Finimize - 🥳 India joins the party

🔍 The focus this week: A big moment for emerging market investors

India’s stocks have been included in major emerging markets indexes for some time, but its sovereign bonds have never received the same treatment. After all, the country doesn't issue government bonds denominated in foreign currencies, and its local rupee ones were historically closed off to international investors.

But that changed in 2020. With the pandemic ravaging the economy and the government borrowing at record levels to fund an enormous stimulus package, authorities opened a wide swath of the country’s sovereign bond market to overseas investors. That newfound access – coupled with the global appetite to invest in the world’s fastest-growing major economy – was a game-changer. This Friday, India’s government debt will be officially added to JPMorgan’s biggest emerging markets bond index, its first-ever admittance in a global bond index. Inclusion will be staggered over ten months at roughly 1% weight per month, up to a maximum weight of 10%.

The milestone is a win-win for investors and India. Buyers of the JPMorgan emerging markets bond index will gain access to India’s $1.3 trillion government debt pool, which has been offering some of the highest returns among its peers lately. They’ll also be getting an index that’s more attractive and diversified – making up for the diminishing appeal of China’s debt and the ouster of Russia’s bonds after the invasion of Ukraine.

For India, the move heralds greater connectivity between domestic and foreign financial markets and will help it reach more investors, raise more funds, and lower borrowing costs. Goldman Sachs predicts that the inclusion could boost global investment in Indian debt by a chunky $40 billion, sending yields lower and giving a much-needed boost to the rupee. On the flip side, however, those increased foreign flows could also make the country’s bond and currency markets more volatile, presenting new challenges for the government and its central bank.

📅 On the calendar

• Monday: Nothing major.
• Tuesday: US consumer confidence (June), US home price index (April). Earnings: FedEx.
• Wednesday: US new home sales (May). Earnings: Micron Technology.
• Thursday: Japan retail sales (May), eurozone M3 money supply (May), eurozone economic sentiment (June), US durable goods orders (May). Earnings: Nike.
• Friday: Japan unemployment rate (May), Japan industrial production (May), US personal income and outlays (May).
• Sunday: China PMIs (June).

👀 What you might’ve missed last week

US

• Most of the stocks caught up in last year’s AI hype have fallen this year.

Europe

• UK inflation hit the central bank’s 2% target for the first time in almost three years.
• The Bank of England kept interest rates unchanged.

Asia

• China’s economic data for May was a mixed bag.

🤔 Why it matters

Approximately 60% of the stocks in the S&P 500 have risen this year. And yet, over half of those in Citi’s “AI Winners Basket” – an index made up of perceived AI beneficiaries – have declined. That’s a sharp turnaround from 2023, when more than three-quarters of the firms in the basket saw their share prices rise. And it suggests that investors are starting to look past all the optimistic talk about AI, focusing instead on whether companies can substantiate their claims with actual dollars and cents.

The Bank of England (BoE) had some reason to celebrate last week, after May’s consumer prices report showed UK inflation hit its 2% target for the first time in nearly three years. Unfortunately, it’s not expected to stay at those low levels, with the central bank predicting that the pace of price gains will accelerate in the second half of 2024 to reach an average of around 2.5%. What’s more, the report showed services inflation – a measure that’s closely watched for signs of home-grown price pressures – ticked down by less than expected, to 5.7%.

Speaking of which, the BoE left its key interest rate unchanged at a 16-year high of 5.25% on Thursday. But it did hint that a reduction is possible this summer – which prompted traders to bet on a better-than-even chance that the Bank will announce a cut at its next meeting in August. The central bank also said it expects economic growth to be much stronger this quarter, thanks to a sharp rebound from last year’s recession.

China’s economic data for May was a mix of good and bad. Growth in industrial output slowed by more than expected, but retail sales beat forecasts, suggesting that Chinese households may finally be responding to government efforts to boost consumption. That was welcome news for authorities, who have turned to manufacturing and infrastructure investment to offset weak domestic demand, leading to strong exports but also accusations of overproduction from China’s trading partners.