Keep eyes on earnings in Brazil, India, inflation in China

Brazil

Events within Europe continue to cause high volatility across equity markets and this is likely to persist in the coming weeks. The imminent confidence vote faced by the Greek government will determine the country’s short-term political stability. Social unrest continues to run high. Though a referendum on the country’s future in the eurozone now seems a more remote possibility, Greece’s acceptance of the proposed debt and austerity package remains in doubt.

A growing issue is the ability of Italy to implement its own austerity measures, with the International Monetary Fund (IMF) likely to play a more central role of supervision. Contagion of the current Greek crisis to either Spain or Italy, the world’s third largest bond market, must not be allowed to occur.

Developed market policy makers are broadly aligned in terms of their rhetoric. The prevailing backdrop is extremely fragile, putting at risk both the future of the euro and the stability of the region’s banking sector. Policy makers have this week demonstrated their commitment to support the global economy, with the European Central Bank (ECB) surprising markets with a 0.25-percentage-point rate cut at the first meeting under its new head Mario Draghi.

Amongst the key economic indicators during the week ahead are China’s October economic activity data, Brazilian retail sales and consumer price index. We expect a sequential easing in local inflationary pressures.

The third quarter earnings season continues, and the Brazilian real estate sector comes into focus. Key metrics in focus include cash burn and operating margins, as the sector balances recent high growth rates with existing financial leverage levels. We expect weak results from the steel sector, though share prices for the local players have now adjusted to the new lower levels of profitability.

India

In India the third quarter earnings season has started and initial results across the bank, auto, IT and oil and gas sectors have been either in line or above expectations.

The Reserve Bank of India (RBI) has raised the repo rate to 8.5 percent and has also indicated that this might be the end of the rate hike cycle. The RBI has also deregulated the savings rate in the banking industry and investors now need to wait-and-see where the rate stabilizes.

Globally, Europe came out with a rescue package and plans to recapitalize banks to a Tier 1 capital of 9 percent. This has enthused global markets, which have seen one the best rallies in the recent past. In Mirae Asset’s portfolio, we continue to remain overweight in the India consumption story and have added risk very selectively and only at favorable valuations.

China/Hong Kong

The China and Hong Kong markets continued an upward trend this week. China’s consumer price index pulled back for two consecutive months to 6.1 percent in September, and is expected to decline further. As such investors may see a halt to the tighter monetary cycle in the near term.

Mirae Asset expects government policy to be fine-tuned. Firstly, there will likely be an adjustment towards small and medium enterprise lending, which has reported difficulties, and secondly, towards local government debt to allow more flexible funding and to ensure ongoing projects can continue. Recently announced funding support for the Ministry of Railways is one sign of this. Mirae Asset added high beta names in materials, energy as well as financials this week.