Do it yourself

Since the Election Commission of India (ECI) does not permit the publication or communication of the results in any other form of Exit Polls conducted by various agencies until the completion of voting for all seats, we do not have any expert opinion available about the likely outcome of the ongoing elections. However, a variety of guesstimates are available on social media and other platforms. Most of these guesstimates are speculative. These are either based on a small and localized sample; or gambling trends.

Many stock market experts have also presented their scenario analysis for the market performance depending upon the outcome of the general elections. Most experts have projected a sharp correction in the markets in case the incumbent BJP and its allies fail to secure the requisite majority in the Lok Sabha. As a keen political observer and a tiny investor, I am interested in these forecasts.

Unfortunately, I find that the discussions available in the public domain are not based on available empirical evidence; they lack credible analysis, and are highly speculative. These discussions deeply suffer from personal biases, political prejudices, and misplaced presumptions. One of the illustrative scenario analyses available in the public domain is reproduced below. In my view, nothing could be more baseless and more speculative than this analysis.

In the outgoing 17^th Lok Sabha, the incumbent BJP has 303 members, a strong majority. In the preceding 16^th Lok Sabha, the BJP had 281 members with its NDA allies having another 71 seats.

The preceding UPA government was arguably much weaker with no single party having a majority of its own. Regardless, the performance of USDINR and Nifty was better during 2004-2014 compared to the 2014-2024 period.

·         Sensex yielded a return of 15.5% CAGR during the UPA regime (2004-2014), while the Sensex return has been ~12.2% CAGR during the NDA regime (2014-2024).

·        USDINR had weakened at a pace of 2.7% CAGR during 2004-2014; while it has weakened at a pace of 3.5% CAGR during 2014-2024. 

On the social and economic reforms front also there is no empirical evidence of weaker governments doing worse than the stronger governments in the past four decades.

In my view, the market does witness heightened volatility during general elections, but there is no empirical evidence to establish a direct correlation between market performance and the form and constitution of the ruling political dispensation in India.

…to continue tomorrow

·         Nifty Next 50 Index (YTD higher by ~21%), which comprises the top 50 stocks outside the Nifty50 (YTD higher by ~2.7%) universe, has performed much better than the Nifty Midcap100 (YTD higher by ~9%) and Nifty Smallcap 100 (YTD higher by ~10%) indices.

·         If we exclude private banks and IT services stocks from the Nifty50 universe, the rest of it has performed better than the broader market indices.

·         These statistics (index performance) completely fail to present a correct picture of the market. The narrative that small caps have done better than large caps is mostly false. On a risk-adjusted basis, large-cap stocks may have done far better than their smaller peers.

·        Even in developed markets like the US, a few large-cap stocks have done extremely well and broader markets have underperformed sharply. The discount of small-cap valuation vs the large-cap valuation in the US markets is the highest since the dotcom burst in 2001.

In my view, all these are fair points. However, my premise behind “no margin for error” was entirely different. I wanted to communicate that –

(a)   Presently, the small investors appear edgy to me. They have invested assuming a clear blue-sky scenario. Any sign of the dark clouds on the horizon would make them jittery and they might look to exit their positions.

Empirical evidence indicates that these small investors prefer to invest in smaller businesses where the chances of making big returns are significant. Besides, these investors have very low risk appetite. If the market witnesses a sharp fall, due to whatever reason, they may seek to exit their position. However, given that the liquidity dries very fast in the broader market their exits could come at a significant impact cost. On a bad day, the exit cost could be 20-50% more than what they would have assumed in a normal market scenario.

(b)   A large section of these small market participants is indulging in option trading. The potential losses in the options segment could be substantially higher and permanent since the single stock options tend to become extremely illiquid in case of sharp moves in the underlying securities.

(c)   The standard investing arguments – invest for the long-term; ignore intermittent volatility; small-cap yield a much larger return than large cap over a longer term, etc. – are very much true. However, it cannot be denied that human psychology and the personal circumstances of individual investors override these arguments. The forces of fear and greed dominate the day to day investment and trading decisions of individual investors. If the basic assumptions behind an investment decision fail or the overall market sentiments turn negative, the fear overwhelms the investing decisions of investors with a low-risk appetite. This is where most of the losses occur.

