Do it yourself

It is relevant to note that in the last rate cycle RBI had cut repo rates from 8% (January 2014) to 6% (February 2018) and then increased it to 6.5% (August 2018). In the current rate cycle, RBI cut the repo rate from 6.5% (August 2018) to 4% (May 2020) and has now started to hike it from May 2022. The consensus market view is that RBI will make another 3 hikes of total 85-110bps till December 2022 to take the rates closer to 6%.

The latest statements of the MPC and RBI governor are significant in more than one way. These statements mark a clear shift in the RBI’s monetary policy stance and highlight the current policy challenges.

In a marked shift to its reluctant stance of “calibrated tightening”, the latest resolution states, unambiguously, “The MPC also decided to remain focused on withdrawal of accommodation (emphasis supplied) to ensure that inflation remains within the target going forward, while supporting growth. However, the pretense of “growth supportive tightening” still continues.

From the statement of the governor it appears that the MPC is confident that the objective of 4% inflation could be achieved just by withdrawing accommodation and taking the rates and liquidity to the neutral level; and a need for “tightening” monetary policy stance may not arise. It implies that the RBI is presently not aiming for positive real rates. For record, the surplus liquidity with the scheduled commercial banks presently stands at Rs5.5trn; down from over Rs7.4trn in early May and Rs12trn last year. Post the CRR hike in May 2022, liquidity surplus in the banking system has thus contracted by Rs2.1trn surplus.

Till now, the RBI had been either avoiding any mention of stagflation or denying any possibility of the emergence of stagflationary conditions. However, this time in his statement, the governor admitted, “Globally, stagflation concerns are growing and are amplifying the volatility in global financial markets. This is feeding back into the real economy and further clouding the outlook.” Obviously, this admission complicates the policy framework.

The MPC has revised its FY23 average consumer price inflation target to 6.7%. It expects the inflation to peak at 7.5% in 1QFY23 and then gradually taper to 5.8% in 4QFY23. It is important to note that this 6.7% inflation target is after accounting for the impact of a series of rate hikes, fiscal measures (e.g., duty cut), and good monsoon. This target factors in the crude prices (Indian Basket) of US$105/bbl, which is marginally lower than the current price.

This implies that the RBI is fully cognizant of the fact that the current episode of high inflation is mostly supply driven and rate hikes may have limited impact on the inflation itself. The rate hikes are therefore aimed more at (i) maintain and enhancing the credibility of RBI’s policy framework; (ii) anchoring the inflationary expectations running wild and unduly disrupting the bonds and currency prices; and (iii) making a stronger case for more fiscal measures to help the growth and contain the inflation.

Clearly, the RBI is playing a multidimensional game. It has played its shot and the ball is now in the courts of Lord Indra, Mr. Vladimir Putin and Ms. Nirmala Sitharaman. A good monsoon; easing of hostilities between Russia & Ukraine; and more fiscal concessions could tame the inflation by improving domestic food supply; easing the global supply chains & restoring normalcy in the global energy markets; and easing the cost pressures on the economy.

Besides, the rates and inflation, the RBI made two more significant announcements.

Firstly, the limits of loans that the cooperative banks may extend for the personal housing has been doubled from Rs30lacs/70lacs to Rs60lacs/140lacs for TierI and Tier II cooperative banks respectively. Besides, Rural Cooperative Banks have been permitted to lend the developers of affordable housing. This shall materially improve the credit available to the real estate sector. Though, for the existing lenders, the scheduled commercial banks and housing finance companies, it may mean increased competition.

Secondly, the RBI has permitted the UPI to be linked with the RuPay Network. This means that the holders of RuPay credit cards can now make credit purchases using the UPI network. Subsequently, this facility may be extended to the other credit card networks also. This may materially enhance the access to short term credit for lower income group credit card holders; beside providing more avenues and convenience to the customers in making payments through UPI platform. 

