Status of households’ quality of life

The National Sample Survey Organization (NSSO) released results of the Comprehensive Annual Modular Survey 2022-2023 a few weeks ago. The survey made many interesting findings. Some of the key findings could be listed as follows:

Primary school enrollments: Among persons of age group 6 to 10 years, about 90.5% in rural areas and 89.2% in urban areas are currently enrolled in primary education.

25% of rural children and 20% of urban children who never enrolled in school, did it because they were not interested in studies. Another major reason for non-enrollment was “parents not interested in sending them to school”.

Among persons aged 15-24 years, around 97.8% of males and 95.9% of females are able to read and write short simple statements in their everyday life with understanding and are also able to perform simple arithmetic calculations.

Secondary education: In urban areas, only 56.6% persons of age 25 years and above have some secondary education. Whereas, in rural areas, this ratio is much lower at 30.4%.

Only about one third of all graduates were science and technology graduates.

Financial inclusion: Around 94.6% of adults have an account individually or jointly in any bank/other financial institution or with mobile money service providers at all-India level. More adults in rural areas have bank accounts as compared to the urban areas.

Digital access and skills: About 94.2% of rural households and about 97.1% of urban households possess telephone and/or mobile phones. About 59.8% of people above the age of 15years have access to the internet.

Among persons aged 15-24 years, around 78.4% reported the execution skill of ‘sending messages (e.g., e-mail, messaging service, SMS) with attached files (e.g., documents, pictures, video)’. In the same age group, around 83.6% of males and 72.7% of females reported execution of the above skill.

About 38% of people were able to perform online banking transactions. (30% in rural areas and 40% in urban areas). Only 17% in rural areas and 37.7% female in urban areas were however able to make an online banking transaction.

Access to Transportation: Around 93.7%t of the urban population has convenient access to low-capacity public transport within 500 meters from the place of living.

About 94% of the rural population has access to an all-weather road within 2kms from the place of their residence.

Cost of healthcare: The average medical expenditure per household on hospitalization during a year is Rs 4,496 in rural areas and Rs 6,877 in urban areas whereas the average out-of-pocket monthly medical expenditure per household on non-hospitalization during is Rs 545 in rural areas and Rs621 in urban areas.

Out of the average medical expenditure, about 91% in rural areas and 76% in urban areas was borne by the households. This implies public healthcare services in rural areas are much worse as compared to the urban areas.

Clean cooking fuel: About 63% of households use clean cooking fuel. The proportion is much less in rural areas (49%) as compared to urban areas (93%).

Unemployment: Around one fourth of the youth in the 15-29 years age group reported to be not in education, employment, or training. The ratio was highest in rural females (over 46%).

Indebtedness: Around 18.3% of adults have some outstanding loan. Rural adults are more likely to have a loan than an urban male. Male indebtedness is much higher as compared to the female indebtedness.

To cut or not to cut

The 3-day bi-monthly meeting of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) begins today. This would be the last meeting before presentation of the Union Budget for the year FY26. The members of the MPC would draw inputs from the latest national accounts (2QFY25 GDP data); October 2024 inflation data; October 2024 Professional managers’ survey results; September 2024 IIP estimates; November 2024 PMI and core sector growth data; April-October fiscal balance data; global developments (political and geopolitical); global inflation, rates, currency and market trends; expert opinions and views of the members of MPC; and assessment of the current and future situation provided by the staff of RBI.

The statement of the MPC on macroeconomic outlook and likely direction of the monetary policy will be a key input in preparation of the Union Budget for FY26. However, the market participants’ interest in the MPC meeting appears limited to whether, or not, at 10AM on 6^th December 2024, the RBI governor announces a repo rate cut and/or a cut in the cash reserve ratio (CRR). Some TV show panelists might also bother to note the downward revision, if any, in the growth estimates for FY25.

If the MPC decides to maintain a status quo on its policy stance – considering growth slowdown a temporary blip expecting a recovery from 3QFY25; and continue to accord higher weightage to still elevated inflation and highly uncertain and volatile global conditions, the market participants may be hugely disappointed.

Not to cut: In the October policy statement, the governor had adequately hinted about its preference for price stability over growth (see here). Perhaps RBI is much more conscious about the looming external threats, especially the balance of payment situation if there are sudden FPI outflows; or the FDI flows get restricted; or remittances are affected.

