Do it yourself

Continuing from yesterday…(see here)

As I mentioned that the old narratives of the Smoot-Hawley Tariff Act (Tariff protection for domestic businesses), New Deal (Fiscal profligacy to stimulate economy) and Plaza Accord (fiscal and monetary manipulation by government/central banks to balance trade) do not fit the current circumstances, given the vastly different context. The efforts to fit the current U.S. President’s economic actions (and promises) related to trade, tariffs, and fiscal policy into historical molds, don’t align with today’s reality, and may be an exercise in futility.

For example, consider the following:

·         In 1930, global trade was 5% of U.S. GDP, and the world economy was already in freefall post-1929 crash. In 2025, trade is a larger share of GDP (e.g., ~25% for the U.S.), but global supply chains are far more integrated, making outright trade wars costlier and less likely. Modern trade agreements (e.g., USMCA, WTO) and digital economies add complexities that were not present in 1930.

Smoot-Hawley’s tariffs were sweeping and indiscriminate (40–60% increase across the board). Current U.S. tariff proposals (e.g., 10–30% on imports, higher on China) are targeted; negotiable; and used more as leverage rather than permanent barriers. Retaliation risks exist (e.g., EU or China tariffs), but multilateral frameworks mitigate escalation.

The 1930s lacked modern central bank tools like QE or quicker rate adjustments. In 2025, central banks globally can counteract trade shocks swiftly; unlike the gold-standard-constrained 1930s.

Critics overstate Smoot-Hawley’s relevance, projecting a worst-case scenario without acknowledging 2025’s resilience (e.g., diversified U.S. economy and tech dominance). The analogy ignores that tariffs today are often diplomatic tools, not ideological commitments, unlike Smoot-Hawley’s protectionist zeal.

·         The New Deal addressed 25% unemployment and a collapsed banking system. In 2025, U.S. unemployment is low (4–5%), and banks are stable, though inflation and debt ($36T) pose challenges. The urgency for New Deal-scale intervention is absent.

The New Deal was a comprehensive overhaul of the extant system. Adherence to Keynesian theory was at core of the New Deal. Trump’s infrastructure spending may echo WPA projects, but without the New Deal’s social safety net expansion or unified vision. Besides, current policies are often stalled by partisan gridlock or judicial review, unlike Roosevelt’s legislative dominance.

The New Deal’s trade liberalization (1934 Act) countered Smoot-Hawley’s damage. In 2025, trade policy is biased towards protectionism, not liberalization; and global allies are skeptical of the US leadership, unlike the 1930s’ pre-WWII alignment.

·         In 1985, the G5 shared aligned interests (Cold War unity, Japan’s deference). In 2025, the Sino-US rivalry, EU autonomy, and BRICS expansion (e.g., India’s growing role) complicate cooperation. A coordinated currency intervention (like in Plaza Accord) is unlikely given China’s managed yuan and the US political volatility.

The Plaza Accord used currency markets, not tariffs or fiscal policy. Current US actions emphasize more on tariffs and sanctions, not multilateral agreements, reflecting unilateralism over 1985’s teamwork.

The Accord strengthened the US’s exports but sparked Japan’s asset bubble and a lost decade. In 2025, similar interventions risk unintended consequences (e.g., inflation from a weaker dollar), but global economic fragmentation reduces the Accord’s replicability.

G-5 has now been replaced with G-20, which is not necessarily aligned with the US on trade or geopolitical issues.

·         Unlike 1930 or 1985, today digital economies (e.g., AI, e-commerce) and global supply chains dominate trade. A 1930 like trade war would disrupt tech flows (e.g., semiconductors), not just goods, with broader fallout. Similarly, a New Deal’s public works may be much less transformative today when remote work and AI are reshaping labor markets.

·         Current US political polarization and debt levels materially constrain a New Deal-scale ambition, while cultural shifts (e.g., distrust in institutions) differ from 1930s’ unity or 1985’s optimism.