Much contrary to the popular perception, India achieved one of the best Covid vaccination rates in the world. As per the latest available data close to two billion doses of Covid vaccines have been administered, defying all the logistic challenges.

These are just two success stories from India’s public health sector. Recognizing these remarkable achievements, the World Health Organization (WHO) recently honored more than a million Asha Workers of India for their commendable public service, especially during the pandemic.

It is rather unfortunate that not much of the urban population is even aware of the existence of Asha (the frontline health workers). Many mistake Asha workers for Aanganwadi workers. Even though millions have “liked” the pictures of Asha workers administering Covid vaccines to people in remote places, sometimes walking for many kilometers, not many seem to have bothered to learn more about them.

ASHA stands for “Accredited Social Health Activists” – “community volunteers” engaged under the National Rural Health Mission (NRHM). The designated Asha worker is the first port of call for any health related demands of deprived sections of the rural population, especially women and children, who find it difficult to access health services. These workers create awareness on health and its social determinants; mobilize the community towards local health planning; promote good health practices; and provide a minimum package of curative care. (learn more)

‘Stories of Change”, a report published by the NITI Aayog, in collaboration with Center for Social Behaviour Change (Ashoka University), highlighted some of the brilliant stories of changes that are happening in the hinterlands, away from media headlines and social media gossips.

These are the real stories that reinforce faith in the bright future of India; much more than a startup with virtually no business model (or even any real revenue) raising a few million dollars at a billion dollar valuation to get “unicorn” status. These stories explain what a small but brilliant innovation could bring meaningful change to many lives.

In my numerous travels across the length and breadth of the country, I can certainly vouch that these true stories are not only inspirational, but also deeply insightful. These stories highlight an original Indian model of frugal innovation and entrepreneurship – the Gandhian model of Swaraj (self-reliance with dignity).

The following is a gist of three simple stories from hinterlands, reproduced from the cited report “Story of Change”, highlighting how small simple solutions can handle complex problems.

PARI – (A pilot program for Diarrhea management in Bihar

Pari (fairy), a plastic inflatable doll with two openings, one at the top and the other at the bottom, is used to educate villagers about diarrhea that kills many children every year. A frontline health worker (FLW) pours water into the top inlet to inflate the doll to show what a healthy baby looks like. Then she releases the water by opening the outlet at the bottom, which deflates the doll to demonstrate what diarrhea does to the body: causes dehydration. When the FLW plugs the second opening and pours ORS into the doll, the water does not leak out. She explains that in order to solve the problem, it needs to be ensured that the outlet at the bottom has been plugged. When the child is administered ORS and zinc supplements, it acts as a plug to the bottom outlet thereby retaining vital fluids that can be absorbed by the body.

Pari has been used in Bihar for over two years across eight districts. In 2018, the Government of Bihar committed funds to scale up Pari to all 38 districts of Bihar. Results showed that among women exposed to Pari, appropriate knowledge of diarrhea management was three times higher and the use of ORS and zinc was almost two times higher than women not exposed.

Mobile Kunji (Guide) – Aid for awareness on family planning, pregnancy and child care

Mobile Kunji is a multi-media job aid (Kunji means key or guide in Hindi) designed for use by FLWs when they counsel families. It has two components: a deck of colour-coded cards with illustrations and related key messages for each stage of pregnancy or post­ natal care, and an audio component accessed via mobile phone. Each card carries a unique, seven-digit number or mobile short code that the FLW dials from her mobile phone, playing a piece of pre-recorded audio content for the family she is visiting. The audio content is delivered in the voice of a fictional doctor character, Dr. Anita, who brings credibility along with her great and very localised bedside manner. Moblle Kunji helps standardise the FLWs' dellvery or the key messages, reducing inconsistency and significantly improving interpersonal communication.

Evidence shows that conversations between FLWs and families last twice as long when Mobile Kunji is used,and families trust FLWs who use Mobile Kunji more than those who do not.

