Moneycontrol Pro Panorama | Cooling US inflation good news for emerging markets 

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Global equity indices literally came back to life as Wednesday’s announcement of cooling US inflation brought relief to markets. The sigh of relief was palpable, given that the below-than-expected 0.3 per cent rise in April’s consumer price index (CPI) revives hopes of rate cuts by the Federal Reserve in 2024. Stubborn and elevated inflation over the past six months had until recently stoked concerns of rate hikes, instead of cuts.

To be sure, it would be investors’ and policymakers’ hope that this is not a one-off reading, but the beginning of the inflation curve trending lower. Some economists are not convinced yet. Bond yields and equities are showing relief. “There were no big positive surprises that would upend the market’s forecasts for interest rates,” says Financial Times’ Robert Armstrong in this article (free to read for MC Pro subscribers). One key reason stated for continued concern about rate cut expectations is that the improvement was more in the price of goods and not so much in services.

In any case, bond yields fell and Wall Street’s benchmark indices rallied strong. Hope and optimism that the US Fed finally has a chance to consider rate cuts sooner than later, saw Asian markets open higher today. European equities too, are likely to toe the line of their peers.

However, Indian equity markets turned jittery (around 1 pm) after opening in the green. Perhaps, the Street is factoring in corporate performance based on recent March quarter results that have been a mixed bag and also the election results given the poor voter turnout. In fact, foreign institutional investors (FII) withdrew close to $2 billion from India in the first couple of weeks of May. The Nifty 50 index has been flattish over the last one month with some meagre gains year-till date in 2024.

That said, global allocation to emerging markets are 5.2 per cent of portfolio weights and a reversion to a 20-year-old average allocation of 8.4 per cent would result in a $912 billion inflow to emerging markets, argues veteran portfolio manager Aaron Chaze in this article. Underpinning this are views that with clarity on general elections, Indian equities would be back on the radar for FIIs, domestic institutional investors and the retail pack!

On the topic of investing and equity markets, this FT article -- Investors should not tear up their playbooks over geopolitical risks -- offers meaningful insights on market reactions and investor behaviour through times of conflict and unprecedented geopolitical developments.

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Vatsala Kamat
Moneycontrol Pro