In my view, rather than forcing old frameworks in the current crisis, it would be more useful if the US policymakers craft a “new solution” suitable to 2025 conditions. The new solution may, for example, include:

·         Fair taxes on trade: Tax goods from some countries but let allies like India sell clothes or spices without extra costs. This keeps prices low for Indian shops and helps American workers.

·         Green projects: Build solar panels, electric car batteries and chargers, like new roads in the 1930s, to create jobs and fight climate change.

·         Global teamwork: Create a new group with India, China, and others to agree on development of a neutral digital currency for international trade settlements; framework for global digital payments, like a global UPI, as an alternative to SWIFT, so no one country controls everything. These ideas can help the US to grow together with its trade partners, without repeating past mistakes.

These are just a few of the suggestions. A pragmatic approach, rather than adopting whimsical and jingoistic measures to achieve MAGA goals, will lead all down, including the US.

Also read

Straitjacketing a crisis-1

Financial Year 2024-25 (FY25), may be recorded in the annals of history as a watershed year for global politics, geopolitics, markets and the financial system. The events that occurred during the past twelve months have opened up significant possibilities for emergence of a new global order. Although the contours of the likely new global order are yet to begin taking a shape, it appears that fight for dominance over technology; endeavor to gain fiscal strength; interventionist democracy where the state exercises intensive control over citizens; and top priority to energy security would be four key characteristics of the new order.

The markets began to take cognizance of the broader developments and oscillated wildly between the extremes of greed and fear during the year. However, thankfully, markets managed to close the year on a rather satisfactory note. Most asset classes – equity, bonds, precious metals, base metals and real estate yielded decent returns for the year. Moreover, as we begin the new financial year (FY26), some of the key concerns, e.g., wider trade conflicts, geopolitical escalations, and fiscal implosions have peaked and showing some early signs of easing.

In India, the economic growth returned to the normal pre-Covid trajectory, as the base effect of FY20 and FY21 low growth tapered off, and external challenges mounted. Equity markets settled close to their long-term average valuations, after witnessing one round each of euphoria and despondency. Bond markets and INR have also managed to end the year on a rather optimistic note.

The following are some of the highlights of the performance during FY25.

Equity Markets

The Indian equity market managed to end the year in positive territory, despite showing negative in six out of twelve months. Indian equities underperformed the global peers. The benchmark Nifty yielded a return of ~5% (3% in USD terms), which was in line with the US markets (S&P500 +8%), and Europe (Stoxx600 +5%, DAX +21%) but much lower than China (Hang Seng +38%, Shanghai Composite +9%). Asian markets, ex China, were mostly negative, with Japan (Nikkei225 -10%), Indonesia (IDX-10%), Korea (KOSPI -10%) and Singapore (SET -15%) ending the year with decent cuts. The valuation premium of Indian markets to the other emerging markets therefore remained elevated.

Banks saved the day for Indian benchmark indices

The benchmark Nifty (+5.3%) performed in line with broader markets (NSE500 +5.4%, Smallcap 100 +5.4%); though midcap stock did somewhat better (Midcap100 +7.5%). The gains in benchmark indices were mostly led by banks (Nifty Bank +9.3%). Overall market cap of NSE was higher by 6.9%, explained by many new listings and outperformance of midcap stocks.

Sector-wise, Financials, Services, Private Banks, Pharma and Metals were top outperformers. Media, IT Services, PSU Banks, Realty, FMCG, Auto, Infra and Commodities were notable underperformers. Micro-sector-wise, Ship builders and EMS were outstanding. Renewable energy and real estate builders were notable losers.

2HFY25 witnessed 5/6 negative months

The benchmark Nifty50 yielded negative month-on-month (MoM) returns for five out of six months in FY25. The second half of the year was worst with five out of six months resulting in negative MoM return. However, the market breadth was negative in nine out of twelve months implying much higher volatility in the broader markets.

Institutional flows positive

Over institutional flows were materially positive for FY25. Net domestic and foreign flows in the secondary equity market amounted to Rs3591bn. Foreign Portfolio Investors (FPIs) were however net sellers of Rs2480bn in the secondary market, while domestic institutions pumped in a record Rs6071bn. FPIs were net sellers in eight out of the twelve months. The nifty-institutional flow correlation (73%) was decent in FY25.

