Do it yourself

A veteran investor recently recommended investors to buy “bruised blue chips”. He was purportedly referring to the consumer goods manufacturers that have underperformed in the year 2024. For reference, Nifty FMCG index is down 0.3% YTD2024 against ~14% rise in Nifty50. Historically in India, the FMCG sector had mostly outperformed the benchmark indices. Intermittent short periods of underperformance were traditionally seen by the long-term investors as an opportunity to buy/add FMCG stocks to their portfolio.

However, the trend seen in the past one decade (reasonably long period in my view) seems to be defying this conventional wisdom. Since 2014, Nifty FMCG has yielded a return of ~236% against a rise of 305% in Nifty 50. Thus, the conventional wisdom of preferring consumer goods manufacturers may not have been a great investment strategy, even accounting for the higher dividend yield in consumer stocks.

In my view, the underperformance of traditional FMCG blue chips is structural and may continue in future also. There are several factors which support this view of mine. For example—

·         I believe that in the Indian consumer market, the balance of power has shifted from the large pan India producers/brand owners (mostly colonial era legacy monopolies) to technology partners (e.g., Quick Commerce, Ecommerce), logistic partners (Modern Retail, Warehousing, Transportation, Payments), regional producers/brand owners (especially for ready to eat food and snacks catering to local tastes and dairy), financiers (consumer finance), scaled up ancillary units catering to multiple brands (contract manufacturing, packaging, digital marketing etc.). The scalability, growth prospects and profitability are much higher in most of these new/emerging “consumer” businesses.

·         The composition of the spending on FMCG basket has seen a conspicuous shift in the past one decade. The current FMCG basket includes a large portion of consumer services, e.g., Data, Food Delivery Services, Beauty and Personal Care Services, Healthcare (Diagnostics, Insurance, Clinic), Air Travel, Quick Service Restaurant (QSR), etc. The share of goods, earlier considered discretionary, like Alcohol, Transportation and Cooking Fuel, Packaged Ready to Eat Food, Fashion Accessories, etc. has also increased materially in the middle-income households’ non-discretionary consumption basket.

·        It is estimated that the share of the items traditionally considered “discretionary” in the India consumption basket may increase 3x from 13% in 2000 to 39% in 2030. The stock market is obviously interested in growth (discretionary consumption), moving away from de-growth (staples).

·         In a few years, some of the food delivery services providers, quick commerce platforms, QSR chains, beverage bottlers, traditional sweets & snacks brands may become bigger, more popular and fit the “Buffet Investment Criteria” better than the traditional FMCG brand owners/producers.

I shall therefore not be in a hurry to buy the 2024 underperformers; for some of these might be damaged, not just bruised.

Also read:

The Reserve Bank of India (RBI) recently released the results of its latest forward-looking surveys (November 2024 Round). Based on the feedback received from the respondents the survey results provide important insights with respect to consumer confidence, inflationary expectations and economic growth expectations.

Consumer confidence – Present tense, hopes high for future

The survey collects current perceptions (vis-à-vis a year ago) and one year ahead expectations of households on general economic situation, employment scenario, overall price situation, own income and spending across 19 major cities.

As per the survey results, Consumer confidence for the current period declined marginally owing to weaker sentiments across the survey parameters except household spending. The current situation index (CSI) moderated to 94 in November 2024 from 94.7 two months ago. (A value below 100 indicates a state of pessimism)

However, for the year ahead, consumer confidence remained elevated, improving 50bps from the previous round of Surveys. Households displayed somewhat higher optimism on one year ahead outlook for major economic parameters, except prices. The future expectations index (FEI) stood at 121.9 in November 2024 (121.4 in the previous survey round).

The respondents’ sentiments towards current earning moderated marginally, they displayed high optimism on future income which was consistent with their surmise on employment conditions. Households anticipated higher spending over one year horizon on the back of higher essential as well as non-essential spending.

Household inflationary expectations rise

Households’ perception of current inflation rose by 30bps to 8.4%t, as compared to the previous survey round. Inflation expectation for three months horizon moderated marginally by 10 bps to 9.1 per cent, whereas it inched up by 10 bps to 10.1 per cent for one year ahead period.

Compared to the September 2024 round of the survey, a somewhat larger share of respondents expects the year ahead price and inflation to increase, mainly due to higher pressures from food items and housing related expenses. One year ahead, the price expectation of households is closely aligned with food prices and housing related expenses.

Male respondents expected relatively higher inflation in one to three months, as well as one year ahead, as compared to the female respondents.

GDP: Real gross domestic product (GDP) is expected to grow by 6.8% in 2024-25 and 6.6% in 2025-26. Forecasters have assigned the highest probability to real GDP growth in the range 6.5-6.9% for both the years 2024-25 and 2025-26.

Annual growth in real private final consumption expenditure (PFCE) and real gross fixed capital formation (GFCF) for 2024-25 are expected at 6.2% and 7.9% (revised down), respectively. Real gross value added (GVA) growth projection has been revised down marginally to 6.7% for 2024-25 and kept unchanged at 6.4 per cent for 2025-26.

 Inflation: Annual headline inflation, based on consumer price index (CPI), is expected to be higher at 4.8% for FY25 and 4.3% for FY26.

External sector: Merchandise exports and imports are projected to grow at a slower rate of 2.4% and 4.6% respectively in FY25 and recover to 5.5% and 6% respectively in FY26, in US dollar terms. Current account deficit (CAD) is expected at 1.0% (of nominal GDP) during both FY25 and FY26.

