Global markets have become more cautious, after solid gains in 1H21. We present the top-performing markets of 3Q, and what the future holds for them.
iFAST Macro Research Team | Published on 12 Oct 2021
- Global markets (MSCI ACWI Index) were flat in 3Q21 (+0.04% in SGD terms). Our top 3 performers (in SGD terms) were India (+14.2%), Russia (+10.2%), and Indonesia (+8.2%).
- India: We are neutral on India. While we think that its outlook remains robust, we think that investors have priced in an overly bullish scenario, resulting in very stretched valuations.
- Russia: We are positive on Russia, due to its large composition of oil and gas (O&G) companies in the index. We think energy prices will remain supportive of Russian equities in the months to come, and the attractive dividends will add on to the already positive price upside forecasted.
- Indonesia: We are also bullish on Indonesia, as we think that the reopening of the economy should be a big boon to Indonesian equities. With the second wave of COVID-19 behind us, we are optimistic on domestic consumption, which should support domestic equities going ahead.
Global equity markets took a breather in 3Q21 and remained relatively flat, with the MSCI ACWI Index up by only +0.04% in SGD terms, a marked slowdown from the first half of the year (+14.7%). The first half of 2021 saw investor sentiment improve, due to the belief that the world had finally endured the worst of the pandemic. However, a resurgent delta variant has since threatened this sanguine outlook. In addition, persistent shortages in raw materials, and more recently shortages in energy (e.g. in China), have meant that producers around the world continue to struggle to meet demand. We also saw country-level troubles, most notably with the big-tech crackdown as well as the Evergrande saga in China.
In 3Q21, the top performing equity markets (in SGD terms) were India (+14.2%), Russia (+10.2%), and Indonesia (+8.2%), while the laggards were generally found in North Asia (particularly China at -17.3%), as well as Brazil (-18.9%). There were a few key drivers:
- Pandemic / Vaccination Outlook: India and Indonesia benefited from improved sentiment, as they have now passed the worst of their respective ‘second wave of infections’ (peaking in 2Q).
- Energy: Russia has benefited from the increase in commodities prices, most notably Brent, which went above $80/bbl recently (compared to just over $50 at the start of the year).
- Rotation from China to India: The recent sell-off in Chinese equities has led to investors pouring moneys into Indian equities instead, as they seek to retain their exposure into high-growth EM-Asian economies.
Chart 1: 3Q21 Global Equities Performance Ranked (Regions under Coverage)
India (+14.8% in SGD terms)
What drove 3Q21 performance?
India’s equity market (gauged by SENSEX Index) witnessed a resurgence at the end of 2Q, led by two main factors. First, there was large jump in flows, with Bloomberg estimating about $1.8bn inflows by foreign funds in Sep and AMFI seeing record equity inflows by mutual funds in 3Q21 (Rs. 39,928 crore). Second, investor sentiment has improved as the COVID situation has started to normalize (after the second wave in Mar – May).
Chart 2: Equity Inflows by Indian Mutual Funds Going Up
Equity Outlook
India’s growth outlook remains solid with a gradual improvement on the pandemic front. This means movement restrictions can be loosened further, which can boost consumption, a traditionally strong driver of Indian growth. This positive growth momentum should then be supportive of Indian equities. The Sensex itself is mainly influenced by Financials and IT Services, which together comprise over 50% of the index. We expect the Financials sector (mainly big Indian banks) to grow as a result of higher consumption, while IT Services should benefit from increased demand alongside the global economic recovery.
However, we highlight that despite these good news mentioned above, valuations appear very stretched, and are vulnerable to correction if any negative catalysts emerge (discussed in the section below). Indian equities are trading at a forward PE of 25.5x, which represents a 42% premium over our in-house fair PE of 18.0x. In addition, it is also more than 2 standard deviations above its historical PE – when this happened in 2020, we saw a sharp correction soon after.
While earnings have seen a decent rebound after falling in 2020, and are projected to grow strongly this year, prices have also gone up at a faster pace. Based on current equity prices, we would need to see roughly +20% earnings growth each year for both 2022 and 2023 to reach our fair PE of 18.0x. This would be a difficult task without the low-base effects seen this year, given that post-GFC, EPS of Indian equities have seen a 5-year CAGR of +12.9%, and a 10-year CAGR of +8.3%. In fact, there was only 1 year (2009 – 2010) in which EPS grew by at least 20%. We therefore expect a downside potential of about -6% by FY23.