Debt and Currency Markets

Indian debt and currency markets were volatile in tandem with the global trend. However, both bonds and INR managed to close the year on a buoyant note.

RBI cut the policy rates by 25bps and Cash Reserve Ratio for commercial banks by 50bps. The benchmark 10-year treasury bond yields eased to 6.58% from 7.11% a year earlier. USDINR weakened 2.6% to 85.59 from 83.35 a year earlier. Lending and term deposit rates were higher by up to 10-20bps. The yield curve shifted lower and flattened completely.

The RBI changed its policy stance to “neutral” from “withdrawal of accommodation” in FY24. The liquidity position however continued to remain tight, with banking system liquidity remaining in deficit for most part of the 2HFY25. The credit growth outstripped the deposit growth. Overnight and call money rates cooled 25bps in 4QFY25, due to aggressive open market operations carried out by the RBI.

Economic conditions

Overall FY25E GDP growth slowed down to ~6.2% as the effects of the low base of FY21 and FY22 tapered off and fiscal correction progressed further. The consensus estimates for FY26E GDP growth is slightly better at ~6.5%. Nominal GDP growth for FY25E has been materially lower at ~9.1%, and is expected to pick up to ~10.5% in FY26E.

·         CPI Inflation mostly remained within the RBI’s tolerance band of 4-6% (except for a short spike in October 2024). Core inflation eased below 4% in August and then February 2024.

·         Real rates have mostly remained in positive territory during FY24.

·         Fiscal deficit remained high despite moderation over the past few years.

·         The private sector investments failed to gather the desired pace, despite several government incentives. The government capex also slowed down in FY25. 9MFY25 investment to GDP ratio dropped to 32.6%. Private consumption recovered in FY25E from the sharp dip in FY24.

·         External conditions worsened during FY25. Merchandise trade balance deteriorated to USD292bn. Exports were lower yoy, while imports were higher by 6% yoy. External debt was higher by 10%. Net FDI flows continued to slow for the third consecutive year.

Commodities

FY25 was a mixed year for commodities. Precious metals (Gold +40%, Silver 39%) and Industrial metals (Zinc +17%, Copper +10%) recorded good gains, while energy (Brent Crude -17%, Coal -20%) and agri commodities (Wheat -16%, Soy -14%) ended the year with strong losses.

Crypto shine

Cryptocurrencies further strengthened their position with material rise in trading volumes and market capitalization. Bitcoin ended the year FY25 with a strong 21% yoy gain. More jurisdiction accepted cryptocurrencies as a valid medium of exchange, financial asset and/or tradeable asset.

Traditionally, the asset allocators have considered the potential return of the various alternatives (to equity and fixed income) to determine the portfolio structure of investors. Of course, the factors like size of portfolio, feasibility of investing in assets like real estate, risk appetite of individual investor, and liquidity requirements etc., influence the allocation to some alternatives. However, dematerialization of assets like real estate (through REITS), Gold (ETF) Bonds (bond funds, RBI direct investment platform etc.) now makes the alternatives relevant even for small investors.

In the past one year, the alternatives assets (e.g., gold, bitcoin) have performed significantly better than equities. Even the average yield of long duration bond funds has been similar to the Nifty50 return. The investors may therefore want to evaluate the return prospects of these alternatives in future to determine their asset allocation strategy.

In this context, I note the following to review my asset allocation strategy for 2025.

Bonds

Bond yields have consistently outperformed the equity yields in the past three years. In 2024, even the return on long duration bonds matched the Nifty50 returns. The consensus currently is that the RBI rate cut cycle in 2025 would be shallow with 25-50bps overall cut. Doubts are emerging on continuation of the Fed rate cut cycle also. The resilience of stock prices despite earnings downgrades, implies low chances of any material rise in equity yields. Bonds might thus remain an attractive asset class in 2025 also.

