Equities did very well in September, but it was also the month when the JPMorgan Global Manufacturing Purchasing Managers’ Index (PMI) slipped to a 14-month low. According to David Hensley, director of global economics coordination at JPMorgan, “The PMI is likely to fall further in coming months, based on the continued slide in the ratio of new orders to inventory. As a result, production is likely to stop growing or even contract in the next few months on a transitory basis.”
In India, despite the benchmark index Sensex’s stellar performance last month, HSBC Manufacturing PMI showed the manufacturing sector was cooling and the reading was the weakest this year—although the rate of expansion is still strong. It also showed rising input prices while output prices have been relatively stable, indicating margins being squeezed.
Also See Money Supply (Graphic)
Why should stocks suddenly start to run when the growth momentum is slowing? A look at EPFR Global’s quarterly data provides the clues. In the July-September quarter, the numbers show that while $44.115 billion (Rs 2 trillion) was withdrawn from all developed country equity funds, $30.218 billion flowed into all emerging market equity funds. That’s much more than during the first half of the year, when $15.671 billion was withdrawn from all developed country equity funds and a net $17.391 billion flowed into emerging market equities. The upshot has been a huge fall in the US dollar, as money flowed into non-dollar assets. The US dollar index, which measures the change in the value of the dollar against six major currencies, had its biggest monthly drop in September 2010 since June 2009. The fund flows have pushed up the value of emerging market equities as well as their currencies, thus giving a double benefit to foreign investors. The MSCI India index, for instance, rose by 10.96% in September in rupee terms and by 16.16% in US dollar terms. Hopes of a new round of quantitative easing in the US have pushed down bond yields in the US, with the 10-year bond yield now at around 2.5%. That seems to have led to a search for higher returns. Moreover, more monetary easing would also weaken the dollar and money is flowing into non-dollar assets as a result.
Graphic by Ahmed Raza Khan/Mint
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