My favorite fund manager highlighted “NVIDIA is more volatile these days than even SME segment. More people would have lost money trading in NVIDIA than the number of investors who would have made money holding it. Trading is for mental wellness, while investing is for material gains”.

I cannot disagree with this proposition. I think most people would agree with it, in principle. But then how many of us live the way our parents and teachers guided us to do!!!

The case of Last Friday is particularly noteworthy. The benchmark Nifty corrected almost 2% from the day’s high within a few minutes, ostensibly due to a media report suggesting implementation of the Direct Tax Code in the July 2024 final budget for FY25. The volatility index (India VIX) spiked over 33% to a multi-month high. The finance minister outrightly denied the report calling it “Pure speculation”.

In my view, three clear inferences could be drawn from this instance.

First, the market is bravely holding up, in line with the global trend. However, the risk appetite of investors and traders may be diminishing. The margin for error, should something go wrong, is very low. For example, if the financial performance of companies misses the elevated expectation levels; the outcome of general elections is contrary to popular expectation; and/or the monsoon is delayed or misses the “better than normal” forecast of the Indian Meteorological Department (IMD), the market may witness sharp corrections in the short term.

Second, the market participants have been very vocal in demanding material direct tax reforms for many years. The reactions to the market rumors of tax reform that may see higher tax rates indicate that the market’s idea of tax reform is nothing but lower tax rates and more exemptions (especially LTCG and dividend tax). There may be no appetite for a progressive tax structure that helps in an orderly wealth redistribution over a longer period without material impact on the revenue needed for the development effort.

Third, during the intraday sell-off, very large part of the market becomes extremely illiquid. The impact cost for selling in such a situation becomes very high. This is true, especially for the option traders. There have been many instances in the past two weeks where the hedges (stop loss) did not work; options became illiquid and even the hedged trades could not be squared; and small and midcap stocks hit lower circuits and could not be sold. If a larger correction begins in the market due to whatever reason, the losses to traders could be much more than usual.

For the record, YTD 2024 - Nifty50 is higher by ~3%; Bank Nifty is higher by ~1%; Nifty Midcap100 is up ~9.5%, Nifty Next 50 is higher by ~21% and Nifty Smallcap100 is higher by ~11%. Rationally speaking, the scope for correction is equal in the large cap and smallcap space that has seen sharp outperformance; and banking that has been weak even in good times. However, given the tendency of liquidity to dry fast on the first sign of correction, the potential losses (Value at Risk) are much higher in broader markets.

Gold prices hit an all-time level in April and have corrected marginally since then. Again, this is the time when self-proclaimed investment gurus commemorate Indian households, especially the women, who have traditionally parked their savings in gold ornaments. They highlight how the uneducated and unaware “mothers” have managed to earn more return than savvy investors who invested in index funds etc. In my view, this narrative is completely flawed and does not merit any comment.

The all-time high gold prices in international markets have also triggered a deluge of reports forecasting a strong performance of gold in the coming years. The key arguments in favor of a strong rally in gold prices are (i) technical breakout; (ii) central banks amassing gold reserves in anticipation of the diminishing role of USD in the global economy; and (iii) the Dilemma of the Bank of Japan whether to protect bond yields or Yen. The traders have however pointed out that the higher gold prices are currently supported by the strong investor demand from China. The gold imports, other than the central bank buying, into China, have surged sharply in recent months and so have the trading volumes of gold in China.

In my view, gold is a declining asset and as such should offer sub-optimal returns in the decades to come. Particularly, for investors in a fast-growing economy like India, investment in gold makes little sense for household investors. It may be a bad idea for Indian investors to emulate their Chinese peers and invest in gold. Those advising Indian investors to invest a material part of their wealth (10% or more) in gold, because gold prices are likely to move higher due to buying by central banks and Chinese consumers/investors must consider the following:

·         Chinese households are much richer and more protected as compared to Indian households. China’s per capita GDP (US$13136) is almost 5x of India’s per capita GDP (US$2731). Chinese households enjoy much more social security and a higher standard of basic amenities like education and health.