Or to cut: In the recent weeks, RBI has allowed USDINR to sustainably breach 84 mark. It appears that it may want USDINR to weaken further before Trump takes over the US presidency on 20^th January, and urges its trade-surplus trade partners to strengthen their currencies. We have seen a similar weakness in USDCNY also, for example. A token 25bps or an aggressive 50bps rate cut could drive USDINR to 86 in near term, providing RBI a leverage to engineer a ~5% USDINR appreciation to ~83 level in the next three months.

In either case, the transmission of the lower rates may not be in the corresponding measure, as RBI might continue to control credit growth and liquidity to reign inflation, asset quality and excessive unsecured lending. I therefore would not expect a CRR cut. I am however mindful that the market is pregnant with the hope of a CRR and/or repo rate cut and no action in this regard may lead to a sharp sell-off in financial stocks, especially NBFCs.

The market participants may also take note of the following three potential near term risks:

·         Besides the real GDP growth, the nominal GDP growth has also fallen to 9% in the 2QFY25. A lower nominal GDP growth directly impacts the tax collections and corporate profitability. November manufacturing PMI is at 11 months low. Core sector growth has also been low in 3QFY25. Expecting an immediate revival of growth in 3QFY25 may not be prudent; and the RBI may not mind a transitory higher inflation to boost nominal GDP growth.

·         The president-elect Trump has explicitly threatened the BRICS nations to refrain from any misadventure that would impact supremacy of USD. It may purely be rhetorical to gain some upper-hand in trade/sanctions negotiation with Xi and Putin. Nonetheless, it could cause higher volatility in the global markets. It becomes critical given that BRICS members supply two thirds of global fossil fuels.

·         The outgoing president Biden has provided a complete pardon to his son, who was facing multiple criminal charges in the US. Biden had earlier categorically denied this favor to his son. Experts are interpreting this as an indication of rising fear of a widespread witch hunt by the Trump administration. The witch-hunt, if it does take place, may not remain restricted to the domestic political opponents of Trump. 

Growth slowdown may be structural

India’s real GDP grew by 5.4% yoy during 2QFY25 (July-Sep); the slowest growth rate recorded since 3QFY23. The Reserve Bank of India had forecasted a growth of 7%, just a month ago, while the market consensus was less sanguine at ~6.5%.

For the argument’s sake, some of the slowdown in 2QFY25 could be attributed to a high base (2QFY24 GDP grew at 8.1%). However, it is tough to deny that the Indian economy has been growing below potential in most of the post global financial crisis (GFC-2009) period. In fact, it will not be totally perverse to argue that in the past one decade or so, the potential growth curve itself has moved lower.

For record, the Indian economy has grown at an average rate of 5.8% during the past decade (FY15-FY24). Even normalizing for the Covid-19 lockdown impact, the Indian economy has grown at an average rate of 6.0%, much below the estimated potential growth rate of over 8%. The real GDP had grown at an average rate of 7.8% during the preceding decade (FY05-FY14).

The slowdown in 2QFY25 has been led by the industrial sector, especially, manufacturing and core sector (e.g., mining and electricity) – a sector that has been the highest priority area for the incumbent government in the past decade. Agriculture (3.5% growth) sector did well on the back of a bountiful monsoon; and services also grew at a decent 7.1% led by public administration. On demand side, investments contracted for the fourth consecutive quarter, belying the promise of a massive jump in allocation for capex in the union budgets for FY24 and FY25. Private consumption grew 6% yoy on a low base of 2.6%, but declined qoq, despite the higher DBT.

The fiscal data for April-October 2024 period shows that contrary to its commitment in the union budget, the government has sacrificed capital expenditure in favor of direct cash transfer (DBT) to households. Ahead of key state elections, the government transferred an advance installment of tax devolution to states to meet revenue expense obligations. The central government capex (including on defense) was much lower than the budget targets. The disbursement of the promised capex loans to the states was also lower. Revenue expenditure on education, drinking water and sanitation were restrained to increase DBT allocation.

The popular narrative after the announcement of 2QFY25 GDP data appears to be that high effective rate of taxes and higher interest rates are hurting the growth and fiscal and monetary stimulus may lead to a course correction. I sincerely beg to differ from this hypothesis.

I have often highlighted that the obstacles to the acceleration in India’s growth rate are structural and not cyclical. Inability to adequately exploit our most valuable resources – the human capital and the largest pool of arable land in the world – is the principal reason for below potential growth. Consistent misallocation of capital, adhocism in policy making, lack of a conceptual growth framework, a distorted federal political structure, blatant pursuit of crony socialism, and lack of a long-term socio-economic growth plan.