Gold

The World Gold Council (WCG) has forecasted a “positive but much more modest growth for gold in 2025”. The yearly outlook paper of WCG notes that “Upside (in gold prices) could come from stronger than expected central bank demand, or from a rapid deterioration of financial conditions leading to flight-to-quality flows. Conversely, a reversal in monetary policy, leading to higher interest rates, would likely bring challenges.”

The best case for Gold appears reversal in rate cycle with forecast of “higher for longer”. A dovish Fed, de-escalation of conflicts in the middle east and Europe, and lower intensity of trade wars, as compared to the present estimates, could be very negative for gold prices.

The weakness in USDINR, capital controls to manage balance of payment and change in duty structure are some additional factors to be considered for the Indian investors buying gold in INR. To me Gold appears less attractive in 2025.

Real Estate

The demand for housing remains robust, driven by resilient end-user interest and favorable macroeconomic factors. Inventory levels are now low in the ready to move category in most key markets. With new launches in mid segment slowing in the key markets, the prices are expected to remain firm in 2025.

As per Kotak Securities, Commercial real estate in top Indian cities saw healthy traction in 2QFY25. Vacancy levels inched lower. GCCs continue to lead the demand for commercial real estate, even as IT companies increased their headcount in 2QFY25 after six quarters of reduction; utilization rates remain high. Occupancy levels across asset owners have improved, aided by floor-wise denotification and consequent leasing of SEZ areas and a stronger push towards “return-to-office” by IT employers. Despite the recent price uptick, office REITs offer an attractive yield + appreciation play within Indian real estate. For me Real Estate (REITS) will thus continue to remain a preferred asset in 2025.

Crypto

More and more governments are now inclined to view crypto as a legitimate asset. President-Elect Trump has also hinted towards a favorable regulatory regime for crypto assets. As per the global investment major Fidelity, “Liquidity metrics have turned back to positive year-over-year growth, and we have entered another interest rate-cutting cycle. Inflation is still elevated above the Federal Reserve's 2% target and so I personally think there is still a risk of inflation coming back in a 'second wave.' Both of these things would be tailwinds for bitcoin.”

Despite a sharp up move in bitcoins, and high volatility it is difficult to ignore this emerging asset class in overall portfolio allocation.

In the past couple of weeks, I have heard more market participants talking about alternative assets like precious metals, cryptocurrencies, and bonds as compared to equities and equity derivatives. The trend has been more conspicuous, particularly after the first phase of voting for the 18^th Lok Sabha. The participants who were confident about an overwhelming majority for the incumbent government and strong equity rally post declaration of final results on 4^th June are now finding a need to hedge their exposure to equities. Surprisingly, none of the non-institutional investors/traders mentioned using equity derivatives to hedge their investment portfolios or trading positions.

For many weeks, global markets have been behaving in a very desynchronized manner. Non-congruence is conspicuous even in the behavior of the same investor/trader operating in different market segments, e.g., equities, bonds, commodities, currencies, cryptocurrencies, etc.

For example, until a month ago an investor with a balanced 50:50 debt-equity asset allocation invested in bonds as if a soft landing was imminent leading to a series of policy rate cuts over the 12-15 months. The same investor invested in equities believing that earnings growth would surpass the estimates and stocks of top technology companies would continue with their dream run. The investor was content investing in USD assets assuming green greenback would strengthen and at the same time he was buying bitcoins expecting the demise of the extant monetary system by independent crypto or digital currencies.

Last week in the US, equities reached their all-time high levels as if all is well in political, geopolitical, climate, economic, and financial spheres. It felt that the Fed was about to begin a sharp rate cycle, earnings growth had rebounded, Sino-US relations had normalized, the Gaza ceasefire had been announced, and El Nino had ended. However, across the street, the bond market was selling off as if prices were going out of control forcing the Fed to push the rate cuts to 2025. Back street, the bullion market announced that a recession was imminent. Across the Ocean, crude prices were rising as if a war was imminent with Iran threatening to escalate. In dark streets, crypto traders were laughing at conventional investors/traders rushing to bullion markets to hedge against recessionary weakness in USD.