We therefore remain neutral on Indian equities. We think that Indian equities’ strong 3Q21 performance was due to a perfect confluence of factors: a sharp sell-off in Chinese equities, and the end of its deadly second wave of COVID-19. Current valuations are sky-high and predicated on continued strong earnings growth which will be difficult to sustain.
Chart 3: Sensex Forward PE is Elevated Compared to History
Key Risks
We see two main risks that could threaten Indian equities, particularly given sky-high valuations at the moment. First, the pandemic outlook remains uncertain. Though India has gotten past the second wave of COVID-19, only 20% of the population is fully vaccinated so far, meaning we cannot rule out a third wave. In addition, recent oil prices have increased inflation pressures, which in turn puts pressure on RBI (which has so far kept policy loose to support fiscal policy) to normalize policy sooner.
Chart 4: Sensex Price Performance and EPS
Table 1: Indian Equity Market Projections 2021 – 2023
| India (BSE Sensex) | FY20 | FY21 | FY22 | FY23 |
| PE Ratio (X) | 28.5 | 25.5 | 21.8 | 19.0 |
| Expected Earnings Growth YoY | -5% | 34% | 17% | 14% |
| Earnings Per Share (EPS) | 1735 | 2318 | 2713 | 3104 |
| Projected Fair Price (based on fair P/E Ratio of 18.0X) | – | – | – | 55,870 |
| Potential Upside from Today (%) | – | – | – | -6% |
| Source: Bloomberg Finance L.P., iFAST estimates. Data as of 30 Sep 2021. |
Russia (+10.2% in SGD terms)
What drove 3Q21 performance?
Russia’s equity market performance continues to be driven by higher energy prices. Brent oil prices continue to hit record high after record high and have already exceeded the $80/bbl mark, with a +11.8% growth in just 3Q. Natural gas prices have recently spiked and are nearing the $6/MMBtu level, compared to about $2.40 at the start of 2021.
Equity OutlookRussian equity fundamentals continue to remain supported by soaring energy prices. We believe that energy prices are poised to move even higher. On the demand side, higher production levels across the world (due to the global recovery), and the prospect of international travel slowly picking up, both support energy demand. Meanwhile, supply remains very stretched, and production remains inadequate relative to strong demand as it needs time to ramp up.
Given that the oil and gas (O&G) sector comprises about half the RTS Index, higher energy prices should support earnings in those sectors, and thus the entire equity index. Earnings are projected to rebound strongly in 2021 (projected +139%), helped by a low base due to the sharp decline in 2020 (-53%). While the low-base effect should wear off eventually, we think earnings growth will likely return to trend levels (about +5%) on the back of constructive supply-demand dynamics.
Despite a strong equity performance in 3Q21, earnings for Russian equities have seen a strong consensus upgrade of 56% YTD. Valuations are currently trading at slightly cheaper than fair value, with FY21 PE at about 6.9x, just below our fair PE of 7.0x. We expect a potential price upside of about 20% by FY23, on the back of projected strong earnings growth.
In addition, Russia has an attractive dividend yield, for investors looking for a regular income stream in our current low-yield environment. We are forecasting about a 7.7% dividend in FY21, which is above its historical average (4.2%), as well as all the countries/regions under our coverage (averaging 3.1%). This should lift our potential upside well over +20% over the next couple of years.
Chart 5: Russian Dividend Yields are High Compared to Historical Average …
Chart 6: … And Compared to Other Equity Markets
To summarise, we think that Russian equities remain attractive, as they should remain supported by rising energy prices (due to supportive supply-demand dynamics in the energy space). The O&G companies in the RTS Index will therefore stand to benefit from higher energy prices, translating into both stronger equity prices and/or higher dividend payouts.
Key Risks
The key risk in Russian equities is political, especially in terms of sanctions threats from the US. However, we would argue that investors have already priced in minor sanctions, given that US-Russia relations are already poor. Therefore, it would take major sanctions from the US or multiple major trading partners (e.g. in the EU), in particular sanctions that severely limit the ability of Russian companies to do business globally, for these political risks to result in weaker equity markets.
