FED’S NORMALISATION PATH TO CONTINUE
year government securities yields to 7.60 per cent is largely contributed by global factors, which are likely to reverse. “Our model fairvalue for 10-year G-sec still stands at 8.4 per cent and expect it to harden toward 8 per cent by March 2019. We also maintain our INR/USD target at 75…The market is still above the fair value …and our base-case for the Nifty stands at 10,400-11,000 over the next 12 months vs. 10,900 currently. Hence, our sectoral position is: Overweight on IT services, Pharmaceuticals, BFSI (primarily private banks) and Speciality Chemicals; Equal weight on Auto & Auto Ancillaries, Consumers, Oil & Gas and Metals & Mining; and Underweight on Capital Goods, Construction & Infra, Cement, Telecom, and Fertilizers & Agro Chem,” the report said.
The buoyancy in financial markets, especially equities, has propelled the value of financial assets held by the US households. The total assets of the US households increased to 553 per cent of their annual personal disposable income (PDI) by Q2 2018 even when their financial liabilities continued to decline to 103 per cent of PDI from a peak of 134 per cent prior to the 2008 GFC. Hence, the net worth of the US households (asset-liabilities) has risen to 700 per cent of PDI, surpassing the earlier peak in 2008.
However, contrastingly, the steep rise in net worth has not resulted in a wealth effect-induced leveraging of households and the resulting consumption. Hence, while personal consumption appears to be the key driver of the recent growth recovery, the personal consumption expenditure (PCE)/GDP ratio of 79 per cent in Q2 is still much lower than 8384 per cent in 2004-2006. In addition, the financial debt servicing/PDI for the US households is still at a 40-year low despite the 200bp hike in the Fed rate in the current cycle.
The household saving rate has more than doubled from 3.4 per cent of personal income in 2006 to 7.2 per cent..The fact that the US has sustained a solid recovery despite the steep appreciation in the US dollar and the Fed rate normalisation is enough evidence to indicate the US economy has attained sufficient resilience.
In contrast, financial conditions in emerging markets have weakened, reflected in the sharp currency depreciation and policy rate hikes amid an outflow of portfolio investments and a decline in forex reserves.
Overall, it appears that the continued normalisation in the US Fed rate will sustain financial market volatility. But the tightening financial conditions for the emerging markets, including in India, could be more pronounced.