Back home, last week equity indices reached their all-time high. Nifty Small Cap 100 gained over 7%. Commodity stocks rallied as if a bullish commodities cycle was imminent. Ignoring RBI's concerns over prices and credit, bond prices corrected only marginally. No one bothered to care about political manifestoes which are promising fiscal profligacy of gigantic proportion. USDINR appreciated marginally ruling out any pressure on the current account and balance of payment due to the sharp spike in energy & gold prices (two major imports of India) and FPI flow reversal due to the narrowing yield differential between India and developed market yields. People are also rushing to buy Silver (up 10% last week) to make some quick gains.

One of the largest asset management companies is running equities weight close to the lowest permissible in their balanced fund. It has also restricted flows to their smallcap fund. The top fund manager at this AMC is one of the most respectable names in the industry. Considering that the Smallcap index was up 7% last week against the 0.8% rise in Nifty, it seems, no one is listening to his sane advice.

We have all heard the story of an elephant and six blind men. It goes like this.

Once upon a time, there lived six blind men in a village. One day the villagers told them, "Hey, there is an elephant in the village today."

They had no idea what an elephant is. They decided, "Even though we would not be able to see it, let us go and feel it anyway." All of them went where the elephant was. Every one of them touched the elephant.

"Hey, the elephant is a pillar," said the first man who touched his leg.

"Oh, no! it is like a rope," said the second man who touched the tail.

"Oh, no! it is like a thick branch of a tree," said the third man who touched the trunk of the elephant.

"It is like a big hand fan" said the fourth man who touched the ear of the elephant.

"It is like a huge wall," said the fifth man who touched the belly of the elephant.

"It is like a solid pipe," Said the sixth man who touched the elephant's tusk.

They began to argue about the elephant and every one of them insisted that he was right. A wise man was passing by and he saw this. He stopped and asked them, "What is the matter?" They said, "We cannot agree on what the elephant is like." Each one of them told what he thought the elephant was like. The wise man calmly explained to them, "All of you are right. The reason every one of you is telling it differently is because each one of you touched a different part of the elephant. So, the elephant has all those features that you all said."

"Oh!" everyone said. There was no more fight. They felt happy that they were all right.

The story's moral is that there may be some truth to what someone says. Sometimes we can see that truth and sometimes not because they may have different perspectives which we may not agree to.

But I am witnessing a different phenomenon. No six blindfolded men are feeling different parts of an elephant this time. It is only one person who sees different parts of an elephant with open eyes and is not able to tell that it is an elephant.

FY23 was mostly a year of normalization. After two years of disruptions, uncertainty, and volatility, both the markets and the economy regained a semblance of normalcy in terms of the level of activity, trajectory of growth, direction, and future outlook.

Building on the momentum regained in FY23, the Indian economy and the markets made a steady move forward in the financial year FY24. The resilience of growth has been surprising, given the tighter money conditions and challenging external environment.

The global economy was also stable despite geopolitical and climate challenges. Global markets accordingly performed well. The sentiments remained mostly positive and supportive of risk.

The following are some of the highlights of the performance during FY24.

Equity Markets

Indian equity market was amongst the best-performing global markets. The benchmark Nifty yielded a return of ~29% (27% in USD terms), which was in line with the US markets (S&P500 +28%), but much higher than Europe (Stoxx600 +12%; DAX +18%).

Asian markets were mixed. Japanese equities were the top global performers (Nikkei255 +44%); South Korea (KOSPI +17%) did reasonably well; while China (Shanghai Composite -7%), Singapore (-14%) and Hong Kong (Hang Seng -19%) ended the year with major losses.

Broader markets at the center stage

The primary action was away from the benchmark Nifty. Broader markets sharply outperformed the benchmark in one of their best years in the past decade. Nifty Smallcap 100 (+70%) and Nifty Midcap 100 (+60%) led the market gains.

