In past few days there has been heightened activity in stocks of
the companies which are perceived to be beneficiaries of the "war"
(trade or military) with China. My fellow small investors are lapping stocks
making defence equipments, telecom equipments and missiles, as if there is
going to be an attack on China tonight. The stock prices of many such stocks
have risen by 10-25% this week. The stock price of a public sector power
equipment manufacturer gained on the assumption that the government might ban
Chinese competitors and the order book of this company may swell. Some pharma,
chemical and agro chemical companies also witnessed action based on assumption
of trade restrictions with China. The businesses dependent on imports from
China witnessed selling pressure, while the businesses considered to be the
alternative to the Chinese impost saw extra buying interest.
I would like to request my fellow investors to exercise some
extra caution and restraint while jumping in buy the "beneficiaries"
of the "war" with China. They must at least take note of the
following points, before making any investment decision based on this impulse.
(a) A war, small or prolonged,
with China will have disastrous impact on both Indian and Chinese economy. By
extension it will also impact the global economy. The war with China will not
be limited to stones and iron rods, as the recent reported skirmishes have
been. It will be fought on ground, in air, in the ocean and most importantly in
the cyberspace. Pakistan for sure would like to engage Indian forces in the
western and northern sectors to distract Indian forces in order to help its
ally China. Moreover, given that China is finding itself cornered due the
suspicions over its role in spread of COVID-19 across the world, and has been
mustering allies who can support it on the global platforms, there are chances
that the conflict may expand beyond Sino-India borders.
The point to note is that a war, even if it lasts less than a
week, could have disastrous economic impact in terms of disruptions and costs
(economic and human). Higher taxation, higher inflation and higher rates would
be the most natural consequences. If the assumption is 'war" then the
investors would be better off buying USD with all their money rather than
buying mid and small cap companies which may or may not survive a 5 day war.
(b) Accept it or not, as of
today China is an integral part of India's economy. Millions of small
businesses, traders, retailers, and footpath vendors depend overwhelmingly on
the Chinese imports for their livelihood. Without a credible rehabilitation
scheme for millions of these people dependent on trade with China, the
"Boycott China" campaign in not going to be successful in any
measure. If you want to fully assimilate what I am saying, take a round of you
local market and see for yourself.
(c) A large number of
large businesses are dependent on the imports from China to carry out their
manufacturing activities. They import critical raw materials, engineering
products, plant & machinery and spare parts for their plant & machinery
from China. Sourcing all these from alternative sources may either not be
feasible or may be materially expensive.
(d) A large number of large
businesses have a big market for their final products in China. Finding
alternative markets may be difficult for these businesses.
(e) A significant number
of global companies are looking to shift their operations from China. The
governments of emerging markets like India are willing to go out of their way
to attract these companies to their shores. Some of these companies may finally
land up in India. This will be both threat and opportunity for Indian
businesses. Some businesses may face enhanced competitive pressure from these
global companies which relocate to India from China, while others may gain from
becoming part of a larger global supply chain. Betting on who will gain and who
will lose from this shift in global supply chain is a difficult task even for
most of the sophisticated investors.
(f) Chinese investors have
invested, directly or indirectly, in a large number of Indian businesses. Many
startups rely heavily on Chinese funds or technical support for their
businesses. Many plants and infrastructure projects have been or are being
built by Chinese companies. Their completion and maintenance could be severely
impacted if the trade relations with China worsen due to war. The Indian
promoters may lose heavily if this were to happen.
I am certainly not against the goals of self reliance and import
substitution. But these things cannot be achieved over night and without
tremendous pain. A long term strategy and willingness to bear the pain is what
is needed to attain these goals. Rhetorical nationalism and mindless jingoism
may lead to devastating consequences. In my view it will take 10-15years of
meticulous planning, diplomacy and execution for us to meaningfully reduce
"Made in China" from our day to day life. Doing a BTST (Buy Today
Sell Tomorrow) trade on this theme can only bring losses. So at best it is
avoidable.
Also note that the transition from a agro economy to industrial
economy is a slow and excruciating process. Expecting quick results may lead to
avoidable disappointment. Remember:
(a) Most of the claimed
"Demand" in India is still "Need". The "capacity to
pay" that is quintessential to "Demand" is still low.
(b) The
"Democracy" is both the strength and weakness of India in economic
context. Unlike China, it is not an easy order here to override sustainability
concerns and regional aspirations for faster economic growth. Socio-political
consideration would continue to take precedence over pure economic concerns.
(c) The
"Demography" is a still a raw strength. Without substantial
investment in "gender equality" and "skill development"
this resource cannot be exploited fully.
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