The two-decade period between 1988-2008 saw the most remarkable progress in the sphere of international relations and collaborations. The technological developments made global trade faster and cheaper, aiding global businesses to collaborate with distant partners to optimally exploit their core competencies to materially enhance productivity. End of the Cold War and fall of the Berlin Wall led to nearly full integration of global economies and unprecedented growth in global trade.

Notwithstanding a marked slowdown in the past few quarters, the Indian economy has managed to grow at a decent pace in the current global context. Though India may have lost the crown of the fastest growing global economy to Vietnam, it still remains the fastest growing amongst the top 10 global economies.

The Reserve Bank of India is holding US$658bn in forex reserves, which is considered adequate in normal circumstances or even in a usual cyclical slowdown. Despite accelerated selling in equity markets by the foreign portfolio investors (FPIs), the current account deficit of ~1.5% of GDP, is conveniently manageable. INR has been one of the most stable emerging market currencies. On the real effective exchange rate (REER) basis INR is presently ruling at a five-year high level.

In their recent policy review, the Monetary Policy Committee (MPC) of the Reserve Bank of India has cut growth estimates for FY25 by 60bps to 6.6% and 1QFY26 by 40bps to 6.9%. The MPC has also hiked their inflation forecast for 2HFY25 and 1QFY26. The RBI estimates are still few basis points higher than the average estimates of professional forecasters, as per the RBI’s recent survey. It is therefore likely that growth slowdown extends well into 1HFY26.

RBI has once again made it clear that it is not comfortable about the inflation trajectory and would prefer to outweigh price stability against growth in its policy dynamics. In the recent meeting, the two external members of the MPC voted in favor of a 25bps repo rate cut, but the RBI’s official nominees voted to maintain a status quo, despite loud growth concerns and political rhetoric for monetary easing.

The market consensus seems overwhelmingly in favor of a February 2025 repo rate cut. This assumes growth staying in the slow lane; lower food and energy inflation; and fiscal improvement as promised in the union budget for FY25. We need to watch for development of La Nina, adversely impacting the Rabi crop; slowdown in tax collection and rise in cash subsidies due to election promises adversely impacting the fiscal disincline. Compensating higher subsidies with a cut in capital expenditure (as has been the case in 1HFY25) would further slowdown the potential growth, making any monetary easing more inflationary.

At the surface level there is nothing that would ring alarm bells for domestic investors. However, some of the recent actions of the RBI are reminiscent of the 2013 crisis period. The monetary policy is increasingly sounding like a plan to secure the stability of USDINR.

I wonder if RBI is really worried or it is just cautious and taking preemptive steps to mitigate any chance of a balance of payment crisis and/or currency volatility.

I have taken note of the following data points; and at the risk of being labeled unnecessarily paranoid, I would keep a close watch on these for the next few months to assess any vulnerability in India’s external sector.

·         There has been a marked slowdown in foreign flows -both portfolio flow and FDI flows in the past one year. The political changes in the US and Europe may further impact the flows in 2025. RBI may not want to further discourage flows by offering lower bond yields. For record, the India10y-US10y yield spread has already fallen from a high of 350bps in January 2024 to ~250bps.

·         RBI has created a record short position in USD (over US$49bn in forward market) in the past couple of months to protect USDINR; besides running down Fx reserves by ~US$47bn in just one month (from US$705bn in October 2024 to US$658bn in November 2024)). It has taken almost US$96bn to keep USDINR stable in the 83-50-84.50 range.

It is critical to watch this because:

The global trade war could escalate, before it settles after the inauguration of President Trump. This could slowdown global trade; lead to China dumping on non-US trade partners; slowdown in remittances and services exports to some extent.

As the denominator (nominal GDP) goes down and exports also slow down, the current account deficit may show a tendency to rise, pressuring INR. The RBI cannot afford to spend another US$100bn on defending USDINR.

RBI has hiked the ceiling on interest rates offered by scheduled commercial banks on foreign currency deposits of NRIs. This is an early sign of the RBI worrying about Fx reserves. Any measure to limit foreign spending, investments (outward FDI) and LRS remittances will confirm these fears.

Presently, FPIs own about US$650bn worth of Indian equities, which is equal to official fx reserves of India. A US$12bn (appx 1.75% of total holding) sale in the past couple of months has caused some damage to the market sentiments. A 5% selling (US$35bn) could seriously damage equity markets, currency markets and RBI’s gameplan. Remember, on an average, we are running a ~US$20bn/month trade deficit; and a net external debt of over US$682bn. In a crisis situation, US$658bn reserves might not prove to be adequate.

·         President-Elect Trump and some of his designated team members have explicitly termed India a “currency manipulator” and demanded RBI to strengthen USDINR. If RBI is forced to meet these demands, it may need to unwind its short USD position, conduct aggressive OMO to buy USD from the market, and engineer higher yields (bond and/or deposits) to attract more USD flows into India. This could make maintaining current account balance a challenging task. Especially in an environment, where China could be dumping everything in the global markets, and competitors like Vietnam, Indonesia, Philippines, Turkey are becoming very aggressive.

If you find it confusing, impertinent, misplaced, let me sum this up in short for you. I would prefer to totally avoid macro trades in 2025, and stay committed to individual business stories that I like.

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.

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. 

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)

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?

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.

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.

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.