The overall market cap was higher by 50% yoy against Nifty50 gaining 29% (81% of total market cap) and Nifty500 gaining 39% (91% of total market cap). Some part of the gap could be explained by new listings, but most of this is attributable to the massive outperformance of smallcap stocks.

Sector-wise, Realty, PSU Banks, Auto, Energy, Infra, Pharma and Metal stocks were top outperformers. Financials (ex PSU Banks), FMCG, IT Services were notable underperformers. Micro-sector-wise, renewable energy stocks were outstanding while chemicals were the worst performers.

Nifty consistent performer; broader markets more volatile

The benchmark Nifty50 yielded positive month-on-month returns for nine out of twelve months in FY24. However, the market breadth was negative in five out of twelve months implying much higher volatility in the broader markets.

Institutional flows positive, Nifty-Flow correlation breaks in 4QFY24

Institutional flows were materially positive for FY24. Net domestic and foreign flows in the secondary equity market amounted to Rs3609bn. Foreign Portfolio Investors (FPIs) were net buyers of Rs1510bn while domestic institutions pumped in Rs2099bn. FPIs were net sellers in four out of twelve months. The nifty-institutional flow correlation however completely broke down in 4QFY24 when Nifty gained less than 3% despite Rs1042bn of net institutional flows.

Debt and Currency Markets

Indian debt and currency markets were mostly stable during FY24, showing little volatility. RBI did not make any changes to the policy rates.

The benchmark 10-year treasury bond yields eased to 7.05% from 7.3% a year earlier. USDINR weakened 1.8% to 83.37 from 81.87 a year earlier. Lending and term deposit rates were higher by up to 50bps. The yield curve shifted lower and flattened completely.

The RBI continued with its “withdrawal of accommodation” policy stance. The liquidity position therefore remained tight for most of the year. The credit growth outstripped the deposit growth. Overnight and call money rates were accordingly higher by 70-90bps.

Economic conditions

Overall GDP growth was consistent and strong for the first three-quarters of FY24. Beating all forecasts and consensus estimates, FY24 GDP is poised to show a growth of over 7% yoy. FY25 GDP growth estimates have accordingly been upgraded.

·         CPI Inflation mostly remained within the RBI’s tolerance band of 4-6% (except for a short spike in 1QFY24). Core inflation eased below 4% in 4QFY24.

·         Real rates have mostly remained in positive territory during FY24.

·         Private consumption, household savings, and government consumption expenditure were some of the distinct areas of slowdown.

·         Project awarding activity witnessed a marked slowdown in 2HFY24.

·         Rural markets gave mixed signals of demand recovery. For example, farm tractor sales declined again in 2HFY24, while 2w-3w sales staged some recovery. FMCG companies’ commentary remained mostly cautious about the consumption demand recovery in rural areas.

·         External conditions were broadly good. The current account balance was manageable at 1.2% of GDP during 9MFY24, supported mostly by services and remittances. Merchandise trade balance remained negative.

·         Electronics (6.5% of total exports) and Pharmaceutical (6.3% of total exports) registered good growth, while traditional petroleum products, gems and jewelry, and textiles recorded materially negative growth during 9MFY24.

·         Net FDI flows continued to decline for the third consecutive year.

Commodities

FY24 was a mixed year for commodities. Precious metals (Gold +15%) and crude oil (Brent 10%) recorded decent gains, while industrial metals (Nickel -30%, Zinc -17%, Steel -19%), natural gas (-21%), coal (-28%), and agri commodities (Wheat -19%, Soy -21%) ended the year with strong losses.

Crypto shine

Cryptocurrencies like Bitcoin staged a massive recovery during FY24, ending the year at all-time high levels. The newest asset category gained a wider acceptance during the year from market participants and regulators.

We are currently in a market phase where most asset prices are rising. Equity indices (Nifty over 22200) are close to an all-time high. Gold prices (over US$2125/oz) are at an all-time high. Bond prices (benchmark 10-year yields 7.05% from 7.50% a year ago) have recovered from their recent lows. Bitcoins (US$66000) are trading at an all-time high. Real Estate prices in India are also close to their highest levels in most metros.