Do it yourself: US

Showing posts with label US. Show all posts

Tuesday, June 24, 2025

Markets Hold Firm Amid Global Unrest: Signal or Setup?

The Indian stock market has once again demonstrated its remarkable ability to weather turbulent times. Despite significant geopolitical headwinds, including the Indo-Pak tensions in April 2025 and the escalating Iran-Israel conflict in June 2025, the benchmark Nifty 50 has shown resilience, recouping losses swiftly and even posting gains. Month-to-date (MTD) in June 2025, the Nifty 50 has its ground firmly , despite threatening news flow, a weakening rupee, and surging oil prices. Trading volumes on the National Stock Exchange (NSE) have surged, even as foreign portfolio investors (FPIs) are only marginal net buyers and promoter entities offloaded over ₹400 billion in shares. Meanwhile, domestic institutional investors (DIIs) have though accelerated their buying and providing support to the market.

One may argue that this tendency to quickly overcome geopolitical shocks isn’t new. Over the past five years, the Nifty 50 and Sensex have delivered annualized returns of 10-12%, navigating challenges like the COVID-19 pandemic, global inflation, and geopolitical tensions.

Notwithstanding, this resilience raises two important questions: (1) Has the market fully priced in the short- to medium-term impacts of these geopolitical and economic challenges? And (2) IS the current investors positioning aligned with this collective wisdom, or are they holding back, waiting for clearer signals?

1. Has the market fully priced in the short to medium-term impact of the current geopolitical and economic conditions?

The market’s muted reaction to rising oil prices and geopolitical escalation suggests that participants may indeed be looking past the immediate risks. Historically, sustained oil prices above $90/barrel tend to spook emerging markets, especially net importers like India. Yet, the INR and benchmark yields have only weakened modestly, indicating a lack of panic among both equity and debt investors.

There is also precedent for such behavior. During the Russia-Ukraine conflict in early 2022, the Nifty corrected nearly 10% in a month before stabilizing as investors shifted focus to earnings resilience and strong domestic demand. A similar pattern appears to be playing out in 2025, as the market leans on India's improving macro fundamentals: GST collections remain robust (₹1.72 lakh crore in May), credit growth continues to trend above 16%, and manufacturing PMI remains in expansion territory.

It is worth noting that the USDINR has depreciated less than 1% MTD, driven by risk-averse sentiment and dollar demand from oil importers. Crude oil prices, a critical factor for India (which imports over 80% of its crude), spiked over 10% to $76-77 per barrel following the Iran-Israel escalation, raising concerns about inflation and the current account deficit. However, retail inflation remains at a six-year low of 2.82% in May 2025, bolstered by a favorable monsoon and RBI’s recent rate cut, providing a cushion against these pressures.

Overall, the market seems to be assigning a lower probability to these conflicts escalating into scenarios that could derail India’s domestic growth story. The base case appears to be a temporary disruption with limited spillover effects—at least economically.

A prolonged Middle East conflict could disrupt oil supplies through the Strait of Hormuz, pushing Brent crude to $120 per barrel, which would strain India’s fiscal balance and reignite inflation. Similarly, sustained FPI outflows, driven by high valuations or cheaper Asian markets like China, could cap upside. Still, the market’s ability to hold above key support levels (24,700 for Nifty) and the absence of strong selling pressure suggest that investors are comfortable with current price levels for now.

2. Are market participants aligned with this view—or are they still waiting for more evidence?

Positioning data tells a mixed story. While domestic institutions (mutual funds, insurance companies) have stepped up their buying—net purchases exceeding ₹600 billion in June so far—retail flows have plateaued. Systematic Investment Plans (SIPs) remain steady (₹20,900 crore in May), but net retail participation has softened somewhat in the derivatives and midcap space.

Moreover, futures & options positioning shows high open interest in index puts, suggesting that institutional players continue to hedge downside risks. Volatility, as measured by the India VIX, has edged up slightly (hovering around 14), indicating guarded optimism rather than outright bullishness.

Promoter selling—over ₹400 billion MTD—further complicates the narrative. While such activity isn’t uncommon ahead of Q2 fundraising or capital reallocation plans, it typically reflects either a valuation comfort zone or a strategic liquidity need. Given that this selling has not dented broader sentiment significantly, one could argue that other market participants are either confident in the underlying fundamentals—or are simply waiting for further clarity before making directional bets.

What does this mean going forward?

The current market resilience could very well be the product of a differentiated outlook: that India’s domestic story is strong enough to weather external shocks. But caution is clearly visible in the way participants are positioned—through hedges, elevated cash levels among HNIs, and selective buying rather than indiscriminate accumulation.

Until there is clarity on crude oil’s trajectory, the rupee’s stability, and the potential policy response from global central banks (especially the Fed’s July meeting), markets are likely to stay range-bound with a mild upward bias. Earnings upgrades in auto, banking, and infra sectors offer a supportive backdrop, but investors will want confirmation via Q1FY26 numbers before going all-in.

Conclusion

The collective wisdom of the market seems to have largely priced in current risks, but positioning suggests that investors are not fully aligned with this outlook—yet. Resilience, yes. Conviction, not quite. A ‘better than expected’ 1QFY26 performance could enhance conviction and pull the fence sitters in.