In this context, it might be pertinent to note the OECD has projected a gradual deceleration in the potential growth rate of the Indian economy in the next four decades, as the marginal productivity of capital declines and contribution from technological progresses diminishes. (Table 1). The potential rate declines, even if in a blue-sky scenario, where India is able to take fuller advantage of its demography and is able to achieve a much higher rate of capital accumulation and employment (Table 2). (see full report here)

What will outweigh USD

Reportedly, Israel and Hezbollah (Lebanon) have successfully negotiated a 60 days ceasefire to the latest round of hostilities which started with Israeli forces invading Lebanon on the 1^st October 2024. The deal involves withdrawal of Israeli troops from Lebanon and deployment of a UN peacekeeping mission and establishment of a US led international monitoring group.

This is an important development in global geopolitics. The Hezbollah group was overtly supported by the Iranian government. Israeli invasion into Lebanon had evoked a direct military response from Iran; threatening a much wider escalation of a hitherto localized Israel-Palestine conflict. The ceasefire deal, which has been welcomed by Iran, diminishes the probability of an immediate wider escalation of the Israel-Palestine conflict. However, since the deal does not cover the ongoing Israeli attacks in Gaza Strip, it does not offer any durable mitigation of the threat.

If the outgoing president Biden could pursue Ukrainian president Zelensky to also negotiate a similar ceasefire deal with Russia, it would be considered a great parting gift for the president-elect Trump.

From the economics viewpoint, presence of the UN peacekeepers on the ground and direct involvement of the US in the region may temporarily help in restoring normalcy in the Red Sea marine traffic, thus normalizing the global trade to a certain extent; and the volatility in oil prices may also subside. A restrained approach from both sides would provide a durable solution.

This is definitely good news for India. An uncertain and volatile oil price environment, higher logistic cost due to disruption in the Red Sea, and a conflict involving Israel (supported by the US) and Iran (supported by Russia and China) are investors and policymakers’ nightmares.

Another thing that may be of immense interest to the Indian investors presently is Scott Bessent’s (Trump’s designated treasury secretary) views on USD and US treasury yields. As a hedge fund manager, Scott has preferred a weaker USD strategy, against raising tariff barriers, for the US manufacturing renaissance. Scott believes “tariffs are inflationary and in turn would strengthen USD. On the other hand, a weaker USD would make US manufacturing competitive. A weak dollar and plentiful, cheap energy could power a boom. A stronger USD should emerge only at a later stage if the US reshoring effort is successful”.

It may not be great news for the global hedge fund managers who are overwhelmingly long USD. As per the recent survey, presently, long USD is the most crowded trade globally.

If Scott sticks to his extant views, we may see USD weakening, US yields falling and US energy production & exports rising in 2025. This trifecta may delight Indian markets and our emerging market peers.

One question that begs the answer is “against what USD will weaken?” The US Fed is not keen to cut rates materially from the current levels. EUR cannot afford any strength, especially when German and French economies are tethering. Both China and Japan have shown no inclination to leave their currencies to the market forces. Strength in emerging currencies, including INR, is like a tiny insect bite for an elephant like USD; makes no difference. A peaceful middle east and Europe and cheap energy may take much of the shine out of gold.

I would be pleased to hear the views of readers on what would USD weaken against, if it does?

Hold on to your horses, for now

The benchmark Nifty50 has rallied over 3% in the past three trading sessions. This rise in Nifty50 has come after a fall of ~11% in the preceding eight weeks. Most market participants have attributed this rally to the assembly election results of Maharashtra. The incumbent alliance (Mahayuti) has registered a sweeping victory, with BJP winning ~90% of the seats it contested.

The popular narrative is that the overwhelming victory in the Maharashtra election would strengthen the Prime Minister led union government and reinvigorate the development agenda, especially the infrastructure capex. I find this narrative counterintuitive and mostly speculative. There is absolutely no substantive evidence to support these assumptions. To the contrary, there are some indications of slowdown in infra capex in FY26, as fiscal consolidation gets higher priority. In this context, I take note of the following:

·         Mahayuti alliance was running a stable majority government in the state of Maharashtra for the past three years. Many key infrastructure projects like coastal road, metro rail, Sewri-Panvel link bridge (Atal Setu) etc. have been completed in these three years. Nifty50 made an all time high of 26216 in September 2024, when the opinion polls were indicating a loss or thin majority for the incumbent government. These election results change absolutely nothing (except perhaps the Chief Minister).

