Moneycontrol Pro Panorama | Did markets react too soon to rate cut possibilities?

Quantum MF believes that with India's resilient economy and earnings growth the slightly expensive equity valuations will become reasonable.

Dear Reader,

The uncertain tone in the minutes of the US Federal Open Market Committee’s December meeting has poured cold water on investor euphoria of rate cuts. Indeed, the markets overreacted to the dovish commentary by the Fed expecting “too much too soon”, on rate cuts.

What’s unsettling global financial markets is that the minutes do not shed any light on when rate cuts could commence. Worse, there is still some uncertainty and lack of conviction that inflation has been conquered, states this FT article that points to rates remaining high for some time. Elucidating this is the statement by Richmond Fed president Thomas Barkin, a voting member of the FOMC this year, “…I fear more will have to happen on the demand side, whether organically or through Fed action, to convince price-setters that the inflation era is over.”

It is not surprising therefore that US financial markets reversed the trends seen at the close of 2023! Equities have remained subdued while bond yields started to climb again, after closing below 4 per cent in 2023. Markets are perhaps finding a balance from their earlier assumptions of early and rapid pace of rate cuts! In fact, most analysts now point to June for the first rate cut, as opposed to March that was envisaged earlier.  

Perhaps, it is the “no-bust cycle” that is worrisome. In another FT article (specially for MCPro subscribers), columnist Ruchir Sharma highlights how when interest rates rose so sharply, it seemed almost certain that indebted businesses would fail quickly, consumers would hunker down immediately, markets would tank, recession would strike, and the world would face a classic bust in 2023.

But the US economy has proved remarkably resilient, so have some emerging markets such as India, with others such as Japan waking up to growth after a prolonged recession. Besides, the geopolitical developments across the world also have increased uncertainties with respect to economic growth. So, it is not alarming that policy makers across countries are turning cautious and cognizant of developing risks to the economy that could derail gains from rate cuts on inflation.

In other words, 2024 could well be a year to turn cautious on equities after witnessing stellar gains in the year just gone by. Sharma’s article that highlights 10 top global trends that could impact investing, offers interesting insights.

After starting on a sombre note in 2024, Indian equities however,  recovered in today’s trading session. While investors may wait for the Fed January policy meeting outcome, the December quarter earnings season that is set to unfold soon, could also swing investor sentiment in the near term.

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Technical picks: Divis Lab, UCO Bank, LTI Mindtree, Turmeric, and Tech Mahindra (These are published every trading day before markets open and can be read on the app).

Vatsala Kamat
Moneycontrol Pro