Kilkari – Mobile health update for mother and the child

Kilkari (Hindi for  a baby's gurgle) delivers  weekly, time-sensitive audio information about reproductive, maternal, newborn and child health (RMNCH) directly to families’ mobile phones, from the fourth month of pregnancy until a child is a year old.It aims to improve families' knowledge and uptake of life-saving preventative health practices. Kilkari supplements the counselling visits that FLWs make, by providing a regular and more consistent source of timely, relevant information for families, reaching families that are otherwise left out, and addressing issues that FLWs hesitate to discuss. As of March 2019, Kilkari had reached almost 10 million users across 13 states in the country. Subscribers cited Kilkari as a private, comprehensive, credible source of information on family planning and the service contributed to building health equity by conveying information to women in marginalised communities, whom ASHAs may not visit.

A good performance of the rural sector is important for investors. Almost two third of the Indian consumers derive their livelihood directly from the rural economy, including farming, horticulture, animal husbandry, cottage industry, forestry, etc. The rural economy directly supports a large number of industrial enterprises, like crop protection, farm equipment, transportation, food processing, etc.; besides providing material indirect support to industries like textile, consumer staples, durable, and services such as financial services, trade and communication etc.

From my discussions with fellow investors, I understand that there exists a great deal of divergence, insofar as the understanding of rural demand is concerned. In my view, the phrase ‘rural demand’ may not be the same for everyone. For example—

·         For farm input companies, the rural demand may denote the demand for their products by the farmers.

·         For the consumer product companies, the rural demand may include demand for their products by the household engaged in farming, animal husbandry, other allied services; industrial labourers living in rural areas and working in nearby industries; public servants; households in semi-rural areas etc.

·         For financiers, rural demand includes demand for farm inputs, farm equipment, household appliances, automobile, personal loans (health, auto, housing, marriage, etc.), rural supply chain (auto dealers, farm input dealers, farm output traders and stockists, etc.)

·         For government schemes, a rural household is defined by the population (as per census definition); while for the taxation purposes it is the geographical area based on distance from municipal limits of a census town.

There are many large towns whose economy is largely built around agriculture & allied activities; SMEs based on these activities and services catering to the households engaged in these activities. Some examples include Shahjahanpur, Hapur, Erode, Guntur, Solan, Jhansi, Jammu, Darbhanga, Rajkot, Sri Ganganagar, Moga, Gurdaspur, Nashik, etc.

However, there are many villages, which are in the vicinity of a large industry or cluster of industries. The economy of these villages may largely depend on the performance of these industries. The economy of hundreds of villages in the vicinity of Jamnagar, Dahej, Barmer, Mathura, Panipat, Bhilai, Jamshedpur, etc. depends on the large industrial units set up near these towns.

With this view in the background, I would like to share some observations made during my recent travels regarding the rural demand.

1.    Despite the extraordinary support from the government during the pandemic, the household finances in rural areas still seem stressed.

2.    The input cost inflation may have matched the rise in farm produce prices. Besides, the adverse weather conditions and fertilizer shortages (unaffordability) may have impacted the yields for crops, resulting in lower margins for farmers.

3.    The finance cost for rural households seems to have increased materially.

4.    The pressure on income is leading most households to down trade for their staple requirements. The local brands have mushroomed all over. The local vendors have learned all the tricks of the trade from their larger peers. They are selling products in hygienic and attractive packaging at much lower prices. Some part of this transition to “local” from “branded” may be long lasting.

5.    The spending on health and education has seen material rise in the past 2yrs. This has obviously come at the expense of some discretionary spending.

6.    Assurance of food supply by the government at minimum cost has impacted the spending and savings patterns of rural households. Focus on aspirational spending (travel, telecom, home improvement etc.) and savings may be increasing. Data will reflect this trend in due course.

7.    The remittances to villages have reduced; whereas many displaced laborers are yet to return to their pre pandemic employment locations. This may also be resulting in further division of already unviable farm holdings.