·         In the 1HFY25, the government capex has contracted 15.4% yoy, against a target of 17% increase. There are indications that the overall FY25 capex may fall short of the FY25 budget target of Rs11 trilion. It is estimated that the government may not provide a material hike in capex budget for FY26, as in a volatile global environment, it may prioritize fiscal consolidation over capex. (see here)

·         Reportedly, a lot of government contractors are facing delays in payments from the state and central government. This is adversely affecting their working capital cycle operating cash flows. Elections are cited as one of the primary reasons for these delays, however anecdotal evidence indicates that there may be a trend in delayed payments. Favoring infrastructure builders facing delayed payments (affecting execution) and slowing order flows might not be a great investment strategy, in my view. (also see here)

·         The primary reason for the ~11% correction in Nifty50 was the declining earnings growth trajectory. Maharashtra election result, or any other datapoint that emerged in the past one week, do not change anything about the earnings prospects of the Indian companies. There are indications that RBI may continue in pause mode; pollution related restriction may impact demand in NCR region; consumption recovery may be back-ended in FY26; and new tax code may not offer any material relief to the individual taxpayers. It would therefore be prudent to wait for another 3-4 months before jumping into the markets.

Trivia: International gold prices have corrected ~3% in the past one month. Some recent reports (see here) suggest that “Israel nearing a ceasefire with Hezbollah, coupled with Trump's nomination of Scott Bessent as the U.S. Treasury Secretary soured the precious metal's safe-haven appeal. If you are also one of the investors who allocated 10% to gold in view of the rising geopolitical threat or Trump related uncertainties, you need to seriously review your investment strategy. Protecting 10% portfolio from war or eccentricities, while keeping 90% fully exposed to it, may not be a great strategy, after all.

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.

Goal incongruence

Lower duty on gold, wider trust deficit

In her final budget for FY25 (presented in July 2024), the finance minister had cut the import duty on gold from 15% to 6%. No clarity was provided for this measure in the budget papers. It is widely speculated that the move was to help the RBI in augmenting its gold reserves and bring back its gold stock held with foreign custodians; and also lower the domestic gold prices to help the government to redeem the sovereign gold bonds at a lower price.

The move has resulted in higher consumer demand for gold, resulting in larger quantities of gold import having adverse impact on the current account balance. This is prima facie contrary to the intent of the government to encourage household savings to move away from physical assets like gold towards financial assets; and maintain a healthy current account balance to support INR and bond yields. The move dented the credibility of the government and widened the trust deficit a little more.

Cooking oil makes the path slippery

Just before the festival season began in India, the government raised import duty on edible oils in September. The duty on import of crude soybean oil, crude palm oil and crude sunflower oil to 20% from zero percent previously. The import duty on refined palm oils, refined sunflower oils and refined soybean oils was increased to 32.5% from 12.5% previously. The stated objective is to provide remunerative prices to the local producers. Much of this duty hike is likely to be passed on to the consumers in due course.

This move appears totally ad hoc - to lead the market prices for edible oil (hence oilseeds) higher than the MSP to lessen the burden on the government. Given the erratic weather seen in most of the country in the past 3-4 years, it is highly unlikely that many farmers could be motivated enough to sow a fragile oilseed crop.

Most experiments with palm farming in the country have yielded sub-optimal results anyways. This move is likely to result in (i) higher and sticky food inflation burdening the already stressed consumers; (ii) stronger motivation for adulteration in edible oil; and (iii) higher working capital requirement and lower margins for edible oil producers.

The better course would have been to help the farmers partner with local manufacturers, provide financial, technology and input support (like green revolution), achieve higher oilseed production on a sustainable basis and make the imports redundant.

CGDs – pushing the chicks out of nest

The government has cut allocation of cheap APM (administered price mechanism) gas supply to the city gas distributors (CGDs), which sell CNG as alternative vehicle fuel and PNG as alternative cooking fuel. The allocation has been by ~40% in two tranches in October and November 2024. Though it is early to assess the entire impact, it is broadly estimated that these cuts are likely to result in ~40% of cheap USD 6.5/mmbtu APM gas being replaced with expensive gas costing USD10-14/mmbtu. Much of this higher cost is expected to be borne by CGDs, while some of it may be passed on to the consumers.

This reduction in the level of protection to the CGDs could be seen as a precursor to the complete privatization of the city gas distribution business. The existing CGD firms are mostly in the public sector. These may either be privatized and made to compete with the private sector without any protection.

It would be interesting to see whether (i) gas distribution business follows the trajectory of telecom, where the consumer emerged a clear winner and multiple operators (including state owned MTNL and BSNL) went bankrupt; or (ii) a private sector oligopoly emerges which would squeeze customers to maximize profits.

