Top-down approach to investment and markets

PMS Bazaar recently organized a webinar titled “Investment Opportunities for 2024 and Beyond: A Macro Top-Down Perspective,” which featured Amit Goel, Co-Founder and Chief Global Strategist, Pace 360. This blog covers the important points shared in this insightful webinar.

29 Jan 2024
Top-down approach to investment and markets

The webinar covered a wide range of topics with a focus was on exploring the intricacies of the Indian market. Goel underscored the necessity for a nuanced understanding of underlying fundamentals and a keen eye for future trends, crucial for navigating the dynamic landscape.

Key aspects covered in this webinar blog are

  • Introduction and Pace 360 Overview
  • Market overview: 2023 retrospective and 2024 projections
  • Valuations and expectations
  • Economic indicators: Unraveling the global landscape
  • Debt dynamics: Tug of war between deflation and hyperinflation
  • US economic health: Consumer woes and housing market strains
  • Warning signs: Default rates and economic stress
  • Global economic outlook: Navigating choppy waters
  • Crucial charts: A visual guide to market sentiment
  • Caution in the face of uncertainty
  • Navigating market turbulence

Goel transitioned into the core of the presentation. He shed light on Pace 360, the asset management arm of PA Group, offering a macro top-down perspective. 

Market Overview: 2023 Retrospective and 2024 Projections

In the retrospective analysis,  Goel expertly navigated through the twists and turns of the global equities market in 2023. Contrary to initial projections, the market witnessed an unexpected positive turn, with risk assets, as measured by the MSCI World index, appreciating by a remarkable 22-23%. This retrospective exploration not only showcased the market's resilience but also laid the groundwork for projecting into 2024. 

By dissecting the events that shaped 2023, participants gained a nuanced understanding of the market's dynamics, providing a solid foundation for anticipating trends in the upcoming year. As  Goel transitioned to 2024 projections, participants were equipped with a holistic perspective, enabling them to make informed decisions in the ever-evolving financial landscape.

Valuations and Expectations: A Pivotal Outlook

Within the domain of valuations and expectations,  Goel shed light on the optimistic projections for both the US and the global market. Elevated valuations, particularly in the US and India, took centre stage, prompting crucial questions about their sustainability. The cyclically adjusted price-to-earnings (CAPE) ratio emerged as a critical metric, with  Goel hinting at the potential for a correction or bear market. 

This pivotal outlook provided participants with a deep dive into the factors influencing market valuations, offering a comprehensive understanding of the potential challenges looming on the horizon. As economic landscapes continue to evolve, this section underscored the importance of vigilance and adaptability in navigating the intricate dynamics of financial markets. Participants were encouraged to approach the unfolding scenarios with a discerning eye and strategic foresight.

Economic Indicators: Unraveling the Global Landscape

Transitioning into the realm of economic indicators,  Goel conducted a meticulous examination of critical metrics, including the M2 money supply, US Bank credit, and bank credit standards. 

The presentation brought attention to a negative trend in the M2 money supply, coupled with tightening credit standards, hinting at potential challenges on the horizon. These indicators served as barometers of economic health, unravelling the global landscape and providing valuable insights into the potential hurdles that the market might face. 

Furthermore,  Goel's insights into the housing and real estate sector underscored concerns, particularly related to affordability. This comprehensive analysis equipped participants with a deeper understanding of the multifaceted economic indicators shaping the global financial terrain.

Debt Dynamics: A Tug of War Between Deflation and Hyperinflation

Addressing the intricate global debt dynamics,  Goel elucidated the challenges stemming from high debt levels and low debt productivity. Anticipating a tug-of-war between deflation and hyperinflation, he emphasized the potential negative impact on real GDP growth during both phases. 

This segment provided a nuanced exploration of the delicate balance in the global debt landscape, illustrating the complexities and potential consequences for the broader economy.  Goel's insights delved into the potential risks associated with debt dynamics, offering participants a comprehensive view of the forces at play and their implications on economic growth.

US Economic Health: Consumer Woes and Housing Market Strains

Zooming in on the United States,  Goel dissected the challenges faced by the consumer. Strains on household finances, coupled with rising interest payment burdens, hinted at a less resilient consumer base. The housing market, a significant component of the GDP, showed signs of strain, posing concerns for global commodities demand. This detailed analysis provided a focused examination of specific economic challenges within the US, offering participants valuable insights into the factors influencing the health of the world's largest economy and its potential ramifications for the broader global market.

Warning Signs: Default Rates and Economic Stress

The presentation took a deeper dive into warning signs, particularly focusing on rising default rates in the US and Europe. Historical trends were highlighted, showcasing the correlation between increasing default rates and impending economic stress. This cautionary analysis served as a vital indicator, signaling potential challenges for banks and corporates. Participants were urged to pay attention to these warning signs, reinforcing the importance of vigilance in the face of potential economic stress and its ripple effects across various sectors.

Global Economic Outlook: Navigating Choppy Waters

The latter part of the presentation shifted towards the broader global economic outlook.  Goel discussed leading indicators for both the US and global equities, shedding light on the implications of negative global liquidity impulses, overvalued markets, and tightening credit standards. This comprehensive overview provided participants with insights into the challenges and opportunities present in the broader global economic landscape. 

Navigating choppy waters in financial markets requires an understanding of these leading indicators and  Goel's analysis equipped participants with a strategic perspective for addressing the complexities of the evolving global economic landscape.