Tuesday, April 8, 2025

Tariff Tantrums

Last week, President Trump announced a hike/imposition of tariffs on most of the USA's imports. As per the proposed tariffs that are presently scheduled to come fully into effect from 9^th April 2025, the Trump administration has proposed a 10% base tariff on all imports into the US. Over and above the base tariff, higher rates of tariff are applicable on several countries based on the trade deficit of the US with each such country.

The global reaction to the tariff announcement has been varied. Some trade partners like China have responded aggressively by announcing matching higher tariffs; whereas the others, like India, have adopted a wait and watch approach, hoping to find a middle path.

Apparently, the calculation of the proposed indiscriminate tariffs has been done through mindless spreadsheet application, using the recent US trade data. Though President Trump had made tariffs a key issue in his poll campaign, the administration appears mostly unprepared for this. The explanation offered by the US administration for taking steps is not convincing. For example, the arguments presented in an interview of treasury secretary Scott Bessant, remind of an old folklore that goes like this:

“Once a little lamb walked to the river to quench his thirst. At that time the king of the jungle, a Lion, was also drinking water from the river a few meters upstream of the lamb. The smell of this small soft lamb whetted lion’s appetite. He wanted to eat the lamb immediately, but the farce of being a just and kind king, he has perseveringly created over years, prompted him to look for a valid excuse to kill this small creature.

After thinking for a moment, he roared "How dare you make me drink dirty water?”. Not sensing the trouble, the lamb politely replied, my Lord, I am downstream, while you are drinking water upstream. It is me who is drinking your dirty water!”

Determined to kill the lamb, the lion retorted, “but why did you laugh at me last summer when I passed by your abode?". Now sensing some trouble, the lamb meekly replied, "My lord, it could not be me, because I was only born just a couple of months ago”. Unable to control his urge, the lion lamented, “If it was not you, it must be your mother. You must pay for her sins.” Saying this he jumped on the lamb and killed him.”

A career hedge fund manager, who has been feasting on the miseries of others all through his adult life, suddenly speaking the language of Karl Marx, and rooting for the hungry and homeless, would make sense only if he wears the rob of a monk and speaks from a monastery. It sounds even more unconvincing when seen in tandem with the DOGE’s move to end humanitarian aid, in some cases a couple of million dollars, to the world’s most poor and disease prone people.

Listening to President Trump and his team members, I get a vivid impression that Tariff tantrums they are throwing are just an ill-thought excuse being used for a bigger design. This is clearly a fight to stay relevant in the emerging world order. The US economics and demographics do not support its pole position in global geopolitics – a position they have enjoyed and greatly benefitted from for over 80 years now.

The US gained its pole position by dropping “Fat Man” (Nagasaki) and “Little Boy” (Hiroshima), eighty years ago, and has been repeatedly shocking the global community through economic, financial and geopolitical shocks to retain this position. The latest tariff tantrums may just be part of that series.

I do not subscribe to the conspiracy theory doing rounds on social media that this may just be a ploy to push the US yields down, to ease the fiscal pressure and facilitate smooth refinancing of the debt maturing in the next couple of years, for three simple reasons:

(i) The US mostly borrows in its own currency. A simple quantitative easing (USD printing) would be sufficient to refinance debt.

(ii) Bond yields are mostly a function of demand and supply for the underlying bonds. Tariff war would certainly weaken the US economy - at least in the short term (2-3years), if not structurally. Besides, it will also trade linkages of the US. Weaker growth (weaker USD) and declining external linkages would invariably result in poor demand for bonds, hence higher yields. To the contrary, a strong economy with contained inflation (cheaper imports) and stronger external linkages is more likely to stimulate higher demand for the US bond and hence lower yields.

(iii) Approximately, one third of the US public debt (US$8-9 trillion) is owned by the foreign entities. Out of this, Japan (US$1.1 trillion) China (US$800bn) and the UK (US$700bn) are major holders of the US debt (US Treasuries). A full-fledged trade war could result in these holders optimizing their UST holdings and might further reduce demand for the US debt.

There is also a serious disconnect between the immigration policies and the objective to make the US a manufacturing power again. The US wage structure, average US citizen skill levels, the cost of imported raw material and capital goods post tariffs, and a weaker USD may not be conducive for an efficient manufacturing ecosystem. The US would need cheap foreign labor, strong USD, strong trade linkages with suppliers of raw material and engineering goods for at least one decade to relocate manufacturing back to the US.

Notwithstanding the brouhaha over the US$5mn gold card, in the absence of an assurance of a free, liberal, diversified, inclusive and equitable society and stable policy environment, not many investors and highly talented workers may find the US a suitable investment/career/study destination. The European competitors may be happy to host these investors/workers.

In my view, Trump’s tariff tantrums are part of the traditional US ‘shock and awe’ tactics. They will test waters with this sometimes and stage a strategic retreat, if it does not show the desired effects, viz., reinforce the US position as undisputed superpower; achieve fiscal correction without triggering a deeper demand recession, and probability of putting Trump’s face on the Mount Rushmore. However, if it does show the desired results, no one should have any strong reasons for worrying.

