Do it yourself: Xi

Showing posts with label Xi. Show all posts

Tuesday, March 25, 2025

View from the Mars - 5

Continuing from the last week (View from the Mars – 4)

For a small investor like me, whose investment spectrum is limited to the locally available instruments and opportunities, it is critical to assimilate the impact of the global events on the local economy and markets. A natural follow-up would be to assess if a change in investment strategy and asset allocation plan is required to factor in the impact of the global events.

In most cases, the impact of global events is temporary and does not warrant any change in the investment strategy and/or asset allocation. However, some global events could have a lasting impact on the domestic economy and markets. Such events often require material change in the investment strategy and asset allocation.

It is important to note that in the past three months, the world has not witnessed any event that was not widely anticipated. The shift in the US policy (fiscal and monetary) paradigm was widely anticipated and documented. The response of the trading partners is also more or less on the expected lines. The geopolitical developments, economic growth, currencies, equities, bonds, commodities, etc. are mostly moving in the direction as was widely anticipated. In my post about outlook and investment strategy for the year 2025 (shared in the beginning of 2025), I had shared my anticipation of these events and consequent adjustments in my investment strategy and outlook.

Notwithstanding, let me again note down the important current global events that could have a material impact on the Indian economy and markets. (Please note that I have taken some inputs from AI tool Grok 3 (beta version) in preparing this post.)

Opportunities for India

Supply Chain Shift: Trump’s tariffs are pushing U.S. firms to diversify away from China. There is an potential for India to grab this opportunity. In 2024, India’s electronics exports to the U.S. spiked 22%. The Bilateral Trade Agreement (BTA) framework, as discussed by the Prime Minister and White House during the PM's February visit, could open bilateral trade opportunities worth US$200bn by 2027.

Visa curbs (H-1B denials up to 35%) might force Indian IT to onshore talent, boosting hubs like Hyderabad—Wipro’s hiring 10,000 locally, providing impetus to local economies. Less immigration pressure might also redirect diaspora skills home, powering startups. As per NASSCOM, 1,200 new startups became operational in 2024.

Defense and Tech Edge: Trump’s anti-China could tilt trade balance in favor of the Quad. India has reportedly already moved forward with $5 billion arms deals with the US, since January. COMPACT tech transfers (AI, chips) could leapfrog India’s R&D. India’s premier defense research organization (DRDO) is eyeing U.S. quantum tech.

Energy Stability: Peace in Ukraine and the Middle East, after the US intervention, could steady oil at $70-$75. India, which is 80% oil-import-dependent, saves $10 billion annually if prices don’t spike. LNG from Qatar gets cheaper too.

Trade normalization: A calm Black Sea and Red Sea (Houthi attacks down 40%) unclog shipping, allowing India’s $45 billion EU exports to flow smoothly via Suez. Peace could also revive the International North-South Transport Corridor (INSTC) with Russia-Iran, cutting freight costs 20%.

China’s Retaliation Opens Doors: China’s counter-tariffs—25% on U.S. autos and tech imports and yuan devaluation (5% drop, PBOC) makes Chinese goods pricier. India’s textiles (now up to 20% cheaper than China’s) and pharma generics (40% of the U.S. market) could take some of the US’s market from the Chinese suppliers.

Investment Inflow: China’s economic slowdown as a consequence to slower exports could reverse the flows of global capital (FDI and FPI) towards India. Though FDI into India hit $70 billion in 2024, up 12% yoy, the rate of growth in FDI flows has been declining for a few years. Weakness in USD and sharp fall in the US treasury yields could turn the global investment flows towards the emerging markets. India being one of the major emerging markets, would certainly stand to benefit.

Cheaper Capital: U.S. 10-year yields dipped to 4.3%, EU’s at 2.1% (ECB). India, having over $400 billion of external debt does benefit directly from the lower yields. Even Rupee bonds could draw more investors if yields keep sliding, easing pressure on domestic banks which are constrained by an adverse credit-deposit ratio for many months.