8.    Many young entrepreneurs, in some cases not belonging to traditional farming households, are engaging in agriculture and related activities. They are using advanced technologies, equipment and methods for farming and related activities like animal husbandry, and marketing of their products. The investment in the farm sector and agri supply chain is definitely increasing. While this may show up in aggregate rural income, the dispersion of rural income may become highly skewed in favor of “new” players over next one decade.

In my view, the rural demand, as traditionally seen by the market participants, might need to be redefined. Investors might have to factor in the changing rural landscapes – more educated, more industrialized and more mechanized farm sector, with widening income inequalities. The dependence of traditional farmers on fiscal support may continue to rise.

If we examine the current equity market behaviour, it appears that the sentiment of fear is gradually becoming dominant amongst the market participants. The following five signs, for example, indicate that relatively weaker participants might be moving to sidelines or even withdrawing from the markets. This is usually indicative of the beginning of the process of a market cycle completing its downward journey. The actual bottoming though may take some time and further downward move.

Market activity shrinking

In the past six months, the market activity has cooled down conspicuously. The volumes in INR terms as well as in terms of shares traded and number of trades executed have remained on the lower side, indicating shrinking participation in the market.

At peak of the market in October 2021, the average traded volume in Oct’21 was over INR4000bn; however in May’22 it contracted to was below INR2800bn. Similarly, the number of trades in Oct’21 was over 130bn; whereas in May’22 only 108bn trades were executed on NSE. In terms of number of shares traded – in Oct '21 83.58bn shares were traded on NSE. In May’21 the number had contracted to 43.91bn, almost half of Oct’21.

Volatility persisting at higher levels

Since the benchmark Nifty recorded its all-time high level in October 2021, the implied volatility (popularly called the fear index) has persisted at higher levels; even though it has eased in the past 10 days.

Broader markets underperforming

The market breadth has remained negative in eight out of the past twelve months. The market breadth on NSE was worst in at least the past twelve months. In fact the market highs in October 2021 were recorded with a negative market breadth and high volumes; indicating a distribution pattern in the technical analysis parlance. Nifty50 has corrected ~10% from its latest closing highs; whereas Nifty Smallcap 100 index is down ~23% from its latest high levels; even though the smallcap high (January 2022) was recorded 3months later than Nifty (October 2021).

Sector wise also YTD 2022 only Financials (1%), FMCG (1.5%), Auto (5%) and Energy (14%) sectors have yielded positive returns. IT Services (-22%), Realty (-15%), and Pharma (-12%) have been the worst performing sectors.

Valuations are now more reasonable

As the sentiment of fear has started to dominate the markets, the valuation excesses are now correcting. The 12month forward PE Ratio of the benchmark Nifty Index is now closer to 5yr average level. The price to book (P/B) ratio for Nifty has also corrected sharply from the higher levels seen in October 2021.

The valuations are now closer to “fair value” zone, a pre-condition for completion of the down leg of a market cycle (bottoming). It is however important to note that in many cases it has been seen that the earnings estimates are materially revised lower. In that case the “fair value” curve may shift sharply downward. 

Global markets – sentiments most bearish since March 2020

As per the Bank of America’s (BofA) proprietary Bulls and Bears Indicator, the global fund managers were most bearish in May 2022, since the Pandemic outbreak (March 2021).

The incumbent BJP is projecting that the Indian National Congress, which has been at the helm for a substantial part of these 75years, is primarily responsible for slower, unequal and misdirected growth and development of the country. It is also assuring the country that the incumbent government is not only undoing the mistakes of commission and omissions committed by the earlier governments and taking impactful corrective action; but also laying the foundation for a stronger, faster, equitable and well directed growth & development of the country.

The party in opposition, Indian National Congress (INC), on the other hand is refuting these claims. INC is insisting that it was their leadership that built a strong institutional framework that laid the foundation for a stronger, egalitarian and harmonious India.

