Finsphere
Issue 10 | December 24 
Your Monthly Guide on Global and Local markets from our Business Head’s Desk. 
Post-Correction Recovery:
Stock Markets Respond to Economic and Political Signals.
Dear Clients and Stakeholders,
Normalisation seems to be returning back in our market post sharp correction. Value buying and cherry-picking were observed during the last couple of weeks. Assurance and reassurance by FM and RBI governor of impending economic recovery in H2 of the current fiscal year led to smart buy traction. Furthermore, RBI, in their December policy meet laid out a well-calibrated monetary policy approach aimed at supporting growth while keeping a lid on inflationary trends.
Not to forget, the past month has proven to be a turning point for global markets, shaped profoundly by geopolitics and economic recalibration. The United States, in one of the most tightly contested presidential elections of modern times, witnessed a Republican resurgence as Donald Trump reclaimed the presidency. This development heralds a likely paradigm shift in U.S. policies, encompassing heightened tariffs, a reinvigorated domestic energy strategy, and fiscal measures such as tax cuts. While these changes may bolster domestic consumption and corporate profitability in the USA, they also carry risks of inflationary pressures, a ballooning fiscal deficit, and disruptions to global trade.
Financial markets reacted with optimism. Major U.S. indices are sitting on record highs, with the S&P 500 climbing 5.3% in November to 6,032.38, the Nasdaq advancing 5.4% to 19,218.17, and the Dow Jones Industrial Average surging 6.8% to 44,910.65. Broader markets also reflected this exuberance, with the Russell 2000 index posting an impressive 10.2% gain through the month to 2,434.73.
The IMF’s latest World Economic Outlook maintained its forecast for global growth at 3.2% for 2024 and 2025, albeit with downside risks stemming from policy uncertainties. Crucially, the shifting geopolitical landscape introduces significant variables. Trump's indication of potential high tariffs on Chinese imports, as high as 60%, dramatically changes the global trade landscape. As we step into this new phase of geopolitical and economic dynamics, the convergence of fiscal activism, trade frictions, and inflationary concerns will undoubtedly shape the trajectory of global markets. Investors must remain agile, adapting to both opportunities and risks presented by this evolving landscape.
United States
Navigating Policy Shifts
The U.S. economy showcased resilience in Q3 2024, with GDP growth holding steady at an annualised 2.8%, bolstered by a robust 5.6% surge in goods consumption and stable government spending at 5%. Inflationary pressures ticked upward, with the annual CPI accelerating to 2.6% in October, ending a seven-month cooling trend. Core PCE inflation—a key Fed metric—also remained firm at 2.8%, signaling persistent price pressures even as energy costs moderated.
Other economic indicators reflected mixed signals. Retail sales showed resilience, growing 0.4% MoM in October, driven by gains in electronics and auto sales, while core retail sales softened slightly, underscoring mixed consumer dynamics. The housing sector painted a challenging picture as rising mortgage rates and hurricanes weighed on activity. Housing starts declined 3.1%, while new home sales plunged 17.3% MoM in October, marking a steep 9.1% YoY decline.
Also, industrial production fell 0.3% in October, hampered by labour strikes and hurricane disruptions, while capacity utilisation dropped to 77.1%, signaling ongoing challenges in the goods-producing sector. Sensing the need to weigh sustained growth more over not-so-tamed inflation, the Federal Reserve responded with a 25-bps rate cut, bringing the benchmark rate to 4.50%-4.75%.
The U.S. economy stands on a firm footing. Policymakers are navigating finely the delicate task of balancing growth stabilisation while keeping inflation under control.
Euro & United Kingdom:
Mixed Signals Amid Modest Progress
The Euro Area exhibited modest economic growth in Q3 2024, with GDP expanding by 0.9% YoY, marking its strongest pace since Q1 2023. However, the economy continues to navigate challenges, as evidenced by the steep contraction in private sector activity. The Composite PMI declined sharply to 48.1 in November, signaling economic contraction across both manufacturing and services sectors. Manufacturing PMI hit 45.2, highlighting deepening struggles with output and new orders, while the Services PMI fell to 49.2, its first contraction in nearly a year. This downward momentum has led firms to scale back hiring and adjust output charges, reflecting subdued demand.
