Equities are holding the line after FOMC

As we have said on our daily Market Call podcast India is a train wreck with credit worsening and consumer confidence measured by new car registrations plummeting. However, today news broke that the Indian government is stimulating the economy through cutting the corporate taxes for new domestic companies. The Nifty 50 Index was up 4% breaking above the recent trading range but in the greater picture (see chart) the technical picture looks ugly. As long as the global economy is slowing down and the USD remains strong India is an equity market investors should underweight.

While US equities are flirting with record highs it is worth noting that the second largest industry group Software & Services is now valued in the 99% percentile on EV/EBITDA; not a good recipe for future returns. We often just talk about valuations as something abstract but the one as to realize that EV/EBITDA just above 20x means that an implied return expectation by investors of around 4.8%. Is that really a fair hurdle rate to expect for your capital given where we are in the business cycle? Our view is that valuations on software companies have reached unsustainable levels given the outlook and the risk-reward ratio is just terrible.

While the Q3 calendar period is not over yet some companies, that are not following the strict calendar year, are still reporting earnings. Nike reports FY20 Q1 earnings on Tuesday with analysts expecting EPS of $0.701 up from $0.67 a year ago. Analysts expect revenue to continue growing by high-single-digit driven by expansion in its woman’s business and e-commerce. Nike’s margins have lately been under pressure so there will be a great focus on this issue from analysts on the conference call. Nike’s valuation on EV/EBITDA is 24.9x which is a steep premium to the S&P 500 ratio of 13.4x.

From a macro point of view the FY19 Q4 earnings release from Micron Technology is of importance as the memory manufacturer sits in the middle of the global economic slowdown and escalating trade war. Analysts expect Micron Technology to deliver EPS of $0.478 down from $3.53 a whopping decline of 86.5%. Analysts are split on the company’s outlook with the current price at the current consensus price target.