In the worst case, if the US stays committed to tariffs and its trade partners prefer to contest rather than yield, we must be prepared for the end of the rule-based global order that has prevailed since the end of WWII. The age of Vikings returns. All powerful nations begin campaigns to acquire territories and resources. The weak nations get subjugated. Poor and starving people are made slaves. Indentured laborers would rebuild empires, before the disease and death destroys it all.

In this context, it is important to listen to the warning of the Prime Minister of Singapore.

Thursday, March 20, 2025

View from the Mars - 4

Continuing from yesterday (View from the Mars – 3)

In my view, the following issues may, inter alia, play an important role in shaping the contours of the new world order that may evolve in the next decade or so.

· China presently is finding it hard to gain acceptance as a major global leader. One of the reasons is lack of democracy, which is still a major consideration for the western developed world. Besides, it is also regarded as an irresponsible power by the extant major global powers. Recently, the spread of Covid-19 virus from Wuhan laboratory, causing a global pandemic, has materially tarnished the image of China. In particular, the mistrust between the US and China have increased manifolds after the outbreak of pandemic, resulting in a Sino-US cold war. This cold war that may last for many years, or may be decades, may be a key determinant of the new world order. Important to note that Russia, which was a key WWII opponent of China, and key OPEC members – Iran & Saudi Arabia, and erstwhile strategic partner of the US – Pakistan, are overtly standing on the Chinese side in this cold war.

· The vulnerabilities of the US and Europe have been exposed by the coronavirus. Post 9/11 incident, we saw dramatic changes in the concept of internal security in the US and many other countries. The suspects were shot dead without much provocation, disregarding all concerns for human rights and liberties. The culprits were chased and killed in foreign jurisdictions often disregarding sovereignty of these foreign lands. The diplomats, politicians and prominent personalities arriving in the US and the UK were strip searched and denied entry with impunity.

We may see further rise in xenophobic tendencies of the developed western countries. Another major impact could be a concerted effort to reverse the course of demography, especially in European countries that are turning old at an alarming rate. This could be achieved by substantial incentives for procreating aggressively or changes in the immigration policies to encourage young professionals from developing countries to settle there.

· The global supply chain presently relies heavily on China for components as well as manufacturing services. Many developed countries get their fiscal gaps filled by China in lieu of using Chinese manufacturing services and allowing China access to their markets. The new world order may see a massive shift in this trend. Countries may seek to limit their fiscal deficits and seek diversification of their supply chains. This could present many opportunities & threats to the emerging economies like India.

· The dominance of USD as the world's only reserve currency could face serious challenges from more neutral digital currencies, especially as a medium of exchange.

· The ideas like free trade, personal liberties, etc. may face serious challenges from the rising tendencies of governments world over, which are eager to exercise enhanced surveillance and control over personal conduct and data.

· The business models, valuation models, risk assessment techniques, commercial contracts etc. may need to be redefined to build in probability of frequent disruptions and conflicts.

· The business and official ‘foreign travel’ may become ‘avoidable unless necessary’, due to rising scrutiny and excessive VISA restrictions.

· The business continuity planning may become a mainstream subject for all businesses, not just for the mission critical processes and financial services.

· A strong wave of debt defaults/waiver may hit the global financial system. Handling of this tsunami and subsequent recapitalization of the lenders will be a key challenge for the governments and central banks. Inappropriate handling of this challenge may eventually lead to shortage of growth capital and thus rise in cost of capital.

Where does India stand in this transition and what are the opportunities and threats?

I shall share my thoughts on this next week.

Wednesday, February 5, 2025

3D view of market – Deleveraging, Demographics and Deflation

“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.

Tuesday, November 26, 2024

Speculating Trump’s second term

President elect of the US, Donald Trump has already designated key members of his team. Based on his election agenda, speeches and rhetoric and personal views of his designated team members, market participants are speculating about the likely policy framework of Trump 2.0 administration, and its implications for the global trade and markets.

My personal view is that the actual agenda of governance might have some shades of the election rhetoric but its actual path may not materially deviate from the trend seen in the post GFC (2009) period. At this point in time, I do not expect to sight any black swan in global economics and/or markets. With this caveat, let me summarize the current market speculations and its likely impact on India.

Trade tariffs

Trump has been speaking about imposing high tariffs on the US merchandise imports to promote local manufacturing, cut US trade deficit and strengthen USD. He has been suggesting 20% universal tariff on all imports, 60% tariff on imports from China and restrictions on the trade partners that he believes have artificially undervalued their currencies to gain trade surplus with the US. India is seen as one of these currency manipulating countries.

The administration will have to assess the impact of higher tariffs on businesses that are heavily reliant on imported inputs. Besides, the present US infrastructure and worker pool may not be adequate to onshore much of manufacturing activities. The impact of higher tariffs on the monetary policy objectives will also need to be calibrated.

Trump 1.0 started a manufacturing renaissance of sorts in the US, through tax incentives, tariffs and favorable skilled worker immigration policies. The Biden administration has carried forward the Trump 1.0 agenda and provided added further impetus though It would be reasonable to assume that trend will continue. There may be some random measures taken to address the political constituency, but a universal restrictive tariff policy (if at all implemented) will take much longer, maybe a couple of years, to evolve. A trade taken on the likely contours of the tariff policy may be frustrating.