·         The Chinese economy (US$18trn) is 5.3x in size as compared to the Indian economy (US$3.4trn). It is expected to remain much larger than India for the next 50 years at least, despite slower growth.

·         China has forex reserves of US$3.23 trn as compared to India’s US$640bn. Though both countries have reserves close to 18% of their respective GDP, India runs a current account deficit of appx. US$100bn as compared to current account surplus of US$253bn for China. China needs to diversify from US and European treasuries and USD assets to protect its reserves from depreciating. For now gold is one of the popular option for it. India on the other hand does not have similar needs, given our current account deficit.

·         The per capita income in China has grown at a CAGR of 6.1% over the last decade. In this decade, Chinese equities have provided a CAGR of 3.5% and real residential prices have barely risen. Whereas Gold in CNY terms has yielded a CAGR of 7.75%. However, for Indian investors, per capita income has grown at a CAGR of 5.3%, real property prices have grown 1.1% and equities have yielded a return of 11.4 CAGR. Chinese investors therefore have reasons to buy a hedge against inflation and negative real rates. The Indian investors on the other hand have little reason to diversify from high-yielding equities and positive real rate offering debt. Besides, they need to invest heavily in their education and health, unlike their Chinese peers.

In the past few years, I have seen numerous wealthy families worrying about Estate Duty and making plans to preempt it. Some of the richest families in the country have relocated their wealth offshore to more convenient tax jurisdictions like Singapore, UAE, Luxemburg, etc., in anticipation of the imposition of Estate Duty or Inheritance Tax in some form.

Estate Duty has however not been an election issue ever since it was abolished in 1985.

Historical context

In India, the Estate Duty Act (EDA) was implemented in 1953. The EDA imposed a tax obligation on the inheritors of property from a deceased person. The tax was imposed if the current value of the property (excluding the exempted properties) of a deceased person exceeded Rs one lac at the time of passing over. The rate of duty ranged between 7.5% to 85%. The palpable objective of imposing the Estate Duty was to mitigate the massive economic inequalities prevalent in the country at the time of independence. A handful of large wealthy families controlled most of the businesses, agricultural land, and real estate. Abolition of the Privy purse, imposition of land ceiling, and nationalization of banking, insurance, and coal mining businesses, etc. were some other measures taken in the 1960s and 1970s, inter alia, for redistribution of wealth and mitigating socioeconomic inequalities.

However, given the complexities and high cost of enforcing EDA, the Act was abolished in 1985 as part of the larger tax reform strategy. For context, in the financial year 1984-85, only Rs20cr were collected as Estate Duty (0.4% of the total direct tax revenue) at a huge cost and numerous litigations. This was also the period in time when the marginal rate of income tax was capped at 50%.

International Scenario

It is pertinent to note several developed countries impose inheritance tax to mitigate inequality and to facilitate economic redistribution of wealth. For example—

·         England imposed Estate Duty in 1894, claiming that the title of the State to a share of the accumulated property of the deceased is anterior to that of the interest to be taken by those who are to share it. Presently, the UK imposes an Estate Duty of up to 40% on inheritance value exceeding £ 325,000. If the estate is given to the children or grandchildren, the threshold increases to £ 425,000.

·         The US imposes an inheritance tax at a rate of up to 40%, on inheritances exceeding $5.49 million per person for 2017.  The exemption gets doubled to $10.98 million for married couples filing joint tax returns. Besides the estate tax (a federal tax) several states have a state-level estate tax over and above the federal limit.

·         In France, the estate tax rate is varied between a minimum of 5% to a maximum of 60% with several tax slabs in between. There is a condition, whereby, if the beneficiaries are children or parents of the deceased, and the value of taxable inheritance (after permitted deduction) is up to € 8,072, the tax rate is 5%. Whereas, if the value of taxable inheritance is above € 1,805,677, the tax rate is 45%. If the beneficiary does not fall within the category of children, parent, brother, sister, nephew or niece, the taxable inheritance (after permissible deduction), is taxed at the rate of 60%.

