Vijay Kumar Gaba

 The struggle between Newton's law of gravity and global markets is perennial. Many times it appears that the markets are defying the laws of gravity and breaking out of their orbit. However, in the end, it is the law of gravity that has always won. Notwithstanding the distance covered away from the “fair value zone”, and the time spent in the away zone, the asset prices invariably tend to return to the fair value zone. In the common market parlance these digressions and eventual return to normalcy is described by the phrases like Overbought, Oversold, Overvaluation, Undervaluation, Mean Reversion, etc.

It is important to note that a long time spent away from the fair value zone could be very deceptive for investors. Sometimes it gives an illusion that the fair value zone for the subject asset may have already shifted higher or lower and the current price is actually closer to the fair value zone. The investors lacking in discipline and/or conviction may fall for this deception and buy/sell the asset in the “away zone”. Two classic examples of this phenomenon are the stock price of ITC Limited and IRCTC Limited during 2019-2021.

In the past one year, all asset prices that were trying to defy gravity, without having necessary escape velocity, are crashing back to their respective ground positions. Now since the asset prices are correcting downward, trampling the traders and investors coming in their way, the questions to ponder are:

(a)   When would the asset prices hit the rock;

(b)   Whether the rock will be soft or a hard one; meaning whether the prices will jump higher immediately after hitting the rock or they will get stuck there at the bottom, till the next high tide comes to their rescue;

(c)    Which assets are fragile enough to crash and get destroyed when these hit the rock;

(d)   Which assets are flexible enough not to get damaged by hitting the rock and bounce back faster.

History could be a good guide in analyzing these points and finding appropriate answers. However, 2008-2009 may not be a good reference point in this context, in my view. The crisis began to hurt global asset prices from early 2008 as the economic growth, fuelled by a decade of exceptionally loose credit, started to fizzle out and financial leverage became unsustainable.

The process of adjustment and correction was interrupted by innovative and audacious monetary policies of large central bankers. Surprised and enthused by the "whatever it takes" approach of central bankers, traders and investors made large bets on a faster economic revival. Consequently, many asset prices in fact scaled higher peaks than seen during the bull market of 2005-2007.

As it turned out that the comfort was false. The central bankers did manage to restore stability in the financial system; but the economic recovery remained feeble and unbalanced. The global lockdown in the wake of Covid pandemic has completely exposed the fault lines of the global economy and markets. Consequently, the asset prices are now rationalizing to factor in the prospects of even slower economic recovery and further rise in global imbalances.

The process is expected to be protracted and painful. Nothing will be achieved in a year or two.

The good news, in my view, is that India is decoupling from the global pain, as the painful economic corrections implemented in the post global financial crisis era are now beginning to yield results. In fact, as one of the worst sufferers of unfavourable terms of trade, India could be a major gainer as the global imbalances get adjusted to more fair terms of trade.

I am certainly not expecting any exceptional return from the Indian equities over the next couple of years. However, it is apparent that Indian equities can give normal returns for a much longer period than their peers.

 Hikes another 75bps

The Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed) hiked the federal fund rate by 75bps yesterday to the range of 2.25% - 2.50%. This is the second 75bps hike in two months. In the post meeting press interaction the Fed chairman Jerome Powell outrightly rejected the speculations that the US economy is in recession. The FOMC members are of the opinion that the strong labor market allows the US economy to tolerate rapid monetary tightening.

For the first time since February 2020, the FOMC statement did not mention Covid or coronavirus.

…leaves the door open for further data dependent hikes

Reiterating the commitment to achieve the 2% inflation target, Powell also indicated that while another unusually large increase could be appropriate at our next meeting, the FOMC would set policy on a meeting-by-meeting basis rather than offer explicit guidance on the size of their next rate move, as he has done recently; thus, leaving the future course of the FOMC action wide open.

As per the Bloomberg estimates, the market consensus is now gathering around two more 50bps hikes in September and December FOMC meetings, with the fed fund rate peeking around 3.4%, lower than the previously estimated 3.8%.

The US economy is estimated to have grown at a tepid 0.4% (QoQ, annualized) rate in 2Q2022 after recording a negative growth in 1Q2022, technically avoiding a recession. The US officially acknowledges a recession if the economy logs a negative growth for two consecutive quarters.

Markets react positively to FOMC – stock rally, yields and USD tumble

The markets took comfort from the growth outlook and Powell’s statement on future rates being data dependent. The market participants appear to have concluded that the FOMC may reach the end of the tightening cycle by the end of 2022, triggering a “risk on” rally in the markets.

·         Battered tech stocks surged strongly with the benchmark Nasdaq rising 4.06%, the largest one day gain since November 2020. The broader index S&P500 gained 2.62%.

·         US Dollar Index lost 0.66%.

·         2yr SU Treasury yields fell 10bps; while 10yr benchmark yields were down 5bps at 2.78%.

…but deeper yield curve inversion signals recession as consensus

The US yield curve is now inverted the most in two decades, highlighting that the markets strongly believe a recession is around the corner. The 2yr yields are now over 30bps lower than the benchmark 10yr yields – clearly indicating that the market sees higher risk of recession than the Fed. The deeper yield curve inversion is seen to imply that Fed may actually return to the path of easing as early as 2023.

