India’s economy is recovering from the demonetization and GST related deceleration. India’s real GDP growth jumped to 6.3% on YOY in calendar Q3 versus a rate of 5.7% in Q2. Since demonetization and GST, foreign investors have been sceptical about India’s ability to rebound from the slowdown. Domestic investors, however, have exuberantly poured capital into the stock market. With the firming of data in recent months, evidence is building that the disruptive effects are dissipating and the long term fundamentals are gaining traction.
In the Euro area, bank lending is rebounding as recapitalized banks find renewed capacity to extend credit. Since aggressively recapitalizing, European banks have been in a good position to lower funding costs by refinancing legacy capital thus improving margins even without any action from the ECB to lift interest rates. With loan growth rebounding the impact to the bottom line is expected to be significant. The question is whether to invest in equity or CoCos, a decision informed by the risk appetite of the investor.
And in the US, Core PCE, the Fed’s preferred measure of inflation perked up to 1.45% in October from 1.36% in September. The odds are on for a December rate hike (in two weeks time) and for further rate hikes in 2018. The Fed says 3 and the market believes 2. Much will depend on inflation and labour data as it unfolds. For investors, the duration decision is clear. Buy floating rate debt. That means leveraged loans and senior CLO bonds.
On the political front, the US Senate has passed its tax bill. Together with the earlier House tax reform, the stage is set for the so-called Trump tax cuts to be formalized. Despite the progress on the policy front, the President faces more questions about his Russian dealings. The Mueller investigation scored a significant coup in the guilty plea of Michael Flynn who is expected to spill the beans on the Trump team’s dealings with the Russians. Watch this space as it could become fraught.