·         In Japan, the estate tax rate ranges between 10% to 70%; in South Korea, the estate tax rate is up to 50%; in Spain it varies between 7.65% to 34%.

The short point is that the state taking a part of the estate of a deceased person for a larger social benefit is considered an acceptable norm for long. This practice has strong moral, economic, and social arguments in its favor. Of course, the inheritors who are subjected to this tax do not like it – but then who likes to pay taxes and duties anyway?

The most common argument against inheritance tax is that it is unfair because it is a form of double taxation.

Current narrative is mostly rhetorical

In the current context, I find the debate in India mistimed, misplaced, misinformed, and hence rhetorical. Firstly, it is mistimed as we do not have any concrete proposal on the table to discuss. Secondly, the current debate is misplaced since it does not seem to be distinguishing between income and wealth. Inheritance tax is essentially on accumulated wealth that is passed to others on the demise of the owner. Third, it is misinformed since the proportion of the population that could potentially be impacted by inheritance tax is much less than 1% of the total population.

As per the latest World Inequality Lab report, the bottom 50% of the 922 million Indian adults earn about Rs71000 per year or less than Rs6000 per month. Only the top 10% of the adults earn more than Rs25,000/month. The top 1% of adults earn more than Rs1,73,000/month.

From an accumulated wealth viewpoint, the top 10% of adults have an accumulated wealth of Rs 22,00,000 or more. If one has accumulated wealth of more than Rs 1 crore, such a person would be amongst the top 1% of the adults in India. The average wealth of the top 1% of adults is Rs5.4 crores.

Note that inheritance tax with a threshold exemption of Rs36 crores, would cover less than one lac people in a country of 140 crores.

The authors find most macroeconomic parameters positive and growth-supportive. The two areas of concern are climate and geopolitics. Overall, the global economy, and particularly the Indian economy, is stable and oriented towards resilient growth in 2024.

Some of the noteworthy points in the article could be listed as follows:

Global economy

Growth: Global growth remains resilient despite geopolitical challenges and extreme weather event risks. In its latest world economic outlook (WEO April 2024), the International Monetary Fund (IMF) raised the global growth forecast for 2024 to 3.2%, 10 bps higher than its January 2024 Update, and expected the global economy to grow at the same pace in 2025 in also. Advance Economies (AEs) are now expected to grow by 1.7% in 2024 against the forecast of 1.5% in January. Emerging Market and Developing Economies (EMDEs), the forecast has been revised up by 10 bps to 4.2%.

In March 2024 The global manufacturing PMI accelerated to its highest reading since July 2022 as new orders, output, and employment expanded. The manufacturing component reached a 20-month high; the services export orders index has remained in expansionary territory since January 2024.

Inflation: Headline inflation receded significantly from levels recorded a year ago in most economies, although it remained above targets. The global headline inflation is expected to fall from an annual average of 6.8% in 2023 to 5.9% in 2024 and further to 4.5% in 2025 (both revised up by 0.1 percentage points from previous projections), with AEs returning to their inflation targets sooner than EMDEs.

Consumer sentiment: Consumer sentiments continued to improve across geographies as inflationary pressures receded from year ago highs, supported by broadly stable employment prospects. Financial conditions remained accommodative on the back of strong equity market performance.

Trade: According to the UNCTAD Global Trade Update of March 2024, global trade is expected to gain momentum in 2024 after a decline of 3% in 2023. WTO in its Global Trade Outlook and Statistics – April 2024 projected world merchandise trade volume to grow by 2.6% in 2024 and 3.3% in 2025, following a larger-than-expected decline of -1.2% in 2023.

Monetary policy: Major central banks, especially in AEs, remained cautious, balancing the risks of cutting too soon against maintaining a restrictive stance for too long and hurting economic activity with financial stability risks. Most AE central banks held their policy rates constant in their latest meetings.

Treasury yields and mortgage rates are ticking up in major economies as expectations of interest rate cuts are being pared.