I am sure both the parties would have strong arguments to support their respective contentions and this game of political grandstanding may continue forever. Nonetheless, I find it pertinent to take note of the present strengths of Indian economy and society that could really lead the transformation of Indian economy into a middle class economy over the course of next couple of decades; and also the weaknesses that could thwart the process of process of faster and sustainable growth and development of the country.

In particular, I would like to highlight the following five factors that now form the core of India’s strategy to achieve the ambitious growth and development goals.

Digital identity for all the citizens (Aadhar enabled by UIDAI)

UIDAI (Aadhar) is widely acknowledged as one of the most sophisticated and pervasive digital identification programs in the world. The program provided a digital identity to more than 1.31 billion citizens of India. This identity now forms the core of the financial inclusion and social security system in India, eliminating the leakages, middlemen and inefficiencies of the system. Aadhar also forms the core of the financial services, telecom and social sector services like health  and education.

The UIDAI model has also been adopted to provide digital identity to all corporate entities, corporate directors, taxable properties, to facilitate faster identification & transactions; and minimize the probability of frauds.

The services like DigiLocker - a free digital storage space for documents available to all citizens – are also primarily based on Aadhar authentication services.

UIDAI was conceived and set up in 2009 by the then UPA government under the ages of the Planning Commission. It was given a statutory status by the incumbent NDA government in 2016.

Digital payment ecosystem (UPI enabled by NPCI)

The RBI founded the National Payments Corporation of India (as a not for profit company) in 2008 to operate retail payments and settlement systems in India. The NPCI developed a Unified Payments Interface (UPI) to facilitate instant digital settlement of interbank peer to peer (P2P) and Person to Merchant (P2M) payments. UPI is an Aadhar enabled mobile based interface, available for free to all the citizens and merchants in India. NPCI also developed the BHIM mobile App and Bharat Bill payment system.

This makes the Indian digital payment infrastructure, one of the best in the world. Millions of small and marginal merchants make billions of UPI transactions, to transform the Indian economy from a cash driven economy to a digital banking society.

NPCI established the National Automated Clearing House (NACH) to integrate all regional electronic clearing services into one national payment system.

NPCI has also enabled a national electronic toll collection through FASTag; National Financial Switch (Network of shared ATMs); RuPay Card, IMPS and Bharat QR etc.,

NPCI was conceived and established in 2008 during the UPA government. However it has taken a lot of new initiatives under the incumbent NDA government.

Expansion and modernization of highways

The Congress government led by P. V. Narasimha Rao, operationalized National Highways Authority of India (NHAI) as an autonomous agency in 1995 to build and manage the network of national highways in India.

The NDA-1 government led by A. B. Vajpayee assigned the task of implementing the National Highways Development Project (NHDP) to NHAI in 2000. NHAI has undertaken and executed several key projects to remarkably improve the interstate surface transport ecosystem in the country. Golden Quadrilateral (20012012), an ambitious project of NHAI under NHDP has become the backbone of national trade & commerce. Besides, NHAI has commissioned North South and East West corridor projects to connect major Indian cities.

NHAI model has inspired most state governments to undertake major highway and express projects in public and private sector to improve road infrastructure and intra state and interstate connectivity.

Best standards in defense and space technology

Indian Space Research Organization (ISRO, established 1969) and Defense Research and Development Organization (DRDO, established 1958) have been two core institutions to make India a major player in the global space and defense technology arena.

ISRO has placed India in the top 5 countries in terms of space capabilities. The commercial satellite launch capabilities of ISRO are now recognized world over. The indigenous GPS tracking system GAGAN, developed by ISRO, has put India in the global elite club.

DRDO has developed a potent nuclear deterrent to safeguard geopolitical interests of India, which is surrounded by rather hostile neighbors. DRDO is a key functionary in the plan to make India self-reliant in defense production and technology. DRDO has also done remarkable development work in the field of chemical engineering and medical science.

BrahMos, developed jointly by DRDO and Mashinostroyeniya of Russia, is the fastest supersonic cruise missile in the world. A hypersonic version of the missile is also under development.