Chart 7: RTS Index Price Performance and EPS
Table 2: Russian Equity Market Projections 2021 – 2023
| Russia (RTS Index) | FY20 | FY21 | FY22 | FY23 |
| PE Ratio (X) | 12.9 | 6.9 | 6.1 | 5.8 |
| Expected Earnings Growth YoY | -53% | 139% | 13% | 5% |
| Earnings Per Share (EPS) | 108 | 257 | 290 | 305 |
| Projected Fair Price (based on fair P/E Ratio of 7.0X) | – | – | – | 2,132 |
| Potential Upside from Today (%) | – | – | – | 20% |
| Source: Bloomberg Finance L.P., iFAST estimates. Data as of 30 Sep 2021. |
Indonesia (+8.2% in SGD terms)
What drove 3Q21 performance?
Indonesian equities have benefited largely from a loosening of pandemic measures (in Aug), a result of a decline in new cases following its second wave of COVID-19 in 2Q. Indonesia now has one of the lowest cases per capita in ASEAN, even below Singapore. Other supporting factors include (i) a dovish BI, which recently held rates at 3.5% and has pledged to keep policy loose despite a global rising rates environment, and (ii) some appreciation in the IDR over the SGD (+2.4%).
Equity Outlook
On the macro front, Indonesia’s macro data looks positive. Exports growth remains robust on the back of the global recovery, which can support earnings growth in the near-medium term. In addition, CPI remains benign (<2%) despite surging energy prices, which gives BI more room to retain its loose monetary policy (contrasting with India, which we discussed earlier). Current market consensus sees BI remaining dovish by holding rates, and we think that even when they raise rates eventually (likely in 2022), they will still remain on the dovish side relative to other central banks.
Indonesia’s equity outlook also remains positive. Jokowi has recently loosened movement restrictions in Aug, and has signaled that he is preparing for endemicity, suggesting a lower likelihood of strict lockdowns in the future. This should support domestic consumption, which will be positive for the key sectors of the JCI Index, such as Financials, Communications, and Consumer Discretionary sectors (totaling >60% of the index).
Earnings are poised for a strong rebound in 2021, and we are forecasting about a +31% earnings growth in 2021 (compared to -22% in 2020). While valuations are slightly above-average (FY21 PE is about 17.1x, compared to our fair PE of 16.0x), we think that this is well-supported by projected earnings growth. We see earnings growth remaining robust with a CAGR of about +15% for the next two years, which gives a decent upside potential of about +19% by FY23.
We think that the Indonesian equity outlook remains strong, particularly as delta-variant risks subside (following the peak of the 2nd wave). We think domestic consumption and exports are poised to recover strongly, supported by a dovish central bank, and will lead to strong earnings growth in the coming years, which could give us some strong upside potential.
Key Risks
The key risk for Indonesia continues to be COVID-19. Vaccination rates remain low, particularly outside key cities like Jakarta, where some cities have a less than 10% fully vaccinated population. As a result, we cannot rule out a 3rd wave entirely, as well as accompanying movement restrictions that could potentially derail the recovery.
Chart 8: JCI Index Price Performance and EPS
Table 3: Indonesian Equity Market Projections 2021 – 2023
| Indonesia (JCI Index) | FY20 | FY21 | FY22 | FY23 |
| PE Ratio (X) | 21.9 | 17.1 | 14.4 | 13.0 |
| Expected Earnings Growth YoY | – | 31% | 18% | 11% |
| Earnings Per Share (EPS) | 273 | 357 | 422 | 468 |
| Projected Fair Price (based on fair P/E Ratio of 16.0X) | – | – | – | 7,487 |
| Potential Upside from Today (%) | – | – | – | 19% |
| Source: Bloomberg Finance L.P., iFAST estimates. Data as of 30 Sep 2021. |
Table 4: Recommended Products
| Unit Trust | ETF | |
| India | UTI India Dynamic Equity USD | iShares MSCI India ETF |
| Russia | HGIF – Russia Equity Fund CL AD SGD | VanEck Russia ETF |
| Indonesia | – | iShares MSCI Indonesia ETF |