Export Boost: Falling inflation (U.S. PCE at 2.7%, EU at 2%) lifts disposable income of Americans and Europeans. As per GTRI, India’s consumer goods (handicrafts, apparel) could see a 10% uptick in demand due to lower inflation and a weaker dollar.

Threats for India

Export Pain: India’s $77.5 billion U.S. exports face a $7 billion hit from tariffs. Textiles and gems bleed the most. IT’s $108 billion U.S. revenue stalls if H-1B cuts force wage hikes (Trump’s 50% proposal, per ORF). Remittances (~$10 billion from the U.S.) could be materially affected.

Retaliation Risk: Retaliatory tariffs on India’s exports to the US could potentially dent some of the $45.7 billion trade surplus India enjoys with the US.

Commodity Competition: As peace returns to Russia, Ukraine and the Middle East, India’s petroleum product export and wheat exports in particular, may be adversely affected.

Dumping Threat: If China floods global markets with cheap goods, India’s MSMEs could be adversely impacted. China’s ~$30 billion trade surplus with India could balloon, straining forex reserves.

Border Tension: China’s tariff war might spill into Ladakh and Arunachal Pradesh, straining diplomatic relations and further fueling tension..

Capital Flight Risk: If U.S./EU yields crash further, investments could flow to the developed economy bonds anticipating further gains. China’s stimulus could siphon even more funds.

Demand Softness: Deflationary pressure in the West might cap India’s export growth—gems and jewelry stagnate if wallets tighten.

Conclusion

India could materially benefit from the current global events, especially U.S.-China fallout—supply chains, tech, and peace-driven energy savings could push GDP past 6.5% by 2027. However, we need to see proactive policy response and strong execution to capitalize on this opportunity. A long-term strategy is also needed to mitigate the impact of frequent tariff and VISA threats. China’s countermoves might flood or flank India, and Western yield drops could make capital flows very volatile and unpredictable. Peace helps, but only if India diversifies fast—BRICS, EU, ASEAN—to offset U.S. volatility. Trump’s bluff might crumble by 2026 if China holds firm, amplifying India’s export risks but opening manufacturing doors. A Middle East flare-up could spike oil and ruin it all.

Overall, the situation, as anticipated earlier, is very volatile and unpredictable. For now, it does not warrant any change in the investment strategy, as shared in the beginning of the year:

“2025 may be a far more challenging year for investors as compared to 2024. The volatility and uncertainty may increase materially, requiring investors to focus on capital preservation rather than making some real returns.

I shall maintain a standard allocation in 2025 and engage in active trading in my equity and debt portfolio to optimize return using the benefit of large swings. At the same time, I would continue to look for opportunities in the emerging themes for the next many years and build a long-term portfolio. Returns will not be my primary focus in 2025.”

Tuesday, November 12, 2024

Wait & Watch

The year 2024 is proving to be one of the worst years for political soothsayers. After a debacle in the Indian general elections last summer, psephologists have failed in the US presidential elections. The challenger Donald Trump emerged a winner, gaining popular votes to occupy the White House for four years with a clear majority in the US Congress and Senate. This kind of decisive mandate has been a rarity in US politics in the past four decades. Most of the media, political commentators, psephologists, and other experts completely failed to read the peoples’ mind and anticipated a victory for Kamala Harris.

Post the election results, thousands of experts – research analysts, economists, strategists, geopolitical experts, money managers, etc. – have written reports running into millions of terabytes, forecasting the likely impact of Trump's victory on financial markets, currencies, commodities, geopolitics, and trade etc. Most of this analysis is based on Trump's election promises, speeches and policy measures initiated during his previous tenure (2017-2021).

Most Indian brokerages have also published reports on the impact of Trump’s victory on the Indian markets and businesses. The most common view of the Indian analysts appears to be that Trump regime may benefit Indian businesses, especially those competing with China.