Crucial Charts: A Visual Guide to Market Sentiment

Visual aids assumed a pivotal role in the presentation, with  Goel leveraging charts to illustrate the historical relationship between leading indicators and economic outcomes. These visual representations served as a guide, elucidating the complex dynamics at play in global equities and economic trends. Participants were presented with compelling evidence, enhancing their understanding of market sentiment and key trends shaping the financial landscape. The utilization of charts added a visual dimension to the presentation, facilitating a more accessible interpretation of intricate financial concepts.

Caution in the Face of Uncertainty

In conclusion,  Goel delivered a poignant message, urging participants to adopt a cautious stance in the face of evolving market conditions. The leading indicators painted a nuanced picture, suggesting potential challenges and a looming economic slowdown. Risk management and a careful portfolio assessment were highlighted as imperative strategies for investors navigating the uncertainties of 2024 and beyond.  Goel synthesized the key takeaways, emphasizing the importance of prudence and strategic planning in an environment characterized by uncertainty and rapid market changes. Participants were encouraged to approach the future with a discerning eye, equipped with the insights provided throughout the presentation.

Navigating Market Turbulence

S&P 500 and Valuation Trends:

Goel begins by drawing attention to historical data regarding the S&P 500. According to him, a bear market for the S&P 500 typically involves a significant drop, often exceeding 35% from its peak. Additionally, valuation indicators suggest a potential correction, with P/E ratios expected to decline by 30-35%.

Effect of Fed Rate Cuts:

Challenging conventional wisdom,  Goel argues that Federal Reserve rate cuts are not necessarily a bullish sign for the stock market. Historical data presented shows that a decline in equity markets has accompanied every instance of the Fed cutting rates.

Earnings Picture and Fed Rate Cuts:

Examining the relationship between Federal Reserve rate cuts and corporate earnings,  Goel suggests a correlation. Though not implying causation, the data indicates that both events tend to coincide during economic slowdowns.

Fed Rates and the VIX (Volatility Index):

Goel introduces the relationship between Federal Reserve rates and the VIX, a measure of market volatility. It is suggested that when Fed rates reach their peak, it acts as a leading indicator, with the VIX expected to rise within the next two years. The speaker anticipates increased market volatility over the next 6 months.

The narrowness of the 2023 Rally:

Highlighting the narrow nature of the 2023 rally in the U.S.,  Goel points out that FANGA stocks (Facebook, Amazon, Netflix, Google, and Apple) contributed significantly to the market's overall gain. Historical data implies that market declines have historically followed narrow rallies.

India's Economic Story:

Shifting focus to India,  Goel questions the optimistic narrative surrounding the country's economic performance. Despite being hailed as the blue-eyed boy of the global economy, India's actual performance, especially compared to initial projections, raises concerns.

China Plus One Strategy:

In the context of the "China Plus One" strategy, which involves diversifying manufacturing away from China, the presentation questions whether India is the prime candidate. A comparison with other economies, notably Vietnam, suggests India may not be the principal gainer in this scenario.

GDP vs Stock Market Performance:

Goel challenges the assumption that GDP growth and stock market performance move in tandem. Historical examples, including China's experience, indicate a disconnect between GDP growth and stock market returns.

Correlation between GDP Growth and Corporate Profits:

A deeper analysis explores the correlation between GDP growth and corporate profits, using India's performance between 2008 and 2018 as a case study. The conclusion is that the two metrics don't necessarily align.

EPS Growth and Market Performance:

Examining the relationship between EPS growth and market performance,  Goel highlights India's stock market, which hasn't consistently reflected GDP growth in terms of EPS.

High P/E Ratios and Future Expectations:

Expressing concern over currently high P/E ratios,  Goel warns that investors might be shortchanged unless there's a substantial increase in EPS. With P/E ratios at approximately 25, achieving a 15% return over the next decade requires an improbable 25% growth in EPS.

Timing of Market Corrections:

Goel concludes by challenging the common belief that markets are forward-looking, arguing that the majority of bear market corrections occur during recessions rather than before.

Goel covered all the topics mentioned above in-depth and answered questions from the audience toward the end of the session.

For more such insights on this webinar, watch the recording of this insightful session through the appended link below:

Get access to rich data and analytics of PMS & AIF by subscribing to us. Join the 55000+ investors & experts now: Subscribe NOW

Recent Blogs

Long-only AIFs sizzle with nearly 9 in 10 funds beating Nifty in January

Equity markets were relatively unchanged in January, with frontline indices not moving much. The unravelling of the corporate earnings season and anticipation around the interim budget meant that the Nifty 50 TRI barely recorded 0.02% returns in the month, while the broader market BSE 500 TRI gave 1.92%. Small caps were back in favour during January after a dull December.

Despite flat markets rally, 8 in 10 PMS approaches outperform Nifty in January

After markets rallied smartly in December, January turned out to be relatively flat for the indices. Inflation’s continued downward trajectory was positive for the markets. However, corporate results for the December quarter were mixed and hence markets were lukewarm.

PMSes Outshine Benchmark Indices, And Mutual Funds

About 79% of PMS approaches have beaten the respective benchmark and mutual funds over 10 years

December 2023: AIFs play it safe with modest returns

The stock market continued from where it left in November, with a steadily strong rally recorded in the month. December saw the markets move ahead as favourable electoral outcomes and global uncertainties on the macro front abated. Large caps came back in favour, while mid and small caps were somewhat lackadaisical in the month.