The global investment landscape is undergoing significant changes as the strong dollar attracts global capital flows toward US equities, leaving emerging markets (EMs) grappling with reduced liquidity and heightened challenges.
The Big Shift: From Emerging Markets to US Equities
A robust US dollar has become a magnet for global money managers, redirecting investments away from emerging markets. Last week alone, large-cap US funds recorded an inflow of $78 billion, while mid-cap and small-cap funds also saw significant traction.
Implications for Emerging Markets
Liquidity Pressure: Emerging markets, particularly India, are experiencing liquidity outflows, potentially impacting future returns.
Historical Patterns: Historically, significant inflows into US equities have correlated with weaker performance in emerging markets, raising caution among global investors.
Momentum Investing: Challenges Ahead
India’s Nifty200 Momentum 30 index has declined by 13% since its September peak, underscoring the volatility inherent in momentum-based strategies. While the index remains up 21% for the year, fund managers face the challenge of navigating corrections effectively.
Key Takeaways:
- Fully invested momentum funds are increasingly turning to derivatives to mitigate risks.
- This trend may signal a strategic pivot in how momentum funds manage downturns moving forward.
Sectoral Trends: Sugar Mills in Focus
Indian sugar stocks, which had enjoyed robust growth, are now facing challenges due to government-imposed export restrictions and reduced sugarcane allocation for ethanol production. However, with a projected surplus in sugar production, traders are optimistic about policy easing.
Sector Insights:
- Bloomberg’s custom gauge of Indian sugar millers has dropped 3%, heading for its first annual decline since 2018.
- Shares of major companies in the sector have declined by 30%-35%, creating opportunities for potential rebounds if restrictions are lifted.
Indian Companies Shift Funding Strategies
Indian companies are increasingly turning to stock markets to raise capital, signaling an investment-driven growth recovery. Over the past year:
Bank Loan Reliance: Dependence on bank loans has decreased sharply, from over 70% in September 2023 to around 51% by August 2024.
Equity Issuance Growth: The share of funds raised through equity issuance has nearly doubled, jumping from 11.5% to 22.4%.
Corporate Bonds Boost: The share of funds raised via corporate bonds has also risen, climbing from 16.3% to 22.4%.
These trends reflect a shift in corporate financing preferences, driven by rising real rates that have curbed bank lending. This marks a positive sign for long-term investment-driven growth in the region.
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