In this context, it would be pertinent to note the comments of Michael Feroli, chief US economist at JPMorgan. Feroli said, “One path sees tax cuts and deregulation unleashing animal spirits, thereby boosting productivity growth and GDP outcomes while keeping inflation well-contained. The other path foresees policy uncertainty hindering growth, while trade and immigration restrictions impart a stagflationary bias.”

Collateral

Presuming Trump carries out his threat of a 60% tariff on Chinese imports – it may have consequences for most of the trade partners of the US and China. Some of the tariff hikes may be absorbed through CNY devaluation like China did in 2018; but some of it will have to be shared by the US consumers and producers. This essentially means higher US inflation and lower corporate profitability. China may dump the surplus production on Non-US importers, impacting local producers in those markets – thus exporting deflation throughout the world.

The Indian chemical sector, for example, which has already been suffering from Chinese price cuts may suffer further damage. Considering the massive capacity addition in the past 5-6 years and leveraged balance sheets, some of these companies might not be able to survive.

Energy policy

Trump has designated Chris Wright to head the energy department. Wright has been a known supporter of fossil fuels, disregarding the threat of climate change. He believes that the oil and gas industry has brought security and power and development to the United States, and global emissions aren't going down with greater focus on clean energy. He famously rejected carbon dioxide as a pollutant, claiming “carbon is essential for life”.

In the words of Wright, “Climate change is a real and global challenge that we should and can address. However, representing it as the most urgent threat to humanity today displaces concerns about more pressing threats of malnutrition, access to clean water, air pollution, endemic diseases, and human rights, among others.” He therefore advocates a need to bring down the price of energy and secure energy independence for the US.

Anticipating higher US oil production and return of thermal power in favor, the traders are placing a trade on fossil fuel – buying coal miners, fracking companies and drilling equipment manufacturers.

If Trump-Wright energy doctrine is actually implemented it would mean – collapse of United Nations Climate Change Conference (COP), sharp rise in the US oil production and exports resulting in lower global crude prices, decline in clean energy subsidies resulting in poor demand growth for solar energy and EVs.

In the past one-decade massive investment has been made in the production and adoption of clean energy solutions for electricity and mobility needs. The viability of these investments, especially in emerging economies where viability gap is already funded through fiscal support, would need to be reassessed.

Collateral

A 20% duty hike on the Indian exports may hurt some of the Indian exporters, as they may not be able to pass on the whole of the duty hike to the importers.

Cheaper oil may hurt the economies of OPEC countries, which are major trade partners, investors and employment providers for India.

Cheaper oil may help current account, inflation and INR.

Immigration policy

Immigration was a core issue in the entire campaign of Trump. He promised strict action against all illegal immigrants and several restrictive actions against the legal immigrants. We have heard similar rhetoric during the election campaign of Geroge Bush jr, Hillary Clinton, and Trump 1.0 etc.

It is widely accepted that ~47 million immigrants form a critical element of the US economy. They support the US businesses by providing a highly skilled workforce; boost federal revenue by paying taxes and contribution to social security; support the economy through high rates of savings and investments; and are an important consumer group.

President-elect Trump has indicated that his administration plans to carry out mass detentions and deportations of millions of immigrants, including long-term residents, by declaring national emergency and deploying armed forces to carry out deportation exercises. This could lead to family separations and negative mental and physical health consequences. This could potentially create widespread civil unrest, affecting the mental and social health of millions and the health of several small businesses who employ these immigrants. It is also feared that there could also be higher taxes on legal foreign workers.

Collateral

Uncertainty about jobs and residential status and higher taxes could result in lower job opportunities for the Indian workers employed in the US, negatively impacting remittances. Tougher VISA norms and immigration policies may also have some negative impact on the margins of the Indian IT services companies.

Geopolitics

George Washington implemented a policy of isolationism and neutrality with regards to the internal affairs of other nations. The successive US presidents followed this policy till the president Wilson was forced to change it in the wake of threats to the American interests that emerged from the first World War. In April 1917, the US entered the war with Germany “to make the world safe for democracy”. In the past 107 years, the US has followed this doctrine in its foreign policy.

Trump has now vowed to revert to the policy of isolationism and neutrality. Many geopolitical experts fear that this will end a major deterrent to the global expansionist forces like China and Russia, and could potentially unleash some major wars.

In my view, Trump may not hurry to a policy of isolationism and neutrality. I believe the US derives most of its power from the bombs they dropped in Hiroshima and Nagasaki. This nuclear deterrent has kept most expansionist ambitions at pay in the post WWII era.

The promise of liberty, fairness and equal opportunity has tremendously enhanced the US’s power. It has enabled it to attract and retain top talent from their adversaries like Vietnam, Japan, China, Russia, East Europe, Iran, Cuba, etc. and even talent starved countries like India, Pakistan, Bangladesh etc. The US will be able to retain its supremacy only as long as these immigrants are loyal to the US and the US administration is ready to bomb any country to protect the world order.

