"I love you the more in
that I believe you had liked me for my own sake and for nothing else."
—John Keats (English, 1795-1821)
Word
for the day
Hagiography (n)
The writing and critical study of the lives of the saints; hagiology.
Malice
towards none
History is always written by
the victorious.
First random thought this morning
I do not know why - but everyone I talk to these days is talking
about war. Some fear an Indo-Pak war; whereas some other go much further and
want to talk about the possibilities of a full-fledged World War III.
On a deeper inquiry I find that no one is prepared for a war. It
is just fashionable. Surprisingly, the people of age 80 and above who do
remember the destruction of WWII do not even want to think about a war. It is
the people in 50s and 60s who are most interested in this talk. Perhaps, these
are the people who want the script to be re-written. First they could not grow
due to controlled economy and later because they could not keep pace with the
dramatic transformation into a free economy.
Clinton & Trump - two sides of same dime
As things stand this morning, FOMC
decision is mostly being seen as a function of the election outcome next
Wednesday. A consensus amongst traders is that a Trump victory will mean a
certain hike by Fed on 14th December; whereas a Clinton victory will make it
doubtful.
Ostensibly, the trades in past few
days are driven more by fear than any anticipation and are therefore somewhat
disparate. For example, the sell-off in equities and buying in gold to
safeguard against a Trump win seem incongruent with the sell-off in USD and
bonds. A hike by Fed in December should theoretically add strength to USD and
lead gold and bonds lower.
If we see in Indian context, the
sell off is being attributed to the fear of a Trump win. But the most severe
selling is happening in Pharma sector - indicating a Clinton victory and
consequent stricter drug price controls.
In my view, investors should not
bother about US elections and look beyond it. In that sense, any inexplicable
fall in markets should be used as a buying opportunity.
Insofar as the impact of the
outcome of the elections on India is concerned, my intuitive, and perhaps over
simplistic, thoughts are as follows:
·
India policy of US: Republican Bush
loved Manmohan Singh (a socialist) and Democrat Obama is a proclaimed Modi (a
right wing nationalist) Bro. It is evident that both the principal US parties
have accepted India as a key strategic ally of US. I do not see any reason why
Clinton or Trump should change this. To the contrary, in the emerging scenario,
where US would be looking for stronger allies, especially in our part of the
world, it is difficult to presume any negative shift in US policy towards
India. Trump in particular would need India's help if he wants to implement his
plan to isolate China. Check on illegal immigration from Mexico may also help
Indian Diaspora in US, who compete fiercely with these illegal Mexicans for
many unskilled and semi skilled jobs.
·
Business opportunities: It is a
proven fact that historically Indian companies have helped the US establishment
and corporations in bringing down the cost, enhancing productivity and
generating more and newer avenues of employment. Any US recovery plan therefore
must provide for a Indian role. At policy level therefore one should not worry
too much.
There may however be a business case where the companies may have to face
greater competition or pricing pressure due to change market dynamics or
overall policy changes. Correlating these business cases to election may not be
appropriate, in my view.
·
Foreign flows: Irrespective of the
elections, the gap between US and Indian bonds yields is shrinking. The trend
may only accelerate given (a) the Fed's commitment to normalize ZIRP and (b)
current macro conditions in India. This convergence of yields and stronger USD
may make the USD carry trade unviable in the short term. It is thus possible
that we may see some of the portfolio flows received in past three years
returning back to US shores.
However,
given the opportunities opening in a number of sectors, e.g., real estate,
defence manufacturing, and infra asset ownership, with decent long term annuity
earning potential, this money shall soon return in a new and much better color.
·
INR vs. USD: Hike in Fed policy
rates and consequent rise in US yields may take USD higher, irrespective of the
election outcome. RBI does not have much ammunition left to support INR. A rate
hike by RBI to support INR is not conceivable at this point in time. 2-4%
depreciation in next 4months looks likely.
·
Equity markets: Unlike Brexit
market crash, the outflow of foreign funds is not likely to be matched by the
domestic investors. The equity prices are therefore most likely to correct
materially. The pain may be particularly severe in case of mid and small cap
stocks which have seen significant PE expansion in recent past. In my view, as
I suggested hereinabove, the outflows could be irrespective of the election
outcome.
·
Bond yields: Rise in US bond
yields, a stronger USD may further accelerate foreign funds' selling in Indian
bonds. The bond yields may therefore come under pressure in next 3-4months. The
trend may reverse if the government sustains its resolve to maintain fiscal
discipline in the FY18 budget to be presented in the first week of February.
More generally speaking, I am
little worried as the USA is forced to chose between the bad and the worst. The
world has been struggling with a leadership vacuum since past many years. The
crisis will only deepen after the election results are declared next week. None
of the two candidates enjoys the respect and credibility with the global
community.
Under these circumstances, I am
inclined to unleash my wishes and imagine our PM, who commands both respect
& credibility with global leaders, assuming a much greater role in
international affairs, of course with the support and concurrence of a weaker
US leadership. Amen!
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