Click here to see a nice compilation of analysts’ reactions to the FOMC statement.

The Nifty Metal Index has gained over 10% in the past one month; outperforming the benchmark Nifty50 (+4.5%) by 2x. Six out of the total fifteen Index components have gained over 10%, with Hindalco (+16%) being the top gainer amongst the metal producers.

In this period, the Bloomberg Commodity Index is down by ~2%; LME aluminum futures are down ~2.5%; LME copper futures are down ~9.5%; Brent Crude prices are down ~11%; NYMEX gold futures are down ~5.5% and China Steel Bar prices are down ~10%.

Also, in the past one month, the benchmark US 10yr Treasury Bond yields are down 9% from 3.13% to 2.78%; and the US Dollar Index (DXY) is up by 1.9%.

I find the divergence between performance of metal stocks and global trends a little intriguing. The global commodity prices, bond yields and US Dollar movement etc. are all pointing to a significant slowdown (if not recession) in demand. The outlook for the domestic demand in India is also not enthusiastic in the near term. The 1QFY23 results have indicated pressure on margins; attracting earnings downgrades.

In my view, the investors holding metal stocks in their portfolios need to analyze the following three scenarios:

1.    The ~33% correction in Nifty Metal Index during April – June 2022 quarter is an overreaction to the slowdown concerns and imposition of export duty on some steel products. The market is now rationalizing the excessive correction.

2.    The slowdown/recession concerns may be overblown, especially in the context of Indian producers of industrial and base metals. The demand for metals will remain strong in India, even if global slowdown extends to 2023 due to monetary tightening and war. The government may withdraw the export duty and even provide additional protection from cheap imports to help the domestic producers. The producers with significant global operations like Tata Steel and Hindalco will manage to recover their volumes and margins in a couple of quarters if the economic slowdown is managed well.

3.    The global commodities, especially the base and industrial metals, have not seen any significant capacity addition since the global financial crisis. During the lockdown in the wake of Covid pandemic, the inventories have been utilized. For most metals, the inventories are at historic low levels. The monetary tightening by the global central bankers is making inventory carrying cost expensive and hence discouraging inventory restocking. The global bond markets and inflation forecasts are indicating that the monetary tightening cycle may end sooner than later; and the central bankers like the US Federal Reserve may actually embark on a path of monetary easing as early as 1Q2023. In that case, we may see a sharp surge in commodity prices in 2023-2024 as the demand-supply gap tightens further.

As a strategy, I usually avoid commodity stocks in my portfolio due their cyclicality, volatility and unpredictability of their earnings and consistent need for capacity building. However, I am inclined to believe more in the third scenario playing out over the next 3-5yrs. I would therefore be on the lookout for some metal producers that have decent operating leverage (unutilized capacity); unlevered balance sheet; offering decent valuations. As of this morning, I found nothing that fits my criteria.

 In the next couple of days, the market participants world over will be focused on the FOMC statement on Fed rates, inflation & growth outlook and guidance for the monetary policy direction in the near term (next 3-6months). The “active” market participants in India, in particular, would be staying awake till late midnight on Wednesday to hear what Fed Chairman Jerome Powell has to say.

The fact that Thursday happens to be the monthly derivative settlement for July contracts, makes the Fed decision, and likely reaction in our markets on Thursday morning, even more pertinent for the derivative traders in India.

Besides the derivative traders, the currency traders; bond traders and corporate treasury managers who need to actively manage their Fx exposure, would also staying awake to see how the US Dollar, EUR and US Treasuries behaves post the FOMC statement and try to assess how Indian bonds and INR may react in near term.

Our markets may however be relieved to a great deal if the RBI makes an unscheduled rate decision on Wednesday morning itself, just like it did on 4 May 2022, preempting the pressure on Indian bonds and INR post FOMC decision. For records, in his recent statement, the RBI governor has already spoken about the inevitability of further rate hikes. It would be better if it is done tomorrow rather than a week later (04 August 2022) when the MPC of RBI is scheduled to make a statement on monetary policy.

The European Central Bank (ECB), for example, hiked 50bps last week – their first hike in 11 years- to preempt further slide in the Euro. ECB hiked despite signs of accelerated slowdown in growth and rising fiscal pressures on peripheral Europe.

Since the FOMC decision would be known in less than two days, I do not find any need to speculate on the likely outcome and the market reaction to that outcome. Nonetheless, it would be appropriate to say that the market is pregnant with the hope of a unambiguous ‘pause’ signal from the Fed and consequent weakness in USD and a rather dovish MPC. The chances of disappointment are therefore marginally higher than the chances of positive surprise, in my view.

What should be the strategy of an investor under these circumstances?

In my view, the first thing an investor should do is to have a good dinner on Wednesday; go to bed early and not watch the markets, including business newspapers & TV channels and investing handles on social media, on Thursday.

Second, investors should focus on performance of the companies in their respective portfolio, rather than bothering too much about the general impact of global macro developments. They should assess the ability of the companies in their portfolio to manage the impact of rate and currency volatility on their respective businesses. The history indicates that better managed companies in India have managed this volatility very well without letting it materially impact their performance beyond a couple of quarters in the worst case.