(PS: A large number of people believe that “the save democracy” democracy doctrine of the US is a façade to camouflage its own expansionist agenda. There are strong arguments on both sides of this belief. I would not like to get into that debate here.)

Collateral

If the US does revert to the policy of isolationism and neutrality by cutting aid to the countries like Ukraine and Israel, we may witness widespread unrest globally. This will unfold the worst human tragedy since WWII.

Besides the above mentioned factors, there are speculations about the trajectory of USD, Rates, Crypto, Gold during the second term of Trump. I believe that these all are derivative factors which would depend on the macro policies of the new US administration. It may be too early to call a good trade on these.

Tuesday, November 19, 2024

Ambivalent

In the past four days, my e-mailbox, WhatsApp message box and social media timelines have been inundated with copies of an Asia Pacific strategy report of a global brokerage. So far, I have received 127 digital copies of the 21 pages (5MB) report, with a rather Tharoorish title – “Pouncing Tiger, prevaricating Dragon”. (I needed to use a dictionary to find out the meaning of prevaricating). I am not sure how many of those sharing the report have actually read it. Most of them appear to have just forwarded it in the spirit of Diwali – just like Soan Papdi boxes exchanged on Diwali, which are never opened and tasted by intended recipients.

The strategy report makes two points that may be of any interest to the Indian investors – (i) Initiation of “Overweight China” trade in the month of September 2024 by some global brokerages was an error of judgement and needs correction; and (ii) the cut in India overweight from 20% to 10% was not warranted and is being restored.

It is important to note that brokerages remained overweight or equal weight on India, while leaning a bit towards China. This report is more about correction in China strategy and less about India. As of this morning no data is available as to how much selling the clients of this particular brokerage actually did in India since September 2024, and how much they would be buying in next few weeks to adhere to the brokerage’s strategy.

The reason cited for the change in strategy are:

a) Trump will herald Sino-US trade war escalation. Chinese NPC stimulus is not reflationary. Elevated US yields and inflationary expectations would prevent the Fed from cutting further, thus limiting the scope for further stimulus by PBoC.

b) India is amongst the least exposed regional markets to Trump’s adverse trade policy. FPIs are underexposed to the Indian equities and looking for buying opportunities. Valuations are now more palatable.

In my view, the brokerage might have committed another mistake to correct an earlier error. We still have two months before Trump’s inauguration and perhaps a few more months to see what his trade policies are going to look like, regardless of the election rhetoric. Six weeks may be too early to assess the impact of the Chinese stimulus. The latest earnings estimates used to derive the valuations of Indian equities might change in the next couple of quarters, if inflation does not ease and growth estimates are downgraded. There is no evidence that FPIs have remitted the dollars out of India in the past few months. The net FPIs flows have been positive (see here). FPIs may not rush to India with fresh bags full of dollars in the next few months. They may want to see how EM debt and currencies behave in 1H2025 in the wake of Trump and Fed policies.

In this context, I note the following, which makes me ambivalent about the impact of the change in heart of few global brokerages.

· Trump has spoken extensively about onshoring manufacturing to the US. This forms the fulcrum of his trade policies towards China and other countries that run trade surplus with the US.

In this context, it is pertinent to note that the US is home to countless unskilled, obese, and unwilling workers asking for a raise in US$18-20/day minimum wage. Trump’s choice for health secretary, Robert F. Kennedy, Jr., is exactly not promising a program to make this workforce fit enough to work 50hrs/week. It is not clear how President Trump would propose to compete with US$350/month wage Chinese workers who are regimented, skilled and healthy enough to work 70hr/week.

· In the year 2018, Trump imposed restrictions on export of high-end semiconductors to China. The Chinese government responded to this by investing massively in the high-end technology sector. Massive flows of capital were directed towards the industrial sector from real estate. Consequently, China is now close to attaining self-sufficiency in semiconductors. China has leapfrogged the US in several areas requiring high-end technology.

The point is that protectionist trade policies of the US may now help some of American businesses; but these policies may not hurt China in any significant way. China is even more geared now to export deflation to the western world, than before. The protectionist policies may impede India's interests noticeably.

· Naseem Nicholas Taleb, regarded as a visionary by many market participants, has recently warned Elon Musk in no uncertain words. He wrote on X (formerly Twitter) “Business people want to make things function; bureaucrats like to perpetuate dysfunction. I fear for @Elon as he is stepping harder and harder on the interests of the Deep State. I will light a candle for him at the Monastery of Hamatoura.”

Obviously, there are reasonable doubts about the success of Team Trump in implementing their election promises, especially those concerning the bureaucratic reforms in the US.

· The latest portfolio disclosures of Michael Burry, the legendary US trader/investor, suggest that recently he has been loading up on Chinese equities.

Tuesday, April 16, 2024

I am not worried about US public debt

The issue of high and rising US public debt is a subject matter of public discussion in Indian streets. Using a common Dalal Street phrase I can say that every paanwalla, taxi driver, and barber is now discussing how unsustainable US public debt is. For example, listen to this boy .

From top economists, analysts, and global strategists to a common man on the street, all are worried about an imminent US default and its impact on the global financial system, especially the developing and underdeveloped countries.