BrahMos Aerospace, the JV between DRDO and Mashinostroyeniya, was formed in 1998. It tested an Air-launched variant of BrahMos in 2012; which was inducted in service in 2019. In 2016 India became a member of the Missile Technology Control Regime(MTCR), enabling India to develop missiles jointly with other members.

We may see India becoming a notable exporter of missiles and missile technology in future.

Democratization of digital commerce (ONDC)

The Department for Promotion of Industry and Internal Trade (DPIIT), of Government of India has recently formed a Not for Profit company named Open Network for Digital Commerce (ONDC).

ONDC shall be developing an open network for e-commerce in India. It is expected to be an UPI equivalent for digital commerce. The idea is to end the monopoly and manipulative practices of some large ecommerce players and democratize the ecommerce market by providing an equal access to all the participants. Like what UPI did with the payments, ONDC could revolutionize the digital commerce market in India, providing huge impetus to growth.

ONDC shall lead to democratization, decentralization, digitalization and standardization of the entire digital commerce value chain, increasing the efficiency and access manifold.

MNREGA (started in 2009) also deserves special mention in this context. The rural employment scheme has provided one of the best templates for implementing social security and uniform basic income (UBI) in the country. It is widely recognized that this program has saved millions of families in distress, especially during the periods of crisis such as drought, pandemic, cyclone etc. In the past one decade, the program has been admirably used to build rural assets like roads, water bodies, schools, health centers, etc.

About the constraints, I shall discuss in a later post.

When the independently priced cryptocurrencies were melting in the past few months, a stablecoin Tether (USDT) has been relatively much more stable. The value of USDT did show some volatility, but it was marginal in comparison to some other stablecoins like Terra and independently priced cryptocurrencies.

Being a technology challenged crypto illiterate person, I must outline my understanding of a stablecoin to make the context clear. In my understanding, a stablecoin is a crypto token which is backed by some financial or real asset, whose value is pegged to a fiat currency like USD. In simple terms, it is a tradable electronic entry priced in a fiat currency (like ADR of an Indian company tradable in US) which has an underlying asset like bonds. Theoretically, the price of a stablecoin shall move in tandem with price of the underlying; but in practice the movement in price could be less or more than the underlying.

Curious by the relative stability of USDT, I discussed the issue with some experts and crypto traders. While no one offered any satisfactory answer, the common thread was a conspiracy theory. It is commonly believed that a significant part of trade by “sanctioned jurisdictions” like Russia, Iran etc., is happening in stablecoins, USDT being the most popular one. Secondly, it is suspected that USDT is also a preferred currency for money laundering in many emerging economies.

Of course, I do not understand much of this, so I cannot make any intelligent remarks on this. Nonetheless, I must say that (i) tech enabled alternatives to gold are here to stay for long; (ii) the challenges to USD as the exclusive global reserve currency are rising gradually; and (iii) the global economy (and markets) might delink from US economy (and markets) sooner than previously estimated.

The experts have extensively talked about Japanification of the US economy (and markets) since the global financial crisis (GFC) hit the world in 2008 and the US Federal Reserve unleashed a torrent of quantitative easing (dollar printing). With massive monetary and fiscal corrections now becoming increasingly inevitable, in view of the rapidly changing (a) global trade dynamics and (b) global geopolitical balance; the probability of experts’ prognosis about the US economy coming true is rising gradually.

In my view, the forecast for the global economy and markets for next few years must account for these probabilities; howsoever small these probabilities may appear for now.

I would therefore not like to undermine the movement in NASDAQ and S&P500 to form my view on Indian markets and/or deciding my allocation to say IT services sector, for next few years. I would also like to read the predictions about a “lost decade for equities”, in relation to developed markets, especially US, without correlating it to India. I am also aware of the fact that equities in two major global economies China (15yrs) and UK (5yr) are already witnessing this phenomenon of lost decade; and this has not impacted the performance of other European and Asian markets materially.

