Do it yourself

“There are events in the womb of time, which shall be delivered in time”. (Othello, William Shakespeare)

Beginning of the current year, I commented that “the trend seen in the past few months is indicating that the conditions might change materially in the next 12-24 months. The macro trends may become ambivalent and unpredictable. Investors may need to make choices; and the return they would earn on their investment portfolios would largely depend on the choices they would make. Making right choices, in my view, would be the central investment challenge for the year 2025.”

Barely one month into the year and it appears that earth already witnessed many seasons. The conditions are becoming more uncertain with each passing day. The 47^th President of the United States (P47), appears in a tremendous hurry to deliver on his promise to Make America Great Again (MAGA). He is using all his negotiating skills to secure good deals for his country. How much success will he achieve with his aggressive approach, we would only know with passage of time. Nonetheless, with his initial actions he has created a fair degree of uncertainty in the minds of his political opponents, trade partners, strategic partners, competitors and markets.

While I continue to maintain that investors would be better off avoiding a macro trade and focusing on individual business stories in the next 12-24 months, the three macro trends worth including in the matrix for identifying and evaluating individual business stories are Deleveraging, Demographics and Deflation.

Deleveraging: The US Fed has contracted its balance sheet by US$2.1trn since the beginning of its monetary tightening (QT) program in April 2022. The total assets held by the US Fed are now lowest since May 2020. It would need to unwind another US$2.7trn to completely undo the Covid related monetary expansion. Besides the US Fed, most other central bankers have shown a tendency to tighten the money supply by reducing their asset holdings. The Bank of England balance sheet is following the same trajectory as the US Fed. BoJ has not expanded its balance sheet in the past couple of years and cut the size of its asset holdings in recent months. Even RBI’s balance sheet has contracted in the past few months.

If we take the plan of P47 at par value, we are staring at one of the biggest fiscal corrections in modern history. Most other major developed and developing countries are also progressing on the path of sustainable fiscal corrections.

This macro deleveraging at the global level might reflect in the corporate and household balance sheets sooner than later. But for a major natural or manmade disaster, we should be factoring in sustainable governments, lower rates and adequate household savings in our investment strategies.

Demographics: One of the most critical trends in a large part of the developed world is deteriorating demographics. Most European and LatAm countries, the US, Canada, Japan, China, South Korea, Thailand, etc. have their total fertility rates fallen below the replacement ratio (implying their population is now on a declining path). The proportion of the working age population in these countries is decreasing fast. The population in China has already peaked and the population in India is expected to peak much ahead of the previous estimates of 2050.

This demographic trend appears structural and irreversible. With deeper and wider integration of technological advancement in social and personal life, the need & space for human interaction is on the decline. Financial and professional constraints are adversely impacting the capability and willingness to commit to personal relationships. Stressed and hectic lifestyles are adversely impacting the fertility of humans. There is nothing to suggest that these trends could change in the foreseeable future.

Obviously, the demographic trends will reflect on the aggregate demand as well as the demand mix.

Deflation: The mix of deleveraging, ageing demographics and superior productivity gains through technological advancements may lead to resumption of the pre-Covid deflationary trend. The supply lines disrupted due to Covid related restrictions and geopolitical developments post 2021 have mostly been restored. Save for a totally unexpected development, the current trend appears that a workable global trade balance may be achieved within the next 12-24 months.

With almost all major global market forces (the US, China, Germany, Japan, South Korea, France and the UK account for ~40% of the global trade) focused on repairing and strengthening their domestic economies, it is more likely a mutually beneficial global trade framework will emerge after the initial aggression of the P47 brings all trade partners to the negotiating table. This framework would, among other things, will certainly dampen the inflationary expectations.