Currently, the US public debt is close to US$35trn (Appx 125% of annual GDP) and is projected to double in the next eight years. The current US government's annual interest payments are more than US$1trn (Appx 20% of annual federal revenue; 14% of annual federal spending and 4% of GDP). The average interest rate on the entire debt is less than 3% p.a.

As of June 2023, 43% of this debt was owned by the Federal Reserve System and State and Local Governments. 32% of the debt was owned by various domestic institutions (MF, Insurance, Pension, and Depositories, etc.) The balance 26% was owned by other institutions including foreign governments. Almost the entire debt is denominated in USD.

This debt level is a matter of concern but does not prima facie appear to be at a disaster level. The worrisome part is that about one-third of US public debt is short-term (12 months or less maturity). However, considering that a large part of this debt could be owned by the government institution and the Federal Reserve System, refinancing of this debt should not pose a significant problem. In my view, US debt could be sustained with 3-4% inflation, 20% USD devaluation, 5% revenue growth (higher taxes), and rationalization/reimbursement of various war funding expenses, this debt could be sustained, reduced, and serviced. It is of course going to be hard for US savers and middle classes for a decade or so. USD losing its reserve currency status may be collateral damage.

For context, as per the interim budget for FY25, India’s central government debt was ~Rs172trn as of 31^st March 2024. This is approximately 58% of GDP. 3% of this debt is held by foreign entities. However, using the standard IMF definition India’s Debt to GDP ratio is ~82%. Since most of this debt is INR-denominated and RBI is holding a strong US$650bn forex chest, servicing is not an issue.

However, as per FY24BE, interest expense would account for 25% of total government expenditure, after material cuts in subsidies. For a developing economy, this interest expense to government revenue expenditure is considered worrisome, as it hampers investments, keeps fiscal deficit high, makes interest rate cuts difficult, leads to lower social expenditure affecting the quality of life, and hampers further market borrowing capability of the government.

The small point is that investors in Indian securities should be more concerned about seemingly unsustainable public debt in India rather than the high debt levels of developed countries.

As a small investor with zero risk appetite, I keep a cushion for lower subsidies, late payments of government dues, higher effective taxes, small probability of higher rates in my investment strategy.

Tuesday, December 5, 2023

Finding a place in the ‘Normalized’ global order

Last week I started a discussion (see here) on how the human race might already be in the process of obliterating the memories of the devastating wars fought during the first half of the twentieth century. These wars not only changed the global political map but also deeply impacted international relations, human psychology, demography, technology, and global economics.

Since the early twentieth century, many experiments have been done in the areas of political, geopolitical, financial, economic, demographic, and science & technology. Some of these experiments failed, many succeeded and had a tremendous impact on human life, and some ended after serving their useful purpose. Some of these experiments could be listed as follows:

· Nazism, Marxism, Zionism & Radical Islam;

· USSR; NATO; Warsaw Pact; European Union; Viena Convention and VISA system; Germany bifurcation;

· Decline of Japan as a military power after Hiroshima & Nagasaki, and rise of Japan as a technology leader and economic power;

· Keynesian economics; Central Banking; Bretton Wood agreement; supremacy of USD as global reserve currency;

· UN, World Bank; end of imperial colonialism; Non-Align Movement; WTO (and GATT);

· China’s cultural revolution (including the one-child policy);

· Internet; birth control pills; microelectronics; communication;

· Dematerialization of commodities, securities & currencies;

· Petrodollar; the rise of neo-colonialism (financialized western world exploiting resource-rich developing and underdeveloped economies); export-based economic growth model of Asian tigers; and

“Artificial intelligence” (AI) is a new equivalent of the 1940s atom bomb in the present context. The technological advancements in generative AI seek to supplement the declining demographics and present huge productivity enhancement potential. However, the rise of authoritarian regimes and hyper nationalistic tendencies creates the potential for misuse; raising the specter of a repeat of the Hiroshima-Nagasaki type disaster.

On its part, India has also experimented with many things and is still trying to find its place in the global order. We have tried central planning (Nehruvian Socialism); Equality and preference for the poorest amongst poor (Gandhian Socialism); centralization (nationalization of banks, insurance, mobility, energy) to decentralization (privatization of banks, insurance, pension, roads, aviation, ports, energy, defense manufacturing, etc.); imbalanced growth (resource-rich states feeding the industrialized states in replication of colonial model) to balanced growth (industry moving to resource producers); non-aligned; strategic alliances; localization (SAARC) to globalization (BRICS+); multilateralism (GATT & WTO) bilateralism (FTAs); Peaceful coexistence (Panchsheel) to surgical strikes; Secularism to Hindu Nationalism; etc.

We have completed a remarkable journey from a totally devastated nation in 1947 to becoming the fifth-largest economy in the world. The indications are that this journey may continue at an accelerated pace over the next couple of decades. However, at a micro level, we are far from becoming a middle-income country as over 50% of our population fails to meet the basic living standards.

Recent events in Ukraine and Palestine indicate that our influence over international matters may be even lower than it was in the 1950s and 1960s.