In simple words, I do not see much merit in drawing correlations between GOLD-S&P500; Nifty-S&P500; and NIFTY IT-NASDAQ. The Beta of Nifty vis à vis S&P500 and NASDAQ shall reduce incrementally. There is no need to stay awake till late night to watch US markets.

At this juncture everyone has to choose a path for onward journey. The options are rather simple –

(i)    Continue the journey in the north direction - Stay with the extant strategy and hold on to your investments.

(ii)   Take a right turn towards the East - Review and restructure your portfolio of investments in light of the new evidence.

(iii)  Take a left turn towards the west – Change the strategy and rebalance the portfolio in favor of Safety and Liquidity from Return previously.

(iv)   Turn around and move back in the south direction - Liquidate the whole or a substantial part of your portfolio and wait for an opportune time to begin the journey afresh.

The empirical evidence suggests that the vintage of investors and size of portfolios plays an important role in making this decision. The seasoned investors and/or investors with larger portfolios usually avoid the fourth option and prefer the options listed at (i) and (ii) above; whereas the newer and/or investors chose from the options (iii) and (iv).

In my view, choosing an option is prerogative of the individual investors. I am sure, they make a decision which they consider best as per their investment objectives, risk tolerance, and personal circumstances. The problem however occurs, in most of the cases, when the investors avoid, delay or precipitate a decision. Avoiding a decision makes you jittery portfolio values move beyond your risk tolerance bands; delaying or hastening a decision often leads to wrong decisions.

The question is whether it is an appropriate time to take a decision; or the investors may take some more time to decide the future course of action; or is it already too late to take a decision.

I believe that each investor will have to answer this question individually; and I can speak only for myself. In my view, it is a bit late to make the decision, but not too late.

I would however like to mention a few historical facts that might help my fellow investors in making an appropriate choice.

Prima facie, the market conditions today may appear to be similar to the conditions during dotcom boom, bust and resurrection (1998-2000-2004). Like the dotcom bubble, this time also the market rally was characterized by the new age businesses with undefined business models and negative cash flows for prolonged periods, commanding unsustainable valuations. Like dotcom bubble, the low interest rates in past one decade fueled the bubble and rate hikes caused the burst.

·         For records, Nifty had gained 127% (800 to 1800) in a short span of 15 months (November 1998- February 2000). It gave up all the gains in the next 18 months (September 2001). It took almost three years (November 2004) for Nifty to “sustainably” break past the 1800 level. In the present case Nifty gained 148% (7500 to 18600) in 19 months (March 2020 to October 2021). In the next seven months it has shed about 25% of gains recorded in the preceding 19 months. So, if we assume the present case to be a case of repeat of dotcom

·         It is pertinent to note that while Nifty recovered the losses during the burst in 3years, many market leaders took much longer to recoup their losses. For example, Infosys took 6 years (2006), Wipro took 20 years (2020) and Hindustan Unilever took 10 years (2010) to reach their high levels recorded in the year 2000.

The present economic conditions are substantially different from 2000. The central bankers had sufficient ammunition to support the markets in 2000. The US Federal Reserve cut rates from a high of 6.5% in 2000 to 1% in 2004 to support the economy and markets. The inflation was not a worry and the new growth engines in the form of the emerging markets, especially India and China, were emerging fast to support the global growth. In the instant case, however, the central banks have virtually no ammunition left to stimulate the growth; all the growth engines of the world are stuttering and inflation is a major concern for the entire world. After all, the world perhaps has never seen a recession while the interest rates are still so low.

It is therefore reasonable to assume that the market trajectory may also be different than 2000-2004. Considering that the cycles (rate, Inflation, growth, etc.) are now much more shallow than 2000s. The rates this time may peak at much lower levels. We may not see global growth at 5% in near future and therefore inflation may not last longer either. The markets may not revisit 2020 panic lows and also may not take 3years to breach 2021 highs.