Speedy implementation of BioSecure Act may benefit Indian CDMO services providers. Higher duties on Chinese imports may make Indian merchandise exporters to the US more competitive. Continued tax concessions may lead to higher discretionary budgets of the US businesses, resulting in more deals for the Indian IT services companies. The conflict in the middle east Asia will likely intensify further leading to higher budgetary allocation for defense in most countries. This may benefit the defense related manufacturing and services. Besides, a weaker USDINR may also boost local currency revenue for them. There may be pressure on the current account. Inflation may become stickier due to higher imported inflation. Interest rates may, therefore, remain elevated for longer than previously estimated.

I do not possess any competence to comment on international affairs and the impact of the regime change on the global markets, trade and geopolitics. However, I would like to share my views about the impact on India.

First of all, I would like to draw the attention of the readers to two points.

1. During the election campaign the Prime Minister Narendra Modi had extensively spoken about the 100 days plan of his third term. He promised that he has directed all his cabinet colleagues to prepare a detailed development plan for execution in the first 100 days of his third term. Its more than 150 days since his re-election and we do not hear any mention of that 100 days plan now.

2. President Putin, in an interview to LeFigaro in May 2017, had shared his impressions about the US Presidents. In my view, he was not far from reality. He mentioned—

“I have already spoken to three US presidents. They come and go, but politics stay the same at all times. Do you know why? Because of the powerful bureaucracy. When a person is elected, they may have some ideas. Then people with briefcases arrive, well dressed, wearing dark suits, just like mine, except for the red tie, since they wear black or dark blue ones. These people start explaining how things are done. And instantly, everything changes. This is what happens with every administration. Changing this is not easy, and I say this without any irony. It is not that someone does not want to, but because it is a hard thing to do.”

In my view, it is too early to make any intelligent forecast about the likely policy direction of the Trump administration. It would be in the interest of investors to wait till the 20^th January 2025, when Mr. Trump moves to the White House and makes his first moves. I would not be surprised if Mr. Trump takes a few months before alluding his thoughts on the policy changes.

Hazarding a guess, I would say that the direction of the US policies is unlikely to change in any material measures under the Trump administration. If at all, the jingoistic rhetoric may rise and we may see acceleration (or deceleration) in the execution speed of certain measures to suit the political expediency of Mr. Trump.

Insofar as India is concerned, I anticipate the following in the next 24 months:

· The surface tension between the expanded BRICS and the US may intensify; though underneath a wider reconciliation may emerge with the US granting several concessions to China, Russia, Iran, India etc. Several multilateral institutions like the UN and IMF may continue to weaken.

· The USD may continue to remain a dominant currency for the next four years, but its share in the global trade may continue to decline at a pace seen in the past decade.

· There may not be any adverse change in the H1-B VISA policy towards skilled workers. There could be changes in the automatic US citizenship rule for the children born to the non-permanent resident parents in the next four years. This may not have any impact on the Indian economy or markets.

· The Trump administration may engage with President Putin to de-escalate the situation in Ukraine. A successful de-escalation may ease sanctions on Russia, normalize energy and food trade in Europe. This could have a positive impact on Indian inflation and exports.

· In the past 4 years, Russia and China have come much closer as compared to the previous presidential term of Mr. Trump. The recent peace in the Sino-India relation has also been likely brokered by Mr. Putin. The US trade policies are taking cognizance of this and are already less aggressive towards China. This de-escalation of trade and currency war may continue, although at a gradual pace, in the next four years. The US may not impose as aggressive tariffs on Chinese imports as currently estimated. Though, the Trump administration may seek measures to reduce the trade deficit with China. This policy of reducing trade deficit might also apply to India, as we also run over a US$40bn trade surplus with the US.

· The BioSecure Act may see accelerated implementation, helping the Indian CDMO/CRAMS players.

· The neutral rates for the US economy are presently estimated at 3.0-3.25%. This level has been rising for the past six months. We may see a further rise in this level, implying the Fed rates bottoming at a much higher level than previously estimated. This will reflect on the emerging market currencies and rates. The Indian currency may witness more depreciation and bond yields may not correct much below 6% in the next four years.