Our eagerness to grab the so-called ‘China+1’ opportunity indicates that we do not mind becoming a factory for the developed country, doing low-margin manufacturing; even if it involves significant incremental climate damage to our already “severe” category conditions. Our leadership has made it clear at the recent climate meeting in Dubai that our commitment to emission targets cannot be at the expense of economic growth (see here); even if it is unsustainable.

The recent incident in Uttarakhand where we needed to import a drilling machine from the US and a mining expert from Australia to rescue 41 workers trapped in a tunnel shows how inadequate we may be in skill and technology. It is common to see product promotion for basic commodities like cement & adhesives, manufactured with foreign technology. We have no leadership in the development of generative AI; 6G and 8G telecommunication infrastructure (still struggling to roll out 5G networks).

Obviously, the effort to assume strategic and technology leadership are seriously lacking in our growth endeavor.

India (small elite urban population) vs Bharat (majority poor, largely rural population) debate has been raging ever since independence. The disparity between these two sections has continued to widen with acceleration in the growth.

Nonetheless, for a small section of the Indian population engaged in manufacturing, construction, mining, financial services, technology services, and premium & luxury consumption, this is perhaps the best time in two centuries. By implication, this is also the best time for the financial investors, who have invested in the equity of these businesses. On a relative basis, Indian businesses may not be doing as well as their American or Chinese counterparts, but in absolute terms, they are doing great, especially from a historical context.

Small investors like me therefore may have a good opportunity to create wealth. More on this in the coming days.

Tuesday, October 10, 2023

Watch those Spread Sheet closely

Last weekend the already tense situation escalated materially in the Israel-occupied Gaza Strip area of the Palestinian state. Apparently, the Hamas controlled militia launched a massive ariel and ground attack on Israeli territories, killing over 700 people and injuring many more, including several civilians - women and children. In retaliation, Israeli forces attacked the Palestinian territories in the Gaza Strip, killing over 300 people, including women and children, and destroying several civilian targets. This is the deadliest episode since 1967, in the conflict that started in the late 1940s.

The government of Israel has formally declared war on Hamas, committing to a “mighty vengeance” and “a long and difficult war.” They have received support and solidarity from all their traditional allies like NATO members, Australia, and strategic partners like India. As per the latest reports 84 nations have issued formal statements supporting Israel’s right to self-defense. On the other hand, Hamas has also received open support from Islamic countries like Iran, Qatar, and Lebanon.

Not surprisingly, two major countries – Russia and China – have not openly taken any side in the recent escalations. After being nudged by the US, the Chinese foreign ministry spokesperson stated that "the fundamental way out of the conflict lies in implementing the two-state solution and establishing an independent State of Palestine" while urging the relevant parties to remain calm and end hostilities against civilians".

Russia also expressed its support for an independent Palestinian state within the borders of 1967. "We regard the current large-scale escalation as another extremely dangerous manifestation of a vicious circle of violence resulting from a chronic failure to comply with the corresponding resolutions of the UN and its Security Council and the blocking by the West of the work of the Middle East Quartet of international mediators made up of Russia, the United States, the EU, and the UN," Russian Foreign Ministry Spokesperson said.

The war is also being seen as a setback to the fast-improving Israel-Saudi relationship. In an official statement, The Saudi foreign ministry stated, “The Kingdom of Saudi Arabia is closely following the developments of the unprecedented situation between a number of Palestinian factions and the Israeli occupation forces, which has resulted in a high level of violence on several fronts there.” The statement recalled, “its repeated warnings of the dangers of the explosion of the situation as a result if the continued occupation, the deprivation of the Palestinian people of the legitimate rights, and the repetition of the systematic provocation against the sanctities” and renewed “the call of the international community to assume its responsibilities and activate a credible peace process that leads to the two-state solution to achieve security and peace in the region and protect civilians.”

Arab League representatives are reportedly visiting Russia for further discussions on the matter.

Many readers and friends have asked for my views on the latest episode of the Israel-Palestine conflict and its likely impact on the financial markets. I claim no knowledge of global strategic affairs, politics, or international relations. Nonetheless, I am happy to share what I see as an observer of current affairs and a student of financial markets. Many may find these thoughts as naïve. Notwithstanding I feel strongly about my view and would like to hold these till I see any strong evidence of the contrary emerging.

In my view, as of this morning, the world is divided more than ever on the issue of the rights of the Palestinian people, Israel’s right to self-defense, and the legitimacy of violence against civilians on both sides.

I believe that the latest escalation may be just another manifestation of the wider trend of the rebalancing of the world order that had evolved after the Second World War and was particularly dominated by the US and its strategic allies since the disintegration of the USSR in 1991.

The unified Germany (that dominates the European Union), China (the leading force in the global economy and strategic sphere), Russia (the traditional US enemy), Saudi Arab (looking to free itself from petrodollar dominance), and Iran (striving to unshackle its economy from the US influenced economic sanctions), etc. have been actively striving to enhance their influence in a mostly unipolar world.

China’s Belt and Road Initiative and China-Pakistan Economic Corridor, Russia’s occupation of Crimea in 2017 and invasion of Ukraine in 2022, Iran’s open support to Hamas, and Saudi Arabia’s decision to initiate Yuan trade with China and INR trade with India are some of the many initiatives taken to rebalance the unipolar world order.