Third, if the change in global rate and currency outlook materially alters the investment argument for a company in their portfolio, they should place a “sell” order for it today itself.

The debate over whether “equity investing” is an art or science is never ending. There are arguments on both sides, but none of these appear strong enough to settle the debate. Almost all episodes of this debate usually end with the compromising statement - “Equity investment is both an art and a science.”

The application of quantitative research and financial models does give it a scientific color. But use of quantitative methods and financial models is highly influenced by the personal preferences, experience, estimates and prejudices of the user. Invariably, the forecasts of fundamental analysts vary based on what parameters they have used in forming their respective opinions. For example, a 50bps difference in weighted average cost of capital (WACC) used by two analysts could give dramatically different assessments for the fair value of a stock. As someone pointed out, fundamental analysis of equity stocks is like navigating a car. While all the cars are designed scientifically, the drivers have distinct styles of driving and the results – time to travel a defined distance, safety of the passengers and vehicle, fuel mileage obtained from the vehicle etc. – largely depend on the style and experience of the driver.

The “art” side of equity investing is even more complicated. Most investors view a particular stock from the vista point they are standing at that particular point in time. Their decision to buy or sell stock depends on their financial, psychological, and social condition at that particular point in time. The decision (and therefore view on a stock) can change dramatically if they move to a different vista point, i.e., their financial, psychological and/or social change.

For example, an investor who invested in a portfolio of stocks 10yrs ago for children's college fees, he/she will sell the portfolio as soon as the children get admission in college, irrespective of the future outlook of these stocks.

Parallel to the debate of ‘science” vs ‘arts”, a lot of mythical investment strategies are also commonly discussed and marketed. The investors, analysts and money managers use terms like “value vs growth”; “cyclical vs defensive”; “large cap vs midcap”; “financials vs technology”, which are mostly mythical and have no scientific basis.

·         Most large IT Services companies count BFSI as their primary customer segment. Most large financial firms are reporting spend on technology as their primary capex. How could possibly the investment in these two sectors be alternative.

·         Auto, Energy, and Banks sector equities have given positive returns over the past 3yr, 1yr and YTD2022 horizon. This period saw one of the most pervasive socio-economic disruption globally and triggered a global recession. Whereas, media, pharma and IT services are the sector that are down on 1yr and YTD2022 basis, though IT and Pharma sectors have given strong returns over the past 3yrs. The question is how would define what is cyclical and what is secular or defensive in this scenario.

·         Midcaps have outperformed Nifty over past 1yr and 3yr timeframe. So what is the relevance of largecap vs midcap debate?

The point I am trying to make is that the investors must avoid these mostly redundant and mythological distinctions and debates and focus on their investment objectives and strategy to achieve those objectives.

Last night I got a call from a friend who had been staying in London for the past 3years. He wanted to know what type of air-conditioner is better – window or split type. He sounded quite hassled as he was figuring out how the air conditioner would be installed in his rented apartment; what kind of permissions would be required; whether he can get a skilled technician to install an air conditioner; and how much would be the operational cost (electricity bill) for using an air-conditioner in London. I am sure he was overreacting to an ordinary situation, because the situation is dramatically asymmetrical to his perception of life in London.

 A recent Reuter’s article (see here) drew attention towards some ominous signs emanating from the bond pricing of emerging markets that are more vulnerable to default on their sovereign obligations. Noting the signals like weakening currencies, bond spread widening beyond 1000bps, and dwindling Fx reserves, it concludes that a record number of developing economies might be “in trouble” now.

More than US$400bn worth of sovereign debt could be facing default. While the countries like Russia, Sri Lanka, Lebanon, Zambia etc. have already defaulted on their obligation, the usual suspects like Argentina and Pakistan etc. appear on the precipice of a default. The serial defaulter Argentina (US$150bn); Ecuador 9US$40bn); and Egypt (US$45bn) may actually default much sooner. If the war drags on for a couple of more months, Ukraine may also default on US$20bn debt payments.

Of course, the sovereign defaults are not new and the US$400bn default might not look massive in the context of trillions of dollars of new money created in the past one decade. Nonetheless, so many countries defaulting in a short span of time could have serious consequences for the global financial system. For one, it could trigger a contagion if some large global institution like Lehman Brothers collapses under the weight of such default. The worst however would be if the ‘default’ loses the moral stigma attached to it, and many profligate nations find it convenient to default and start afresh.

It is pertinent to note that the Bank of Japan (BoJ) owns more than 50% of the debt taken by the Government of Japan. This effectively means that Japan has borrowed about USD one trillion from the JPY printing press in the three years 2020-2022. Considering the deteriorating demographics and anaemic growth over the past three decades, it is obvious that Japan is ‘riding a tiger’. Many developed countries like Italy and Greece are also trapped in a vicious low growth high debt cycle. Obviously, getting out of this trap is not feasible in the normal course of business.

The most relevant question at this point in time therefore ought to be “how the global economy gets out of this extortionate high debt-low growth trap?”

