday season, and a fabulous 2023.

Niraj Shah is Executive Editor at BQ Prime.

The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.