The recent Hamas attacks on Israel appear just an extension of these initiatives. The intensity of Hamas attacks is clearly aimed at highlighting that (a) Israel (and Mossad) may not be as invincible as it has been made out to be. Of course, Israel would retaliate strongly to protect this perception, inflicting devastating injuries to Hamas; (b) The US (and CIA) has been totally ineffective in the Afghanistan and Ukraine conflicts and would lose many more points in its standing as the unchallenged global strategic leader.

Notably, unlike the past instances, there is significant civilian support for Palestine in countries like the US, UK and France. This could also result in the hardening of right-wing stand on the policies regarding immigration and refugees in these countries, further diminishing their acceptance as global leaders.

Obviously, the conflict will not only intensify but avoid any sustainable resolution till the larger issue of global rebalancing is addressed.

Insofar as the financial markets are concerned, this will just add to the extant level of uncertainty and volatility. The mountains of debt, rising borrowing costs, still elevated inflation and faltering growth are keeping the global financial markets jittery. This escalation could add to this jitteriness, especially if it causes a sharp spike in crude oil prices or disrupts global trade, especially the movement of cargo through the Suez Canal.

It would be highly imprudent, in my view, to believe that the Indian economy and financial markets will escape the damage, especially when the stress on fiscal and current account balances is already visible and RBI has cautioned about inflation in its latest policy statement. A 25bps hike in policy rates from here could materially disturb many Excel sheets.

Thursday, August 17, 2023

Will 2025-2035 be India’s decade?

The tremendous economic growth achieved by Japan in the post-WWII era is popularly known as “The Japanese Economic Miracle”. It was in fact nothing less than a miracle – a country totally devastated by war rose from ashes to become one of the largest economies in the world. Japan recorded a high rate of economic growth during 1950-1975. The growth was primarily led by strong capital accumulation, strategic initiatives to expand trade share in global markets, concentration on technology development & innovation, and development of a strong high-quality ethical workforce.

Supported by benign monetary policy, easy credit, and profligate fiscal policies, by the end of the 1970s, Japan had become a powerhouse of technology and finance. The 1980s however witnessed unprecedented heating of the Japanese economy. Asset prices ballooned to unsustainable levels. The Bank of Japan, in its wisdom, decided not to tighten the monetary policy to control the surging asset prices. Low rates and a stronger JPY, led to a prolonged phase of low growth and low inflation. Worsening demography, due to a variety of reasons, further exacerbated the deflationary pressures in the economy. 1990-2020 witnessed Japan struggling with low inflation and low growth. The Global Financial Crisis and Covid-19 pandemic made things only worse.

The present state of the Japanese economy has become a generic reference for economies struggling with low growth, low inflation, low rates, and high debt for a prolonged period; and is referred to as “The Japanification of Economy” in the popular economic lexicon.

Post the Global Financial Crisis (GFC) in 2008-09, the fears of Japanification of several global economies increased. Unprecedented monetary easing in the wake of Covid-19 further enhanced the risk of a prolonged phase of low growth in several developed and developing countries.

In the past couple of years, we have witnessed a strong spike in inflationary pressures across the globe. Initially, it was believed that this episode of inflation is mostly a consequence of supply-chain issues, which broke down badly due to the pandemic; hence it would be transitory. However, later it emerged that it may be more structural than transitory.

The quantitative easing in the wake of the GFC did not cause consumer inflation, because money printed during 2009-2011 was mostly given to banks, which did not lend much of it to consumers. The velocity of money remained very poor; thus the actual money supply did not increase materially. But during Covid-19, a large chunk of new money flowed into the hands of consumers increasing demand at a time when supply was seriously constrained. High inflation was a natural consequence. Erratic weather conditions globally and a war between Russia and Ukraine (major suppliers of energy and food to Europe in particular) added further to the food and energy inflation.

In the past fifteen months, the central bankers globally have tightened the money supply and efforts have been made to add production capacities to meet incremental demand. It seems for now inflation has been controlled; though the inflationary expectations remain high as it is commonly believed that slower growth and financial crisis (that looks imminent) would force central bankers to open the liquidity taps again – sooner than later.

Nonetheless, for now, Japanification of the US and Europe has not happened as inflation remains high, rates have been hiked and recession has been avoided.

On the other hand, the conditions in China eerily resemble the conditions in Japan during the early 1990s. After two decades of massive growth led by huge investments in technology, infrastructure, and manufacturing capacities, the Chinese economy is feeling the fatigue. The population is aging and employment conditions are worsening. The growth rate is consistently declining. The real estate market is in a bubble-like situation, with several defaults and a huge inventory. China is the only major economy, besides Japan, that has not cut rates in the past decade. Inflation continues to remain low. The financial institutions are weakening and fiscal support to consumers and the financial system remains high.

The risk of the Japanification of the Chinese Economy is real and material. Considering that China has been a major driver of global growth in the past couple of decades, a Japanified China cannot be good news for the world as a whole. However, on the positive side, it may be an excellent opportunity for India that may get favorable conditions for growth – what Japan got in two decades post WWII and China got after its admission into WTO.