Historically, the following methods have been used by the governments to break out of the low growth high debt trap:

1.    Currency debasement by stimulating high inflation for long or devaluing the currency.

2.    Financial suppression by keeping the real rates negative for long.

3.    Fiscal tightening by increasing taxes disproportionately and/or reducing public spending.

4.    Incremental improvement by gradually tightening the monetary policy.

5.    Defaulting on debt obligation and negotiating waivers with the lenders.

 One good thing about the Monsoon season in North India is that this is the season for new crops of fruits from hill states. We get fresh and juicy pears, plums, apples, cherries, peaches etc.; besides, juicier varieties of mangoes like Chausa and Langda. A visit to the fruit market in Gurgaon yesterday however left a little sour taste in my mouth. None of the seasonal fruit was selling at less than Rs100kg. Apples are more than Rs200/kg. Even mangoes are selling at a rate of Rs120-250/kg.

The vendors selling from carts and smaller shops are unhappy as sales are down notably due to higher prices; and a larger than usual quantity of their merchandise is going to waste due to rotting. The consumer is obviously unhappy as even the seasonal fruits are becoming unaffordable for many of them. The importers of fruits from South East Asia and Americas are also not particularly happy as the demand for expensive and exotic fruits is diminishing consistently due to higher prices. I shall make a trip sometime in September to find out how the farmers are feeling about it.

The food and energy inflation has often remained elevated in India for the past many years due to one reason or the other. Erratic weather (poor crop), depreciating currency (imported inflation), higher support prices, and geopolitics (higher energy prices) etc. The core inflation though remained mostly tamed, except for the sharp rise in input prices post Covid.

There is no evidence to suggest any direct correlation between wage inflation, especially farm wages and non-government urban worker wages. Nonetheless, the indicators like consistent decline in household savings rate; rise in demand for currency, rise in household debt, especially credit card outstanding, could be seen as pointers to indicate that wage hikes might not have matched the household inflation.

Notwithstanding the stagflation like conditions and low visibility of any material improvement in near future, we do not see common man protesting on streets in India. The protest, if any, are feeble and rhetorical, mostly by the politicians from opposition parties. The primary reason for this broader acceptance of high inflation, in my view, is the persistence of inflation for decades, with brief periods of relief in between.

Being an economy materially reliant on agriculture (weather) and imports (edible oil, energy, gold, defence equipment, technology) the population and policymakers both have significantly higher tolerance for food and imported inflation. The phrases like “Beyond control” and “Act of God” are often used by all to accept high inflation. The consumers, investors, money managers and policy makers usually do not consider an episode of high inflation as something that may require any structural change in their respective approaches.

However, this has not been the case for many developed economies like the USA, which are witnessing high inflation after a few decades. A large proportion of the current generation of consumers, investors, money managers and policy makers have not seen any episode of high inflation (and consequent higher rates). Their tolerance to inflation is obviously very low and thus their responses could be very strong. A casual chat with some friends in the USA and UK tells me how the common people in these countries are already feeling “devastated”, even after enhanced cash support from the government. The policy makers, investors and money managers also appear panicked and reacting in haste.

Being an investor in Indian assets only, I see no reason for panic. In fact, I find many reasons to feel optimistic about the future of Indian assets and markets. In the past few years many steps have been taken to contain the imported inflation. These steps shall definitely yield positive results in the next 4-5 years. For example—

·         Focus on renewables, biofuels, local electronic, defence and chemical manufacturing, multiple FTAs etc. should either reduce reliance on imports or at least protect from volatility in global prices. The impact of increased self-reliance (import substitution) could reflect in improved trade balance taking pressure off from the Indian currency.

·         Mission scale efforts to improve production and processing of oil seeds, pulses, fruits & vegetables (horticulture) and marine products etc. have already started to show some early results. The situation could improve materially in the next 4-5years.

·         The current war between Russia and Ukraine has emphasized and reinforced the idea of having a more diversified vendor base for the global businesses. We shall definitely see more bilateral agreements (FTAs etc.) between India and other countries, especially the developed countries that relied overwhelmingly on China and Easter Europe for sourcing their manufactured goods.

·         Full operationalization of Dedicated Freight Corridors, development of multiple expressways along with industrial corridors shall improve the logistic infrastructure brining efficiency in supply chain and optimization of cost of productivity.

·         A leap forward has been taken towards INR convertibility by allowing Indian entrepreneurs to settle their cross border trades in INR. This shall in due course ease pressure on the current account and improve the terms of trade for Indian businesses.

In my view, the current phase of volatility and uncertainty in macro factors like inflation and trade deficit etc. is transient. We have successfully travelled from 12-15% inflation range to 4-8% inflation range in the past 3 decades. In the next decade inflation may stabilize in 3-4% range with materially better trade balance, and a stable INR and mostly neutral rates.

The Federation of Indian Chambers of Commerce & Industry (FICCI) in a recently released knowledge paper – “Metaverse and Emerging Opportunities” – highlighted some interesting aspects of this massive opportunity that has the potential to transform, inter alia, the way we work, study, communicate, entertain, socialize, get healthcare and transact with each other. The following are some excerpts from the FICCI paper that I believe are relevant for researching Metaverse as an investment theme.