Regardless, in the short term we may see some trouble for CNG/PNG customers. The queues at CNG pumps may become longer, and expansion of piped gas to households may slowdown. This is definitely not congruent with the dire need for a cleaner fuel to check severe levels of air pollution in many cities.

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.

A visit to market

With the conclusion of the US elections, most of the noteworthy events for the current year 2024 are over. Though some traders may be looking forward to 23^rd November (Assembly election results), 6^th December (RBI’s MPC policy statement) and 18^th December (FOMC policy statement), these events are not expected to make any material change in the market sentiments.

·         In the absence of any foreseeable major event, the markets are in maintenance mode for the past couple of weeks.

·         Benchmark indices are consolidating in a narrow range, just keeping the day traders busy.

·         Broader markets are carrying out the process of clearance: the stocks that crossed the red line and strayed into bubble territory are being punished and dragged back to their right place.

·         The stocks that have been underperforming (or are likely to underperform) due to macro conditions, are being assigned lower weights and stocks performing (or likely to perform) strong are being promoted to top order.

·         Traders and investors who became greedy and traded beyond their financial capacity, are being taught some important lessons. They are learning how to balance the sentiments of greed and fear, manage risk and reign return expectations.

The current state of affairs of the Indian markets could be summarized as follows:

Nifty YTD2024: Decent performance, but lags alternatives

Indian stocks have delivered a decent performance YTD2024. The benchmark Nifty50 has gained over 11%; whereas Nifty500 (16.4%), Nifty Smallcap100 (21.1%) and Nifty Midcap100 (21.2%) have delivered much better returns. Media (-6%), FMCG (0.7%), Private Banks (+1.7%) are the sectors that have underperformed the benchmark indices. Pharma (33.6%), Auto (+26.5%), Realty (+25%) are some of the notable outperformers.

However, if we compare the YTD2024 returns yielded by Gilt funds (~10%) or Gold Funds (~20%), Nifty50 returns appear disappointing.

Globally, Nifty50 has been one of the best performing emerging market indices, though it lagged the major markets like the US (S&P 500 +26%), Japan (Nikkei +18%), China (+16%). Nifty50 outperformed Europe (STOXX600 7%), Indonesia (0.5%) Brazil (-3%), and South Korea (-5%), etc.

Foreign investors trim equity stakes to the lowest since GFC

Net YTD2024 FPI inflows in the Indian markets is over Rs one trillion. However, they have been net sellers in equities to the tune of Rs190.6bn.

What has bothered most of the market participants is the net selling in secondary equity markets to the tune of Rs 1.06 trn. Out of this Rs876bn worth of sale occurred in the month of October alone.

With this selling, FPIs have reduced their stake in Indian equities below 17%, from a high of over 20% in pre Covid period. The current stake of FPIs in the Indian equities is the lowest since the global financial crisis (2008-09).

 

Market breadth worsening

Despite the sharp outperformance of the broader market indices, overall market breadth has been dismal YTD2024. In particular, the breadth has been worsening consistently since June 2024.

 

Volumes shrinking

The level of activity in the Indian stock markets has declined in the recent months. The traded value and the quantity of shares traded have declined much below average. This may imply the participation of non-institutional investors/traders in the cash equity market has declined.

 

Market cap at 136% of GDP

The market capitalization of India crossed the US$5 trn mark in 2024. Presently, India market capitalization contributes ~4.25% of the global market capitalization, the highest ever level. For context, in the past two decades, on an average India’s share in the global market capitalization has been close to 2.5%. At the present level, India’s market capitalization is over 135% of the FY2025e GDP, against a 10 year average of 85%.

1HFY25 Earnings growth for Nifty50 companies has been one of the worst in several quarters. As per some brokerages, about two third of sectors are trading at a premium to their historical valuations.

Orderly weakening of USDINR, bonds stable

USDINR weakened 1.5% YDT2024 to its lowest ever level of Rs84.4/USD. The decline has been orderly and well managed. The INR resilience has been remarkable considering that the RBI has been accumulating USD and also buying Gold; CAD has started to worsen, inflation has been sticky and fiscal deficit has remained elevated.

The benchmark bond yields have also eased 6-7% YTD2024, in tandem with the global trends. The bond markets have been very stable and have not shown any sign of jitteriness during general elections, escalation in the Middle East Asia, and recent sharp rise in the US benchmark yields.

Overall, the markets appear stable with no sign of panic or turbulence. The ongoing corrective phase might last for a few more months and add to the inherent strength of the Indian markets, as the excesses of the past get erased and valuations normalize. 

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.