Nonetheless, the valuation readjustment within markets may be material and lasting. The valuations for many new age businesses that have lost significantly from their recent high might continue to correct further. Many of these businesses may fail to sustain and become extinct. On the other hand, some old age businesses that have corrected to “cheap” range may regain some prominence. So it would still be in order to restructure the investment portfolios.

For the record, I chose option (ii) a couple of months ago and took a Right Turn.

On the top, Indian Railways has cancelled many trains to expedite the coal supplies to the languishing power plants. This is hindering the movement of farm labour, as the sowing season begins. This is making things even tougher for the majority poor and lower middle classes, who are already struggling with stagflationary conditions.

Somewhat similar is the situation on the global scene also. Abnormal weather conditions are persisting in the Americas and Europe. Shutdown in some key China provinces and protracted Russia-Ukraine war are keeping the global supply chain's recovery from pandemic disruption on hold. Aggressive monetary tightening by central bankers is leading to sharp correction in asset prices (equity, cryptoes, gold, realty).

The wealth effect of higher asset prices that supported consumer spending for the past one decade is eroding, stalling the economic growth from the US to China. The corporations that used cheaper money to fund expensive buybacks; fancy acquisitions and investments in utopian projects are feeling the burn in their hands. The wealth erosion is thrice as fast as wealth creation has been in the past decade.

The macroeconomic conditions are thus clear – inflation is elevated; money is tightening; consumption is moderating; and growth is slowing. Besides, global trade is facing challenges from the rise in tendencies of de-globalization, ultra-nationalism and imperial communism. One could therefore strongly argue a case for structural bear market in assets like equities and commodities; and rise in safe havens like gold, USD and developed economy bonds. In the words of Bill Dudley, the former president of the Federal Reserve Bank of New York and Former Vice Chairman of FOMC, “one way or another, to get inflation under control, the Fed will need to push bond yields higher and stock prices lower”. The message to Mr. Market could not be clearer and louder. Mr. Market however does not appear to be in an obliging mood by exactly following this script.

There are visible signs of growth slowdown post 75bps hike by US Fed; but it has so far not impacted the inflation. This makes the further hikes a little tricky – “Will it hurt inflation more or hurt the growth more?” The rising cost of borrowing has no visible impact on the government borrowing so far. The fiscal conditions continue to remain profligate.

As of now, no one is suspecting the central bankers’ to be cruel enough to cause a hard landing of the economy. A soft landing is the most expected outcome, but then this assumes that the central bankers are in control of things and can plan a controlled slowdown of the economy. Unfortunately, the evidence is overwhelmingly stacked against this assumption, as most central banks have completely failed in first reversing deflation (pre pandemic) and then controlling inflation (post pandemic). The role of central bankers in stimulating sustainable and faster growth, as was the stated objective of QE, is also questionable.

Similar is the situation elsewhere – in Europe, UK, India, Brazil, Japan, Pakistan, South Africa, and Australia - everywhere.

Most of the governments are still burdened by the guilt of suppressing poor savers through negative real rates; fueling inequalities; undermining the investments in global supply chain and not respecting the importance of free markets. Doling helicopter money on the poor and oppressed is their way of tackling this guilt; or maybe political compulsion also.

Since the damage to the global economy was done by the monetary and fiscal policies together, the course of correction must also involve both of these to be effective. Without an effective support from the fiscal side,

The global markets at this point in time are more like a Rubik Cube in the hands of a novice. Bringing one piece to the desired place is displacing two other pieces from their desired place.

Equities, cryptoes and bonds have corrected, but so have gold and silver. Emerging markets are suffering and so are the developed markets. Energy prices have shown no intent of weakening in the near term. Metals are lower than their recent highs but in no way showing a sign of collapsing, as should have been the case if the central bankers were seen winning the war with inflation. Maybe it is too early to judge the efficacy of the central bankers’ strategy to tighten the money markets; and we would see the impact in due course.

Obviously, it is a tough market for traders and investors, as correlation are breaking and diversification is not working.

More on this tomorrow.