FED’S NOR­MAL­I­SA­TION PATH TO CON­TINUE

Financial Chronicle - - MONEY GAME -

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.

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