For now, I do not see any need for a change in my investment strategy due to the regime change in the US. I continue to expect more challenging times for the Indian equities in the short term (6-9 months). The stocks in the popular categories (clean energy, EV, defense, railways, PSE, etc.) have corrected sharply, but still trade at elevated valuations. The consumption remains in the slow lane and sectors like media and realty (consequently building materials) are also showing conspicuous signs of slowdown. Credit growth has also shown some signs of slowdown in September-October. I therefore continue to remain in a “wait & watch” mode, looking for better opportunities.

Thursday, June 13, 2024

Raising the guards

The year 2024 started with the fervor of Ram Bhakti. The stock market made a new high in mid-January. Investors felt that the grand opening of Ram temple in Ayodhya will stimulate economic activity and provide a material impetus to economic growth. However, the stock market could not hold gains and ended the month of January almost unchanged.

The interim budget in February was mostly a non-event, and markets ended the month only with marginal gains. Announcement of elections and early indications of a larger majority for the incumbent BJP took the markets to new highs in March. However, the markets remained circumspect about the election outcome. Below expectation results for 4QFY24 also did not help the markets. For three months (March-May), the Nifty50 gained ~2.5%. After the announcement of the election results, the Nifty50 has gained another ~3.5% from April closing level. Overall, the Nifty50 is up by ~7.5% YTD2024. The Bank Nifty has underperformed the benchmark Nifty50 and is higher by ~3.4% YTD2024.

The broader markets have performed much better. Nifty500 (+13%), Nifty Smallcap 100 (+16.5%), Nifty Midcap100 (+16.6%) have beaten the Nifty50 returns by a wide margin. Most professional analysts are forecasting a high-single-digit to low-double-digit return from the Nifty50 this year. This implies that the upside for Nifty might be limited from the current levels.

However, the momentum in the market is strong and domestic flows continue to remain buoyant. The progress of the monsoon so far is encouraging. The formation of a new government augurs well for continuity and stability. A combination of all these factors might take the markets much higher in the next few weeks.

I certainly do not want to be a party pooper. After all, who does not like to make some quick bucks!! Nonetheless, it would not be completely undesirable to raise the guards a little higher.

I agree that on an aggregate basis, the market does not appear anywhere closer to the bubble territory. However, there are numerous stocks that may have already crossed over to the red zone. Controlling the urge to run after fast running trains and avoiding FOMO is critical under these circumstances. It may sound cliché, but stock selection indeed is very important.

There are some scattered dark clouds on the horizon that may spoil the party. It is important to keep a watch and take out umbrellas in time, should the clouds gather and advance towards Indian markets. In particular the following six events could potentially impact the market sentiments in the next six months.

· The final Union Budget for FY25 not meeting investors’ expectations.

· FY25 earnings failing to meet the elevated expectations.

· The temporal and Spatial distribution monsoon becomes erratic causing floods in many areas and drought in some areas.

· Key state assembly elections later this year going against BJP and destabilizing the central government.

· Xi Jin ping trying a misadventure in Taiwan, as the home situation continues to improve.

· RW hardliners gaining full control of Europe after significant victory in the EU Parliament.

· Triumph of Trump in November presidential elections threatening large scale geopolitical and economic disruptions.

Wednesday, November 16, 2022

Politico-economic ideologies slithering in obscurity

In my view, we have entered a phase in world history where the politico-economic ideologies, e.g., free market, socialism, communism etc., have lost their theoretical context. In a significantly large number of countries the ruling parties and their leaders are not particular about adhering to their core ideologies. The voter base of the parties also appears to be divided on the basis of current issues rather than the core ideologies.

The sharp rise in socio-economic inequalities across the ‘democratic world’ has made the bulging bottom of the socio-economic pyramid even more attractive from ‘popular vote’ perspectives; and the thinnest ever top of the pyramid the most attractive from election funding and corruption purposes.