What is Metaverse?

Meta (Beyond – Greek Word) + Universe (English) = Metaverse is an offering which provides users immersive and multisensory experiences using futuristic technologies.

In technical terms, Metaverse is a network of 3D virtual worlds focused on social connections. It is a collective virtual space, created by the convergence of virtually enhanced physical and digital reality. It is an independent virtual economy, enabled by digital currencies and non-fungible tokens (NFTs). It is device independent and is largely democratized and not owned by a single vendor. Metaverse is built on a combination of Blockchain, Virtual Reality (VR), Augmented Reality (AR), 3D hologram, and Video.

Metaverse allows people to enhance or mimic their physical activities in the virtual space. This could mean transforming the existing physical activities that one is doing or by transporting to a new virtual world. Presently, multiple Metaverses are functioning independently from each other, having a functionality of their own. However, as the concept evolves, we shall see large Metaverses encompassing all the activities with broad functionality, or even conglomerates of multiple Metaverses integrated with each other.”

The opportunity size

A recent Citi report predicts that with 5bn potential uses, the total addressable market for the Metaverse in B2B and B2C segments could be between $8 trillion and $13 trillion by 2030.

Gartner expects that by 2026, 25% of people will spend at least one hour a day in the Metaverse for work, shopping, education, social media and entertainment. Metaverse is a trillion dollar opportunity per year around 2030 onwards while it is a $60billion now in 2022.

On the B2B segment, some of the use cases include:

·         Transformation of “Workspace collaboration” with always ON conference/meeting rooms for global meetings, conferences.

·         Talent acquisition, hiring and onboarding taking a new dimension in Metaverse

·         Digital test run of products and experience different options.

·         Learning, education, training, skill development with avatars (manufacturing, factory setups will get good leverage with this tech)

·         Healthcare (Telemedicine, Therapies, Surgeries)

·         Defense (Training, On-boarding, Recuperation, Simulation)

·         Real-estate, E-commerce companies can have product demos, showcase and branding opportunities

·         Advertising will move to the next level with a unique kind of storytelling experience for the audience using 360 videos and 3D technology.

B2C use cases for Metaverse include

·         Gaming and entertainment

·         Education, Learning, Skilling

·         Travel and Tourism

As a consumer I could already imagine a few things like:

*  No need for expansive showrooms for automobiles, electrical appliances, electronics, watches etc. Virtual shopping malls could be equally popular as the traditional shopping malls.

*  Much less need to physically visit doctors for regular consultation.

*  Much less frequency of business visits. Virtual conferences, book launches.

*  Lower frequency of visits to stadiums for watching games; or to theatres for watching movies.

*  No need for physical coaching/training centers.

*  No need for builders to make a sample flat or employ a huge sales team.

All of this essentially means less traffic on roads and lesser use of air conditioning and therefore less pressure on the environment. The present generation which is reasonably tech literate and is more comfortable with virtual shopping, working and socializing could be hitched to the Metaverses with broader functionalities.

Key concepts

The Metaverse is composed of many core elements that are combined together to provide a whole new world to the users. These technologies include eXtended Reality (XR), Blockchain, Artificial Intelligence and the Internet of Things but are not limited to them.

Blockchain is a shared, immutable ledger for recording transactions, tracking assets and building trust. An asset can be tangible (a house, car, cash, land) or intangible (intellectual property, patents, copyrights, branding). Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved.

A non-fungible token (NFT) uses the technology of blockchain to create something that is unique and irreplaceable in the digital world.

A cryptocurrency, crypto-currency, crypto, or coin is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. Individual coin ownership records are stored in a digital ledger, which is a computerized database using strong cryptography to secure transaction.

Artificial intelligence (AI) is the ability of a computer or computer-controlled robot to perform tasks commonly associated with intelligent beings like humans.

The eXtended Reality (XR) is a superset that covers Augmented Reality, Mixed Reality and Virtual Reality. Virtual Environments are considered as synthetic or computer-based spaces.

The Internet of Things (IoT) is a network of people, devices, and services [2] that can sense, connect to one another, make inferences, and act(uate) at scale. It is considered that over 30 billion IoT devices are already deployed globally today.

 The summer has been truly scorching in many parts of the country this year. Reportedly, land surface temperatures neared 55 degrees Celsius over many parts of northwest India; even crossing 60 degrees Celsius over several pockets (see here). The visuals of floods and inundated streets & homes from many states are also disturbing. Obviously, the weather patterns are changing rather quickly and our infrastructure is not designed to handle these changes. Power shortages, urban flooding, uncontrolled wildfires, frequent landslides, roads caving in, flight delays, traffic jams, etc. have become rather common issues.

The rating agency CRISIL highlighted in one of its latest reports (Sustainability Yearbook 2022) highlighted that over 52% of India’s GDP could be exposed to physical risks like wildfire, flood, sea-level rise, or storms by 2050. This cannot be a good augury for a large proportion of our population which is poor and largely dependent on agriculture for its sustenance.

