FITCH, a global rating agency, triggered a sharp reaction in financial markets. It downgraded the sovereign credit rating of the United States of America. There was a ripple effect across the board. US and global equities tumbled. US bond yields spiked. The downgrade impacts every nation as the US dollar is a reserve currency. Countries hold foreign exchange reserves in US dollars or US dollar-denominated assets like US treasury bonds. Ahead of the rating downgrade, there was a rally in US stocks. The S&P 500 snapped a gaining streak because of the downgrade. If the risk appetite is likely to decrease, foreigners could slow their search for value and growth worldwide. The US Federal Reserve commentary is still hawkish, and the interest rates trajectory is unlikely to see any change as inflation worries persist.
Over the past two days, the selloff in Indian equities was brisk too. It was a reversal from a sharp surge in share prices witnessed over the past few weeks. However, a lot is going for equities as an asset class. There is a good chance that the selloff in equities could be short-lived. Corporate earnings have remained robust both in India and the US. Major US technology companies like Apple and Amazon continue to deliver strong financial performance. The profitability of most top-rung companies continues to remain strong, and very few earnings surprises make the street nervous.
In India, companies are reporting the best financial performance in several quarters. The overall earnings per share growth continues to remain strong. The chart below explains the flat trend in the NSE Nifty despite gains in the Nifty EPS.
Image Source: https://trendlyne.com/equity/1887/NIFTY50/nifty-50/
That gives hope for Indian equities as they are reasonably valued. However, investing is all about relative valuations. Global liquidity trend needs to be a ‘risk-off’ for foreign portfolio money to flow into emerging markets. Indian equities continue to attract relatively large foreign flows. Morgan Stanley, a global bank, recently upgraded India to overweight.
India Ratings, an affiliate of rating agency FITCH, published a new report that shows rating upgrades of corporate debt in India continued to outpace downgrades in June 2023.
“The upgrades in June 2023 were mainly in the capital goods, renewable power and auto & auto components sectors. Issuers belonging to capital goods benefitted from a strong order flow and improved financial metrics,” the report observes. Businesses in the capital goods sector saw an increase in the order book. That matters for future revenue and profits. At the same time, the appetite for automobiles pushed up the ratings for the auto sector.
Companies in the construction sector saw a downgrade ratings action as raw material prices rose.
There are opportunities based on prospects for profit growth in India and the US. You need to look up the fundamentals to identify the rightly valued companies. You can do it yourself or get help from experts who can assemble a basket of stocks across markets.
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