Markets unlikely to bottom out soon amid recession fears: Nomura

As regards valuations, Nomura believes stocks have largely (if not fully) priced in expectations of higher policy/discount rates. They expect the markets to remain choppy in the near-term

Global stock markets are unlikely to bottom out soon amid recession fears, according to analysts at Nomura, who expect the US economy to see five straight quarters of declining GDP (gross domestic product) growth. The silver lining, however, is that the recession will be shallow - a peak-to-trough decline in US real GDP of around 1.5 per cent in this cycle compared to declines of nearly 10 per cent during the pandemic and around 4 per cent during the GFC, Nomura said.

“History shows that stocks tend to bottom out during recessions—and not before —and thus, if Nomura’s macro view does materialize, investors will probably have to wait longer for a likely bottom in global stocks. Asian stocks will not be fully immune, but we expect some differentiation,” Nomura said.

Over the past few months, most global central banks have tweaked their monetary policy to combat the rising inflation. The US Federal Reserve (US Fed), for instance, raised its main interest rate by 75 basis points (bps) recently - the biggest increase since 1994 in a move to tame CPI inflation that hit 8.6 per cent in May - the highest level in 40 years.

“Markets are primarily focused on Fed tightening and the coming economic fallout while Ukraine is more or less forgotten about, or at least assumed to have turned into an extended stalemate,” wrote Christopher Wood, global head of equity strategy at Jefferies in his recent note to investors, GREED & fear.

Inflation concerns, geopolitical issues and rising interest rates have kept the market sentiment in check. The S&P 500, for instance, has lost nearly 20 per cent year-till-date (YTD). Back home, the S&P BSE Sensex and the Nifty50, too, have lost around 10 per cent each during this period.

Global inflation that currently stands at 7.8 per cent, according to analysts at JM Financial, is expected to peak out by mid-2022, soften modestly to 6.6 per cent by end-2022 and hover around at 3.6 per cent till the end of 2023 – higher than 2.1 per cent recorded in February 2020 (pre-Covid level).

As regards valuations, Nomura believes stocks have largely (if not fully) priced in expectations of higher policy/discount rates. However, they do expect the markets to remain choppy in the near-term, as investors debate “hard landing” versus “soft landing” (of the economy), and timing and duration of the next US recession.

“However, into late Q3-22, we expect some stabilisation in Asian stocks once/if there are clear signs that actual US inflation may be moderating and/or the Fed turns less hawkish. Spector of earnings downgrades will likely dampen Asia stock markets’ expected returns. The deeper the economic slowdown, the stronger the earnings downgrade cycle,” Nomura cautioned.

Indian markets, according to analysts at JM Financial, have not priced in the full impact of the ongoing tightening and prospective slowdown or recession. India’s challenges, they feel, emanate from the re-emergence of global tightening, high domestic inflation, and current account deficit amid expected decline in structural growth.

“Consensus earnings growth for fiscal 2022-23 (FY23) and FY24 currently stands at 16 per cent and 14 per cent, respectively. We expect an earnings downgrade of 15-20 per cent due to expected economic slowdown and the higher base of FY22," wrote Dhananjay Sinha, managing director & chief strategist, JM Financial Institutional Securities in a coauthored note with Hitesh Suvarna.