Fortunately, the government is fully conscious about the devastating impact climate change could have on the social-economic milieu of the country. It has forcefully committed itself to ambitious climate goals. Nonetheless, the conditions may not improve much for the current generation. All those in the 15-59yr age bracket may continue to suffer every winter, summer and monsoon season. The duration of spring and autumn has been diminishing for the past many years, anyways.

One less talked about impact of climate change is the declining rate of population growth. Climate change has impacted fertility, affordability and inclination to have children.

The government data has already highlighted the sharp decline in Total Fertility Rate (TFR) of Indian women. The TFR of India is now very close to the replacement rate, indicating that our population is likely to peak much earlier than previously estimated.

Recently, a superstar of Telugu Cinema, Ramcharan Teja and his wife Upasana, were in news for their decision to not have kids in the interest of climate control. Temjen Imna, the Nagaland Minister who was trending all over social media for his comic twist to racism slur faced by the people of North East India, also tweeted, “On the occasion of #WorldPopulationDay, let us be sensible towards the issues of population growth and inculcate informed choices on child bearing. Or #StaySingle like me and together we can contribute towards a sustainable future”.

From my interactions with numerous people across the country, I know for sure that these feelings are not limited to a few celebrities or people from the higher socio-economic strata. Young couples even from smaller towns and villages are deciding not to have children. Affordability and desire to live a “free” life without the responsibility of raising children are two primary reasons offered for their decisions. In recent months, the worsening social harmony and high crime rate have also been added by some couples to the list of reasons for not having children.

I believe that this trend is a global trend, not specific to India. In my view, therefore, demographic change (ageing and population decline) is a much bigger investment theme as compared to climate control (or ESG). From a long term perspective (2-3 decades) deflation, technology, insurance, healthcare, home appliances, casual clothing, home delivery etc. should be the popular themes. Inflation, personal mobility, fashion, travel, food and water etc. should become increasingly less popular trades.

 I find nothing more disturbing than demolition of a long preserved and much cherished image or belief. Occurrence of this often gives rise to cynicism, shaking the core of the belief system. The recent act of violence in Japan is one such event.

People of my generation have known Japanese people for their politeness and commitment to non-violence. The pictures of Japanese crowds showing remarkable patience and calmness during adversities have been much cherished by post WWII generations. The assassination of the former Japanese Prime Minister Shinzo Abe, last week, while he was addressing a public meeting has shattered many images I was carrying in my mind. This is perhaps first of its kind of act of violence since assassination of Inejirō Asanuma, the then Chairman of the Japan Socialist Party. However, in the pre-war era, political assassinations were rather commonplace in Japan. Japanese people took pride in their martial and imperialistic traditions. Many believe the 1945 nuclear attack on Nagasaki and Hiroshima overwhelmed Japanese society, burdening it with the guilt of being one of the main characters in the two disastrous world wars and losing its pride to the USA.

In fact, after decimation of the manifest fascist forces (e.g., Germany and Italy) and imperialistic forces like Great Britain, Japan and Austro-Hungarian empire post WWII, the world has been a rather peaceful place as compared to the preceding 2000yrs. The conflicts post WWII have mostly been contained. Even during the height of the cold war between NATO and Warsaw Pact countries, and shenanigans of star wars, there had never been a threat of escalation to the scale of larger World War.

However, if we correlate some of the recent events and trends, the picture that would emerge is not very comforting. For example, consider the following events and trends:

·         Assassination of Shinzo Abe.

·         Numerous acts of violence across USA and Europe, apparently perpetrated by random people who are not radicalized.

·         Blatant violation of international laws by Russia in invading Ukraine, as energy starved Europe overlooks the devastation of a sovereign nation.

·         China is threatening its neighbours’ territorial and economic integrity.

·         USA handing over Afghanistan to Taliban.

·         Communists (or socialists) winning elections (re-elections) in many jurisdictions, e.g., US, Germany, France, Italy, Australia, Chile, Mexico, Argentina, Bolvia, Peru, Honduras, and Columbia, etc. Polls are indicating that Bralians are most likely to lecet a leftist eader in October election, as Chinese premier Xi Jinping further strengthens his position at 20^th National Congress of CCP later this year.

·         Reliance of population on governments for meeting basic needs rising exponentially along with the rise in the ffinancial and fiscal vulnerabilities across the globe.

·         Frequency of mass public protests rising in various jurisdictions.

·         Tendency of governments to overregulate and over govern increasing across jurisdictions.

·         Expansion of NATO.

When I look at these events and trends and many other similar things happening around, I get a feeling that people of the world are tired of pretending politeness, being democratic and practicing non-violence. They appear eager to get over their guilty conscience and establish supremacy of their respective races. We may in fact be close to the return of Vikings Age 2.0.

In the past 6-7 decades, we have seen many countries being invaded in the garb of restoring or establishing democracies or people’s rule in these countries. Russia’s invasion of Ukraine ends that façade. This will perhaps re-establish the legitimacy of colonialism and imperialism. We shall see multiple such instances in the coming decades.

Before we reach a stage when the new Roman, British, Ottoman, Qing empire would rise, we need to cover a long distance. Who covers this distance fast while conserving enough energy and stamina to occupy the post would decide the new world order, maybe 40-50years from now.

More thoughts on this later.