We are, therefore, witnessing (i) a larger role of governments in the economies; (ii) deeper influence of large corporates in the matters of economics and geopolitics; and (iii) preference for stronger (egotist; fascist; ultranationalist; hardliner whatever you prefer to call them) leaders who could be hailed as superhero – taxing the rich (mostly middle classes) and providing for the poor. It would be interesting to see what shape this opportunist politico-economic ideology finally acquires to become a legitimate widely acceptable political practice.

The Wikipedia page describing “Political Parties in the United States”, incidentally provides a good historical context to the latest transition in the global politico-economic order. It, inter alia, reads as follows:

“The first President of the United States, George Washington, was not a member of any political party at the time of his election or throughout his tenure as president. Furthermore, he hoped that political parties would not be formed, fearing conflict and stagnation, as outlined in his Farewell Address. The Founders “did not believe in parties as such, scorned those that they were conscious of as historical models, had a keen terror of party spirit and its evil consequences," but Richard Hofstadter wrote, "almost as soon as their national government was in operation, found it necessary to establish parties.”

In the past 150+ years the two dominant parties have changed their ideologies and base of support considerably but kept their names. The Democratic party, that in the aftermath of the Civil War was an agrarian pro-states-rights, anti-civil rights, pro-easy money, anti-tariff, anti-bank, coalition of Jim Crow "Solid South", Western small farmers, along with budding labor unions and Catholic immigrants; has evolved into what is as of 2020, a strongly pro-civil rights party, disproportionately composed of women, LGBT, union members, and urban, educated, younger, non-white voters. Over the same period the Republican Party has gone from being the dominant American "Grand Old Party" of business large and small, skilled craftsmen, clerks, professionals and freed African Americans, based especially in the industrial northeast; to a right-wing/conservative party loyal to Donald Trump, disproportionately composed of family businesses, less educated, older, rural, southern, religious, and white working class voters. Along with this realignment, political and ideological polarization has increased, norms have deteriorated, leading to greater tension and "deadlock" in attempts to pass ideologically controversial bills. (emphasis supplied)”

In the context of Indian politics, we see that all socialist parties have become feudal; BJP that started as a party of middle class upper caste businessmen and Hindu nationalists is winning elections on “social welfare program” agenda; the left of center Congress is striving hard to establish its Hindu credentials and Hardline Hindu Shiv Sena is preaching secularism.

The Indian National Congress which started with the Leninist concept of planned economy driven mainly through public sector; inserted the word “socialist” in the preamble of the Constitution of India”; curtailed free speech by imposing national emergency ended up as a strong votary of disinvestment of public sector; right to information; free trade and larger role for private sector.

BJP gained power on the promise of “less government” and is affording more power to the government; stifling transparency and free speech; has not pursued privatization in the past 8yrs of rule. ``Free ration”, “cheap (free) medicine” and cash subsidies have been its primary campaign slogans in most of the recent elections. The party with difference is now happy to be led by a strong leader who has vowed to destroy all its opponents.

Socialist parties like BSP, SP, RJD, LJP, TMC etc. have mostly become fiefdoms of leading families and appear more feudal in their conduct than anybody else.

The middle class people raised their voice against the rampant corruption of the Congress led UPA government leading to a nationwide movement that resulted in the birth of Aam Aadmi Party. The same party is now seen as a party of the poor financed by corrupt businessmen. Some of its leaders are facing allegations of serious corruption and communal rioting. Most professionals who enthusiastically joined the party have deserted it alleging lack of internal democracy and autocratic ways of the top leadership.

The traditional ideologies like free market, socialism, communism etc. have absolutely no role to play in the Indian politico-economic paradigm. The global transition might also have some reverberation in India also. However, insofar as the latest round of elections is concerned the results would hardly change anything in the broader context. Congress has nothing to lose in these elections; though stakes are high for both AAP and BJP. There could be some setbacks for both.