FDI Flows: A recent UNCTAD report estimated a modest rise in global FDI flows in 2023 over 2022, driven by two European countries (Luxembourg and Netherlands); however, excluding these countries, global FDI flows declined by about 18% in 2023. Amidst an uncertain global investment environment, India held its position as a favourable investment destination among peer Asian economies in 2023. India ranked fourth among EMEs in the 2024 FDI Confidence Index, reflecting continued optimism over its growth potential.

Domestic economy

The Indian economy continued to exhibit resilience amidst external headwinds which led to the build-up of supply chain pressures. Consumer confidence strengthened across parameters set out in the RBI’s latest survey of households. Enterprise surveys indicate that business assessment and expectations remain in positive terrain, with optimism on production, capacity utilisation (CU), order books, employment and overall business conditions. According to the economic activity index (EAI), economic activity remained resilient in Q4:2023-24, although available data indicate some moderation in March vis-à-vis the previous month on a seasonally adjusted basis.

Growth: The conditions are shaping up for an extension of the trend upshift that took the average real GDP growth above 8% during 2021-24. In order to achieve its developmental aspirations over the next three decades, the Indian economy must grow at a rate of 8-10 per annum over the next decade to reap the demographic dividend that started accruing from 2018 and, as calculations show, will last till 2055.

The domestic economic activity remains resilient, backed by strong investment demand and upbeat business and consumer sentiments. Headline inflation has come off the December peak; however, food price pressures have been interrupting the ongoing disinflation process even as shocks from adverse climate events and geopolitical tensions add uncertainties to the outlook. The Monetary Policy Committee of RBI, in its last meeting, projected real GDP growth for 2024-25 at a robust rate of 7%.

High-frequency indicators point to sustained momentum in domestic demand conditions in March 2024. As per the data from the Centre for Monitoring of Indian Economy (CMIE), the all-India unemployment rate (UR) fell to 7.6% in March, declining across both urban and rural regions. Agricultural prospects are expected to receive a boost amidst the IMD’s forecast of an above normal monsoon.  Construction sector indicators reflected sustained growth in steel consumption and cement production. Available high frequency indicators for the services sector exhibited an optimistic picture in March 2024.

Inflation: Headline inflation moderated to 4.9% in March 2024 from 5.1% in February 2024. Core inflation eased further to 3.3% in March from 3.4% in February, the lowest in the current CPI (2012=100) series. The moderation was broad-based, with inflation softening across various sub-groups barring personal care and effects, and recreation and amusement. In terms of regional distribution, while CPI-rural inflation increased by around 10 bps to 5.4% in March, CPI-urban inflation moderated by 64 bps to 4.1%. Most of the states continued to record inflation in the range of 4-6%.

Food price uncertainties continue to weigh on the inflation outlook with the increasing incidence of climate shocks a key upside risk for food prices. Cost push pressures faced by firms are showing an upward bias and the recent firming up of international crude oil prices poses an upside risk to the path of inflation going forward. CPI inflation for 2024-25 is expected to be 4.5% with risks evenly balanced.

Financial Conditions: Liquidity conditions eased in March, with net liquidity adjustment facility (LAF) [including marginal standing facility (MSF)] injection narrowing to ₹0.29 lakh crore from ₹1.78 lakh crore in February 2024. Increased government spending and the RBI’s market operation smoothed system liquidity. While the buildup of government cash balances on account of GST collections and advance tax payments tightened liquidity intermittently, liquidity conditions turned into surplus towards March-end and early April in response to the increase in government spending. Overall, the Reserve Bank injected ₹4.16 lakh crore cumulatively into the banking system during March 16 - April 19, 2024.

Reflecting these liquidity developments, the weighted average call rate (WACR) – the operating target of monetary policy – has remained within the policy corridor since the February policy meeting, barring the usual year-end spike.

Across the term money market segment, yields on 3-month treasury bills (T-bills), certificates of deposit (CDs) and commercial papers (CPs) for non-banking financial companies (NBFCs) eased towards end March and early April. The average risk premia in the money market (3-month CP minus 91-day T-bill) reduced to 98 bps during March 16 – April 19, 2024 from 141 bps during February 16 - March 15, 2024. While short-term rates moved in tandem with the evolving liquidity developments, long-term rates remained largely stable. Corporate bond yields generally softened and risk premia narrowed during March 16 to April 19, 2024.