 Being the finance minister of India is arguably one of the most challenging jobs in the world. The incumbent has to deal with 28 Federal States and 8 Union territories, each having a distinct socio-economic and fiscal profile. Unlike some developed countries like the USA, the Federal States in India are not autonomous and/or self-reliant in fiscal matters. These states rely on the Union Government for financial resources. Besides, the finance minister of India is limited by the constitutional mandate of being “socialist”. To make things more complicated, implementation of GST; acceptance of the recommendations of 15^th Finance Commission; and abolition of the planning commission have materially curtailed the powers of the union finance minister.

Technically speaking, all the policies formulated and proposed to be implemented by the union finance ministry must pass the test of “socialism”, since the Constitution of India overrides all the legal provisions and policy directives. This makes it very hard for the finance minister to pursue the goal of faster growth through promoting capital investments in the private sector that are likely to eventually result in more socio-economic inequalities.

Even when the finance minister tries to extend fiscal and other support to large businesses to stimulate economic growth, these efforts are invariably met with strong opposition from the politicians belonging to the ruling party & opposition; civil society and common people.

To mitigate the political damage that may be caused by such criticism, the finance ministers have often supported the larger public sector; contrary to the stated policy of minimizing the role of the government in business. Also, the finance ministers in India have often taken the path of ‘crony socialism”.

They often pursue fiscal policies targeted to benefit a specific set of voters and/or specific regions; inviting criticism from the businesses and capital market participants. The finance minister is often criticized for inaction in terms of economic policy and reforms; fiscal imprudence in pursuing profligate social policies and programs; incoherent foreign policy; failure of monetary policy in controlling consumer prices; impeding critical infrastructure projects; incongruent taxation policies; and corruption in financial institutions etc.

The socio-economic condition (especially the fast waning demographic dividend) of the country warrants that the governments vigorously pursue the course of faster and sustainable growth over the next couple of decades. However, the pursuit of this goal would inevitably result in widening and deepening inequalities of income and wealth.

The experience of western developed economies indicates that faster growth ultimately results in 10:90 division of the society – 10% people owning most of the wealth and accounting for most of the savings; while the rest 90% just survive. Of course, the standard of life for the underprivileged 90% in developed countries is much better than the corresponding 90% population in India.

 A recent visit to Jehangirpuri in North Delhi was enlightening in more than one way. It is a colony inhabited mostly by poor workers, consisting of unskilled and semi-skilled factory workers, security guards, auto/taxi drivers, daily wage earners, small vendors selling fruit, vegetable, meat, snacks etc. The elite population of the area includes class IV employees of Municipal Corporation of Delhi and Delhi government. There is a sizable population of motorbike riding youth, working mostly as delivery boys for ecommerce and food delivery platforms. There are numerous unregistered workshops and cottage industries running from houses built illegally. A large majority of the 1,00,000 population of this colony are immigrants from various parts of the states of UP, Bihar and West Bengal. 

Before 1975, Jehangirpuri was a small semi-rural habitation on the outskirts of Delhi. During the Emergency, a resettlement colony comprising a few thousand studio apartments was built here to relocate the dwellers of the slums (mostly immigrant laborers) removed from various locations of Delhi. Over the last 47years, the population has expanded manifold as the employment opportunities around the area have developed. The largest fruit and vegetable market in Asia (Azadpur Mandi), a transport and logistic hub (Sanjay Gandhi Transport Nagar); Delhi’s largest Garbage Dump (Bhalswa), and an Industrial cluster (Burari) are in the vicinity of Jehangirpuri. The area now has an abundance of unauthorized and hazardous construction.

In fact, in most sense it could be compared with the more popular Dharavi of Mumbai – a small world within itself. Though economically residents of the locality mostly fall in the bottom quartile, socially the population is diversified. It has a good mix of religion – Hindu, Muslim, Sikh, Christian. Caste wise though SC, ST, OBC and MBC are in majority; there is decent presence of upper castes like Brahmins from eastern UP and Bihar, Rajput from Rajasthan etc. It is commonly believed that the locality has a decent number of illegal immigrants. It was in the news a few months ago for the wrong reasons (communal riots).

A short 2-3hr visit to Jehangirpuri would give you a good insight into the current socio-economic condition of the country. The local residents come from various parts of the country; work all over the city; and interact with the entire spectrum of population. They are smart and fully aware. They are a good representative sample not only for learning about the latest in social, economic and political issues; but also for finding simple solutions to many of the problems.

The following are some of the interesting highlights from my discussion with the local residents:

·         Even the rich people living in large bungalows are showing concerns about rising prices of fruits and vegetables. Service class people are buying much less quantity. Sale of expensive imported fruits has fallen.

·         The instances of people living in the same locality sharing a taxi have increased due to sharp rise in fares, especially during peak hours.

·         The demand-supply gap for delivery boys is widening. Many young boys are now working for multiple vendors delivering food as well as other merchandise. Motorcycle financing had eased during Covid, but has tightened again now. Getting a driver’s license is also becoming tougher in Delhi. Most youth are taking DL from home towns, which is relatively much easier.

