No escape!

The legendary Warren Buffet has been on an equity portfolio selling spree in recent weeks. His fund, Berkshire Hathaway, has reportedly raised over US$275bn in cash; which is over 20% of total assets under management. His selling in the stocks of Apple Inc and Bank of America have been reported the most. Apparently, either his team is not comfortable with the present market conditions (valuation, growth, macro, geopolitics etc.) or believes that they can get much better buying opportunities in near to short term, or both. They may be looking for better buying opportunities in terms of better stocks or better price points in the same stocks.

It may be pertinent to note that it is not Berkshire Hathaway alone. A number of reputable investors have taken note of the conspicuous warning signs flashing on billboards for the past few months in particular.

Yen carry-trade

Hike in the policy rates by the Bank of Japan (BoJ) and strengthening of Japan is perhaps the most talked about event in the market space. Young traders in their twenties, with one or two years of trading experience are confidently talking about the disastrous impact unwinding of “JPY carry trade” will have on the global markets, almost trivializing this important event.

World War III

The older and more mature investors on the other hand are preferring to discuss the impending World War (WWIII). They are worrying that (i) the countries producing about 60% of the global energy resources may be on the one side of this war; (ii) most NATO members may not be fully committed to the cause, due to economic and demographic constraints; (iii) many western countries may implode due to a strong internal resistance to the war at Israel’s behest; and last but most important (iv) the war this time will involve the fragile and totally intertwined digital world, which could be more debilitating.

US recession

A sharp rise in unemployment indicators; a marked slow-down in real estate market; the Federal Reserve hinting a rate cut on the table and the markets extrapolating it to full one percentage point cut in 2024 leading to sharp fall in bond yields; hedge funds raising their short position in commodities to the highest in over a decade; etc. have triggered a wave of concerns over sustainability of stock market euphoria in the US; especially the high valuations for a few technology stocks that have been at the core of the US equity bull market in the Post-Covid period.

Is a 2008 like collapse coming

In my view, there are genuine concerns for the market at present. However, the present narrative, which is revolving around the yield curves (and whether the central bankers are running much behind the curve) and geopolitics, may not be enough to cause a market collapse like 2008-09. We may need something bigger to break.

My worries

Notwithstanding, my worries are as follows:

·         Unlike 2008-09, the global economic growth is not strong. China and India were growing 8-11% 15 years ago. Now both are struggling in the 5-7% band; more so China.

·         In 2008-2013 the peripheral Europe faced problems that caused a lot of volatility and concerns in the global markets. A US$32bn bailout of Greece made headlines for many weeks. Sovereign debts Portugal, Iceland, Greece and Spain (PIGS) totalling less than US$120bn were primary talks of the table. But this time it is in Europe. Germany, France, and the UK are facing problems – economic, demographic, social and political. The primary talk of the table now is US$35trn debt of the US, ~US$10 trillion debt of Japan and mammoth but unknown amount of bad loans in the Chinese banking system.

·         In 2008-09, most countries had adequate financial leverage to stimulate their respective economies and mitigate the impact of the crisis. Today, not many global economies enjoy that kind of fiscal leverage. The recovery this time therefore could be a slow and long-drawn process.

·         2008-09 was more of a financial market crisis than an economic crisis. This time it might be an economic crisis driving the financial markets into a deep abyss. Moreover, the treasury bonds of many large global economies are technically junk (dipropionate to their respective GDP and debt servicing capabilities). Selling more of this to bail out struggling markets and economies may not be feasible.

·         A large number of developed and developing countries are facing internal social and political unrest. Besides, the mutual trust that characterized the globally coordinated action in 2008-09 may not be prevalent today. The efforts of various global powers may be focused on sinking the larger ships rather than bailing out the smaller boats.

Insofar as India is concerned, there are not much macro concerns at present; though the fiscal leverage to provide meaningful stimulus in case of a wider crisis may be limited. On the market valuation side, few pockets are clearly in bubble territory and need to retrace a long way back to the realm of sanity. Otherwise, a large part of the market is fairly valued. Maybe a 10% correction would make it look attractive again.

Nonetheless, when a global tide comes, it will also take the Indian markets along. No escape from higher volatility and jittery trades.

Interesting time ahead, for sure!