External conditions: India’s foreign exchange reserves reached an all-time high of US$ 648.6 billion on April 5, 2024. As on April 12, 2024, India’s foreign exchange reserves stood at US$ 643.2 billion, sufficient to cover for 99% of total external debt outstanding at end-December 2023.

India’s current account deficit (CAD) improved to 1.2% of GDP in Q3:2023-24 from 1.3% in Q2:2023-24 and 2.0% in Q3:2022-23. Robust services exports and strong remittance receipts eased merchandise import pressures on the current account in Q3:2023-24. Net capital inflows exceeded the CAD, supported by robust FPI and banking capital, leading to an accretion of foreign exchange reserves on a balance of payment (BoP) basis (excluding valuation effects) to the tune of 6.0 billion during the quarter.

At end-December 2023, India’s external debt stood at US$ 648.2 billion; the external debt to GDP ratio declined to 18.7% at end-December 2023 (at end-September 2023 it was 18.8%). India’s external sector exhibited resilience, indicated by sustainable levels of key vulnerability indicators at end-December 2023.

Currency: The Indian rupee (INR) depreciated marginally by 0.04% (m-o-m) vis-à-vis the US dollar in March 2024 while remaining one of the least volatile major currencies.

Climate challenge

Global weather agencies are in agreement that March 2024 was the warmest March since record-keeping began in 1850 – global surface temperature was at 1.6 degrees Celsius (3.01°F) above the 1880-1899 period.

The World Meteorological Organisation (WMO) sounded a red alert about global warming in its latest report “State of the Global Climate 2023”, stating that there is a high probability that 2024 will breach the threshold set in 2023 as the hottest year on record even as the world careens towards a freshwater shortage crisis. According to the WMO report, “data from the Indian Meteorological Department (IMD) reflects a worrying escalation in extreme weather events necessitating an urgent and collective response.”

Central bank conundrum

Central banks continue to speak in cautious tones about growth prospects in 2024 as they deal with the interest rate conundrum. Regime shifts are underway in the form of exits from negative interest rates and their unintended consequences. Expectations of interest rate cuts are being pared where they have not yet commenced in recognition of the risk of moving too fast and turning disruptive if inflation moves up again with the lift provided by buoyant economic activity. Switzerland became the first AE to cut interest rates, reflecting a wariness of currency appreciation and an eagerness to join the growth party, given that inflation is well within the tolerance band.

I would like to share some of my impressions gathered from my numerous interactions with a variety of investors and traders - from very small ones to ultra-high networth; from frequent and short-term traders to long-only investors; from highly educated to less educated; professionals, businessmen to salaried; metro residents, tier2 & 3 town residents to semi-urban residents, etc.

·         The understanding of equity derivatives is poor and misplaced. Most investors/traders assume Futures and Options to be speculative instruments only. They are mostly unaware of the hedging function of the equity derivatives. The intermediaries are playing a negligible role in promoting this awareness. Often their role is limited to making the clients sign complicated and illegible risk disclosure documents and posting some elementary guidance material on their websites.

·         Contrary to popular belief, a significant number of traders are looking to buy precious metals (gold and silver) for short-term trade.

·         The knowledge about precious metal market dynamics is abysmal amongst investors. Most people are buying gold and silver based on preconceived notions or word of mouth. Silver in particular is a strange case. Very few people have previous experience of buying or holding silver as an investment or trade. Given the complications in owning silver in physical form, most of them are looking at buying silver derivatives. Only a few are aware of Silver ETF etc.

·         Cryptocurrencies are becoming a normalized trading option for young participants. Notwithstanding the regulatory limitations and frequent cautionary statements from the regulators, a large number of urban youth have taken to trading in cryptocurrencies. A large number of young traders are trading in cryptocurrencies on the advice of unregulated and unauthorized advisors. Their understanding of the underlying currencies is almost zilch. There is no effort from any side to create awareness about the cryptocurrency.

