Vijay Kumar Gaba

 An impromptu discussion with my friend, & favourite fund manager, yesterday was quite disconcerting. We raised some pertinent questions and tried answering those questions with even more pertinent questions; the answers though remained elusive.

The discussion started from my yesterday’s note (see here) which highlighted that despite signs of recovery, India’s GDP may contract in 4QFY21 and may barely grow at 1% CAGR during twp year period (FY20-FY22). Also, some suspect, FY22 may also not be as good (10%+ yoy growth) as presently anticipated. Some of the questions that did not have clear answers were—

·         How could market be excited about cyclicals, especially commodities, with 1% CAGR growth over FY20-FY22?

·         If logistic constraints are leading to higher commodity prices, should investors be not worried about manufacturers who face raw material shortages, higher input cost in a demand driven market?

Most auto manufacturers have already cautioned about poor supply of semi-conductors and rising commodity prices as key risk factors.

·         Do we see enough capacity building projects to justify sharp rise in prices of base commodities like cement and steel?”

Especially when average capacity utilization remains below optimal and ministers are complaining about price manipulation and RBI is cautioning about plateauing recovery.

·         In which pocket of the market this extreme stress in sectors like MSME, intermediation, hospitality, etc is getting reflected?”

Logically, this stress must reflect on retail lenders (NBFCs & Banks) and consumers discretionary (due to lower income on poor employment & business closer etc.) and commercial real estate, at least. The trends in market are however not showing any sign of this stress!

It is widely acknowledged that MSME sector is in a terrible state. The pandemic has tremendously helped the large corporates with deep pockets to gain market share at the expense of MSME units.

·         Is Indian economy prematurely rushing to complete its “Americanization”?

With consolidation of businesses into top 100-200 entities, we may soon have 5% population growing, 60-65% population just surviving from payday to payday, and the rest 30-35% being taken care of by the government. Is this model desirable for India?

The general principle is that when you fail to get answers from economics and history, you may look upwards and seek answers in philosophy. My philosophical answer to the market conundrum is “Hope is a good thing, maybe the best of things, and no good thing ever dies”.