Indian markets garnered a lot of attention of late as Foreign Portfolio Investors (FPIs) significantly added to the inflows into the Indian equity markets. Foreign investors turned into net buyers July onwards after nine straight months of excessive net outflows, which began in October 2021. This has been a catalyst for the relative outperformance of Indian markets over others so far this year. However, scratching beneath the surface and digging a little deeper into the recent developments, one finds that the U.S. equity markets may actually be more attractive for a variety of reasons. This article analyses the patterns in global equity fund flows, the effect of U.S. Dollar appreciation on equities, market expectations for the U.S. Fed’s further rate hikes in 2022-23 and how the U.S. markets are currently trading in terms of earnings and valuations. 

Global equity flows by region: recent developments

• Net fund flows into equity markets remain positive.
• Net fund flows to Developed markets outpacing the Emerging markets, signify the strength of global markets and the U.S. Equity markets.
• U.S. Equity markets continue to see strong flows YTD among developed and emerging markets.
• Net fund flows remain negative for Europe and Japan (developed markets), and India in the Emerging markets YTD 2022.
• China sees huge inflows of funds despite the domestic issues largely on the back of attractive valuations.

Exhibit 1: Global equity fund flows into Emerging and developed markets YTD 2022

Source: BofA Global Research, Data as of September 2022

US Dollar Index (DXY) touches a new 20-year high

The Fed Chair in its recent Jackson Hole Symposium expressed his stance to remain Hawkish with an intention to tackle inflation signalling further interest rate hikes which resulted in the Dollar Index (DXY) touching its recent high of 110 levels. 

U.S. Dollar is seen as a safe haven currency across the globe on the backdrop of an anticipated slowdown in the global economy. A stronger dollar may help ease inflation as imports of goods and services become cheaper. If the Dollar Index continues its upward rally, then it is positive for the U.S. Equities. However, emerging markets are likely to struggle with a stronger dollar. 

Dollar Index (DXY) vs. Basket of currencies

The Dollar Index (DXY) is a weighted geometric mean of the US dollar’s value relative to the basket of six currencies, namely Euro (EUR), Japanese Yen (JPY), Pound Sterling (GBP), Canadian Dollar (CAD), Swedish Krone (SEK) and Swiss Franc (CHF). The dollar has appreciated against all major global currencies YTD 2022 and by almost 54% from the lows seen in 2008.

Exhibit 2: U.S. Dollar Index (DXY) performance over the years

Source: CharlieBilello, ycharts, Data as of September 2022

US Dollar vs. INR

Dollar has appreciated against INR too over the past years. It is up over 8% against the INR in the past year and over 50% in the last 10 years YTD 2022. 

Exhibit 3: USD/INR Performance History

Source: Stockal Research, Data as of September 9, 2022

Exhibit 4: Value of investment amount after accounting for Dollar appreciation 

Source: Stockal Research, September 2022

Market expectations of the Central banks’ rate hikes in the coming months

• The Fed is likely to hike rates by 0.75% in its September meet
• Nov and Dec likely to see 0.5% and 0.25% hike in rates
• Last rate hike is expected in May 2023 followed by rate cuts to begin in 2nd half of 2023.

Exhibit 5: Fed Rate hikes expectations for 2022-23

 Source: BofA Global Research, Data as of September 2022

U.S. Markets trade at a discount at current levels compared to emerging markets

When we look at the chart below, the U.S. markets are trading at 20.5x FY22 earnings (on price-to-earnings multiple) and about 17.5x FY23E earnings with a Return on Equity (ROE) of 20.6 and 22.5 for the same years respectively. This makes the U.S. markets most attractive at current levels and trading at a discount of about 78% compared to other emerging markets like India, which is trading at a price-to-earnings multiple of 24.2x for FY22 and 21x earnings and an ROE of 15.2 for FY23E. (Table below). All key markets continue to trade at a discount to India, making Indian markets relatively expensive at current levels to the rest of the world. 

Exhibit 6: Current Valuations of Key Global Markets (Emerging and Developed)

Source: Bloomberg.com, Data as of September 2022