·         A large number of household investors have been advised to allocate a larger proportion to bonds to benefit from anticipated rate cuts. Some of these investors are edgy as the narrative is moving away from “imminent cuts” to “cut or not to cut”.

I clearly remember in the 1980s and 1990s a large majority of Indian households believed investing in equities to be akin to gambling. They avoided investing in equities and preferred bank deposits. In the 2000s awareness about equities started to grow. New-age businesses, especially IT service companies and financial services firms, which paid a significant part of remuneration to their employees in the form of stock options, made equities an essential part of many middle-class households. The cult has been growing ever since.

However, in recent times, I am finding the fears of the 1980s generation are now coming true. Trading in equities, precious metals, bonds, etc. is increasingly becoming akin to gambling.

In July 2023, the then President of BRICS, South Africa claimed that over 50 emerging nations have expressed their desire to join the group. Recently, Russia’s Federation Council Committee on International Affairs, stated that BRICS would be expanded further as more than 40 countries are desirous of joining the group.

The cooperation between BRICS members is free, and flexible and extends to a variety of subjects of common interest amongst members. The members and other countries desirous of joining the group, view BRICS as an alternative to global bodies viewed as dominated by the traditional Western powers and hope membership will unlock benefits including development finance, and increased trade and investment.

Defining the vision of BRICS, President Putin said, “BRICS is attracting an ever increasing number of supporters and like-minded countries that share its underlying principles such as sovereign equality, openness, consensus, aspiration to form a multi-polar international order and a fair global financial and trading system.

The expansion and strengthening of BRICS could, therefore, be interpreted from different perspectives. From the geopolitical perspective, it could be seen as a vote of no-confidence in the extant global order, dominated by Western developed countries (especially the US), by the emerging economies. A larger BRICS could undermine the dominance of NATO, the UN, and even the IMF.

From India’s perspective, it could act as a strong resistance to any material escalation between India and China. We have already seen the traditional rivals Iran and Saudi Arabia bridging the differences and coming together on the Palestine issue. We have also witnessed ineffectiveness of the NATO sanctions against Russia over the Ukraine invasion issue. BRICS and other developing countries have increased their trade with Russia materially in the past couple of years, as reflected in a larger current account surplus for Russia.

From an economic perspective, a larger and stronger BRICS could play a significant role in determining the terms of global trade. Its present and prospective members would control a significant proportion of the global human, mineral, and manufacturing resources. Besides, helping in securing better terms of trade, ensuring energy security is seen as another key advantage of a stronger and larger BRICS.

From a financial perspective, post global financial crisis, a large number of developing countries have reported a slowdown in financial aid from developing countries. The conditions appear to have deteriorated further post the Covid-19 pandemic. A deeper and wider cooperation between the enlarged BRICS grouping, the humanitarian aid to the developing nations could be restored.

From a monetary perspective, there is an intense debate about limiting the role of USD in global trade. A BRICS agreement on adopting a common independent currency or increasing the bilateral trade in local currencies could help in achieving this objective. There is strong evidence of a material rise in yen trade between Saudi Arabia-China and Russia and China. India has also made some advances in promoting INR trade with traditional trade partners like UAE and Russia. We might see more developments on this front in the next couple of decades.

These may be the early days to term BRICS as a foundation for change in the post-USSR unipolar global order to a multipolar world order that shall facilitate much-delayed reforms in the global institutions like the UN and IMF etc. Nonetheless, the developments are encouraging and offer hope.

Everyone who has traded stocks or crypto for three months is now an expert. They not only try to influence other investors/traders by giving unsolicited advice and recommendations; but also get influenced by the advice/recommendations of others who may not be any better than them. Sometimes it appears that there are more experts in the market than the actual number of investors and traders. Unfortunately, this is the situation worldwide.

Misallocation of capital and unwarranted and avoidable losses are some natural consequences of this phenomenon. However, a more significant consequence is a diminution of traditional correlations.

