Joanne Goh, Equity Strategist
Radhika Rao, Economist
DBS Group Research
Equities: Bond stress is widespread, but US equity inflows continue
During the past week when financial markets were in turmoil, US equity ETFs had inflow of $1.95 billion while fixed income ETFs had $6.17 billion of withdrawals. Inflows were also seen in international equities and international fixed income ETFs. The data suggests that equity investors were not panicking, but were using the opportunities to buy. Meanwhile, while higher interest rates were driving outflows in the fixed income space, a shift of allocation to lock in higher bond rates may be warranted given the bond yields spike.
ETF sector returns were all negative last week, with the exception of energy. The top five worst performers, ranging from 5.6% to 6.9%, were in cyclical sectors and the growth sector ETFS — technology, communications and consumer discretionary all declined by about 3%. Utilities and real estate are sensitive to higher rates, while financials benefit from increases in rates. Cyclical stocks do better than defensive issues in a rising rate environment which tends to coincide with an expanding economy. Technology tends to outperform during rising rates periods. This time around some of the high-flying tech names looks shaky with their high valuations. Technology is still in our favoured list sector.
India: Liquidity-driven calm eases yields
INR 10Y bond yields continued to seesaw around the 8% mark for much of this month. Yields slipped to 7.92% on Monday as softer-than-consensus (but in line with ours) September CPI eased policy tightening expectations. Two successive open market operations and expectations of further such purchases pulled yields lower. A smaller trade deficit in September of USD13.9bn vs USD17bn also provides a reprieve.
Few factors will drive near-term action. Notwithstanding the liquidity cushion, currency and oil prices have been amongst the key catalysts for the bond markets. From a record low last week, the INR recovered slightly to gain past 74/USD on Monday. Oil prices are off highs, but Brent is still supported above USD80pb. Geopolitical developments, particularly Saudi Arabia’s investigations and upcoming Iran sanctions in early-Nov, mark two key risk events for the commodity space, suggesting another leg-up in oil prices cannot be discounted.
Secondly, part of the cheer over a smaller net borrowing was in check after yesterday’s INR150bn cash management bill auction. These are short-term instruments, typically floated to meet temporary cash flow mismatches of the government, adding to lingering concerns that revenues are slow to catch-up while expenditure is being frontloaded. On the demand end, FPIs remain net sellers, as do mutual funds. The trading bias for the dominant PSUs continues to be to play tight ranges, whilst private and foreign banks are bid.
We continue to look for 10Y bond yields to stay supported at 7.9% with a brief break below likely in the run-up to Friday’s OMOs worth INR120bn, before the pullback is bought into. Two-way interests mark 8.05% as the resistance level. Short-term rates are likely to ease as rate hike expectations are pared back, steepening the yield curve. Call money rates are close to repo, signalling systemic liquidity is near neutral.
In the non-sovereign space, short-tenor yields have eased as tougher regulations are still pending, even as the issuance pipeline is thin. On the long-end, following a 15Y issue, a top-rated company plans to float a 10Y paper this week, returning to the bond markets after nearly a year’s hiatus, according to Bloomberg. Defacto liquidity support through banks (amidst new of a leading domestic bank buying loan portfolios from select NBFCs) has also lent a hand in restoring temporary stability. Cautious comments from Moody’s for NBFIs, however, underscore the fragility and structural fissures in the strong growth path of the sector in the past 3-4 years.