Inflation in the Euro Area edged higher to 2.3% in November, driven by a slower decline in energy prices and marginal increases in industrial goods costs, though core inflation held steady at 2.7%. Notably, the Producer Price Index fell by 3.4% YoY in August, indicative of easing input cost pressures. Retail sales offered a glimmer of optimism, rising by 0.5% MoM in September, buoyed by non-food products. However, consumer confidence dipped to a five-month low of -13.7 in November, as households grew more pessimistic about their financial outlook.
In the UK, economic resilience was evident in Q3 2024, with GDP expanding by 1% YoY, its best performance in nearly two years, bolstered by robust household spending and business investment. Inflation in the UK accelerated to 2.3% in October, driven by higher energy and housing costs, exceeding the Bank of England’s target. While, the industrial production fell 0.5% in September, and the trade deficit widened to £3.46 billion. The central bank, lowered its benchmark interest rate by 25 bps to 4.75%, making its intent clear to support growth.
Looking ahead, the Eurozone and the UK face an uphill battle as weak demand, softening industrial activity, and cautious consumer sentiment weigh on economic momentum. Policy interventions, particularly monetary easing, are likely to play a pivotal role in shaping the recovery trajectory.
Asia
Evolved from ‘Emerging Market Basket’ to Country Specific Opportunity!
The Asian markets displayed mixed fortunes, with a spotlight on Japan’s steady yet cautious recovery and China’s persistent economic uncertainty. China's equity markets, along with Hong Kong, suffered 5% declines, primarily driven by the lack of clarity on stimulus measures. South Korea, despite a 25-bps rate cut, saw disappointing corporate earnings, such as that of Samsung Electronics, pulling its markets further down—solidifying it as Asia’s weakest performer for the year.
Japan’s Q3 GDP expanded by 0.2% QoQ, in line with forecasts but slowing from Q2’s 0.5%. Annual inflation eased to 2.3% in October—the lowest since January. In China, economic data reinforced concerns over slowing momentum. Inflation softened to 0.3% YoY in October, its lowest in four months, while producer price deflation deepened to -2.9%, marking an 11-month low. The lack of concrete stimulus measures has weighed heavily on market sentiment.
Asia is a now a country specific plays rather than a ‘Emerging market basket’ play. Markets have evolved over time to capability and product offerings play from cost arbitrage offerings.
India’s Economic Pulse:
Markets, Macroeconomy, and Policy Highlights
Macro-economics, corporate earning updates, FII’s selling pressure and State politics all were at heightened activity in November. India’s GDP growth decelerated to 5.4% YoY in Q2FY24, significant dip from 6.7% in the prior quarter. However, infrastructure output offered some relief, accelerating to 3.1% YoY in October, supported by coal and steel production. Inflationary pressure, intensified as CPI surged to a 13-month high of 6.21% in October, propelled by food inflation, particularly soaring vegetable prices (+42.18%). WPI inflation followed suit, rising to 2.36% YoY, driven by sharp spikes in primary and food articles. Dismal corporate earnings added to woes. However, incumbent coalition government’s strong performance in Maharashtra state legislative election provided much needed respite.
Value buying emerged towards the fag end of November, as investors took into consideration the market correction of over 10% from peaks. Assurance and re-assurance by FM and RBI governor of economic recovery coming by in H2 of current fiscal led to smart buy traction.
Furthermore, RBI in their December policy meet laid out a well calibrated monetary policy approach aimed at supporting growth while keeping a lid on inflationary trends. Our management interactions suggest tough Q3 as well. It will be a daunting task for government to meet their guided real GDP growth target of +6.50% in FY’25 through government capex and public spending. The ask rate in 2nd half of FY’25 would be around ~+7% for +6.5% real GDP growth in FY’25; not to forget the high base of around ~+8% GDP growth rate in H2 of FY’24 (previous year). Present market is a rare lifetime opportunity to cherry pick quality companies offering long term value.
Conclusion
At Chola Securities, we remain committed to navigating these complexities with clarity and precision, ensuring that your investments are aligned with emerging opportunities and resilient to potential headwinds.
We sincerely thank you - our valued clients and investors - for your continued confidence and partnership. Together, we look forward to embracing the challenges and opportunities of the months ahead, ensuring sustained growth and success.
Warm Regards,
Mr. Senthilkumar Naidu
Chief Business Officer, CSec