·         There has never been communal tension in the area post 1984 Sikh massacre. Even during 1992-93 Babri demolition unrest, the area was largely peaceful. Almost every resident believes that the local politicians are to be blamed for recent violence.

Incidentally, there are frequent riots in the area over water. For most of the summer, a substantial part of the population in this area depends on “tanker water” for their daily need. Violent clashes at tanker sites are a common occurrence.

·         A group of women demanded, “if US government can give cash to its citizens (referring to California government proposal to give US$1050 to families for meeting higher cost of living) why Indian government cannot give it to poor.” Incidentally most families have been beneficiaries, direct or indirect, of free ration, free health insurance (Ayushman Bharat).

·         People here talk more about local politics of their respective states and Delhi rather than the national politics. The Chief Ministers of UP, Bihar, Delhi found more mention than the Prime Minister.

·         Most of the women living in the area work and contribute to the household economy. The level of gender equality in the area is however pathetic. The crime against women, especially domestic violence and sexual exploitation, are rampant. Most middle aged women accept this as fait accompli; but the young girls are resentful.

·         The residents do not seem to be according any significant importance to the law of the land. For them survival is the top most priority. For police every resident of the locality is a perennial suspect. There are numerous accused, under trial, and convicts in the area. But I could find only one very small NGO operating in the area that helps them in legal matters.

·         The youth of the locality are much more liberated and uninhibited in their personal and social conduct as compared to the middle class neighborhoods in the city.

·         Lot of workers who left the city during Covid, and went back to their respective hometowns, are yet to return. Despite shortage of workers, not many employers are willing to increase wages materially.

·         The awareness about educating children is rising. Most children below 12yrs attend school. While the government schools are preferable, there are many “convent schools” and coaching centers operating from houses. The dropout rate is higher especially amongst the children of migrant workers.

·         The people of Jehangirpuri celebrate all festivals with fervor and gaiety. But the knowledge about religion and spirituality is close to nothing. Most people claim to be deeply religious but their understanding of religion is mostly based on folklores and misinformation. I guess this could be true for a large majority of the Indian population in general. But I found it relevant to discuss in the context of the current environment of hate and intolerance.

·         Unfortunately, a locality that is inhabited by numerous workers engaged in the work of cleaning houses, offices, streets, vehicles etc., is full of filth. The local people and administration are showing no initiative in keeping their own locality clean.

·         Most important, and perhaps most disturbing, learning was that the youth of the area is happy living by the day. None of the young people I spoke to is aspiring for something big. In fact they are too angry and cynical to think anything big. This makes them vulnerable to manipulation by organized criminals and unscrupulous politicians.

I intend to revisit the area during Ramzan and Diwali to gain more understanding of the social fabric and economic strength (or otherwise) of the area.

 Yesterday I had a long discussion with a renowned social media influencer. The core topic of the discussion was what could be a good method to test the character and strength of a phenomenon, e.g., popular leader, progressive society, ideology, innovation, system, organization, etc.

The point of debate was whether the evaluation should be based on how the underlying has performed under the normal stable circumstances or should include the handling of exceptions as well. The conventional wisdom says that the true test of character and strength of a phenomenon is tested during a crisis. When the sailing is smooth, even an ordinary captain will command the ship safely to the destination.

My view is very clear in this context. I believe a phenomenon could be termed so only when it has helped in normalizing an exception(s). For example, to me a captain would be phenomenal if he designs or helps in designing a guidance system that enables all sailors to navigate through turbulent waters comfortably. Similarly, a political leadership would be phenomenal in my view, if it implements a policy framework that is efficient enough to handle most exceptions in the normal course.

In the investment context, enterprises that are always geared to handle economic cycles in the normal course of their business should be the most preferred investment candidates. The enterprises that have shown extreme volatility in their profitability and sustainability during crises like global financial crisis and Covid-19, regardless of eventual recovery and growth should be less preferred than the enterprises that weathered the crises smoothly and maintained a steady progress.

To put it simply, the managements which were showing extreme exuberance in 2018-2019 and have been regularly complaining about raw material price hikes; worker shortages; supply chain issues; consumer demand etc. to justify their poor performance every quarter since mid-2020 may not be the ideal companies to invest, regardless of their popularity or average performance track record over a longer period.

Investors need to remember that it is highly probable that they may need to sell their investment during a crisis when there would be few buyers in the market and the stock they own would be trading at the lowest price in the market cycle. Because this would be the time when their finances would be constrained and their inclination to borrow money, while staying invested in equities, would be at the lowest. Hence, the statistics about 10yr XIRR (usually from the low point of previous market cycles to the highest point in the current market cycle) of a stock is not only redundant but also ridiculous. If at all, they should consider the XIRR from the median point in the previous market cycle to the lowest point in the latest market cycle to assess the performance of a stock.

Elsewhere, some of the most powerful political leaders (technically) in the world, e.g., Joe Biden and Boris Johnson, et. al., have shown extreme vulnerabilities in handling crises. The unconventional monetary policy followed since 2009 has also failed its first examination. Many experiments with laissez faire in India have failed repeatedly. Accordingly, long US equities (on Trump loss); Long London real estate; long developed bonds and long PSUs in India have been some of the notable disappointing trades in recent years.