A multitude of market influencers is driven by individual positioning as against a conceptual understanding of finance and economics. There are no dominating views in the markets. Each influencer is influencing multiple traders and also getting influenced by multiple other influencers. Since more positions are driven by intuitions rather than fundamentals, the divergence between market prices and fair values is wider, and lasting much longer.

For example, consider the following:

Gold and bonds are trading in opposite directions. Gold, traditionally considered a hedge against a drop in real rates, started firming up in 2022. However, now that 2024 rate cuts are getting dropped from foreca500sts, gold has given its best 2-month performance in decades.

This divergence of gold from real rates, against the historical trend, is being explained from a variety of angles. Some believe that a US sovereign downgrade may be imminent. Others explain this as a move away from USD in a worsening geopolitical scenario. However, the equity positioning and tech valuations do not corroborate any of these views.

Similarly, equities and rate expectations are also diverging against the historical trend. In the past six months, S&P500 has rallied 25% despite hopes of 2024 rate cuts fading fast.

Recently, Jamie Dimon, CEO of JPMorgan, was quoted as saying, “We are prepared for a very broad range of interest rates, from 2% to 8% or even more”. Larry Summers, Former Treasury Secretary, a very reputable name in financial markets also said, “You have to take seriously the possibility that the next rate move will be upwards rather than downwards”. Michelle Bowman, FED Governor, also said, “I continue to see the risk that at a future meeting, we may need to increase the policy rate further should progress on inflation stall or even reverse."

But no one appears to be listening to these experts. Professional TikTokers are getting more attention than them. I will not be surprised if the people who trade on their advice learn some basic investing lessons paying a heavy price.

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

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

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

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

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

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

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

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

However, if we juxtapose the statistics of GDP growth and infrastructure development with the following, we get a different picture.

·         India carries the highest number of people suffering from tuberculosis (TB). In the year 2022 alone, about 2.8 million new cases of TB were registered in India. Out of these 342000 reportedly died due to the disease. India is popularly termed as the TB capital of the world. (Read here)

·         India has over 100 million confirmed diabetes patients and 136 million pre-diabetics. the number of diabetic cases has increased by 44 percent during 2019-2023, from 70 million affected people in 2019. (Read here)

·         Some reports have stated that one-third of the Indian population may be pre-diabetic, two-thirds population may be pre-hypertensive, and one-tenth population may be suffering from mental disorders like depression. India is also known as the diabetes capital of the world.

·         A recent report has also declared India as the cancer capital of the world, with the country experiencing the fastest increase in cancer cases. The most common cancers in order of occurrence in India are breast cancer, cervix cancer, and ovarian cancer among women. For men, the most common cases are instances of lung cancer, mouth cancer, and prostate cancer.

In 2020 India had 1.39 million cases of cancer. This number is expected to grow to 1.57 million in 2025. The median age for cancer diagnosis is 52 years for breast cancer and 59 years for lung cancer. 30% of colon cancer patients are less than 50 years of age.

·         Cardiovascular diseases (CVD) have become an epidemic in India. At least 27% of deaths in India are caused by CVDs. (Read here)

·         The present total fertility rate (TFR) of India is estimated to be 1.91 (year 2021). It is well below the universally accepted replacement rate of 2.1; implying that India’s population is likely to peak in the next two decades and begin to decline. TFR is projected to decline to 1.29 by 2050 and slip further to 1.04 by 2100. (Read here)

·         As per the India Skill Report 2021 the employability quotient of Indian graduates is disappointing. Among the formally educated, employability is less than 50% across the board. About 47% of B Tech, 47% of MBA, 43% of BA, 40% of B Com, and 30% of BSc graduates had employable skills. Only 22% of MCA degree holders could be considered employable.

To me, this implies that India is losing its demographic dividend very fast and ahead of full realization. We are racing fast to become an old, depressed, and sick nation by 2050, instead of a young, vibrant, and progressive nation. There is something wrong with our development model. Celebrating GDP statistics and driving into complacency may not be a good idea. The urgent need for all stakeholders is to sit together and make radical corrections to the extant development model. For now, I do not see any hint of this in any of the election manifestos released so far.