Vijay Kumar Gaba

I travelled to the Agra, Aligarh and Bareilly divisions of the state of Uttar Pradesh last week. Holi being the principal festival of these regions, it was the peak season of festivities in these areas. Since, in the past two years, the Covid pandemic impacted the festivities to a great extent; this year’s celebrations were particularly enthusiastic. A good sugarcane and bumper wheat crop added to the farmers’ delight. Poor realization for potatoes was a little dampener.

The elections to the state assembly have just concluded and the new government is yet to be formed. Both the principal political parties, the BJP and SP, have performed well in the elections. So the political leaders and workers were also seen celebrating with fervor.

Broadly, the aerial socio-economic view of the region appeared quite ebullient and promising.

There are few observations that I would like to share with the readers. These observations are relevant for understanding some popular political narratives, and more important, understanding the (un) relationship of politics and economics.

I have been travelling to Bareilly from Delhi for the past 25years, at least 4 times a year. In late 1990s, the distance of 260kms used to take 8 to 9 hours by road and more than 7 hrs by train in normal course. The highway was a single road (without a divider) and the train route was not electric. We had to pass through cities like Hapur, Moradabd, and Rampur. Crossing Ghaziabad district was a nightmare even till a few years ago. There were five railway crossings on the way. On a bad day, each crossing could take 30-40 minutes to cross. Travelling in daytime would mean 30-60minutes of time to cross Hapur and Moradabad cities. On the way we had to cross the river Ganges at Garh Mukteshwar, which had a narrow bridge, barely sufficient for two buses to cross each other. One overladen truck, bullock cart or tractor trolley would mean one hour of jam. A vehicle breaking down on the bridge would mean 6 to 8hrs of traffic jam and a 30-50km detour through nearby villages using unpaved roads. In the Bareilly city 5-6hrs of power cut was considered normal. On bad days the power cuts would last 10-12hrs.

The highway being a single road, it was a constant struggle to save one-self from road transport bus drivers, who for some unknown reason were always in a tearing hurry, and enjoyed scaring the traffic coming from the opposite side. The trucks were mostly overloaded with sugar cane, fodder, food grains or perilously hanging steel rods. Almost every person driving a personal vehicle had the James Bond like driving skills, for dodging the cattle freely crossing the roads; transport buses swirling like missiles; bullock carts strolling in the middle of the road; and big potholes in the middle of the roads. Driving at night was particularly challenging.

Things started improving towards the end of the millennium. Construction of Moradabad bypass road obviated the need to cross the crowded city. An Inland Container Depot (ICD) in Moradabad was set up and the project to widen the highways to 4 lanes was undertaken. Bridges were made on numerous intersections on the highway. Then Hapur bypass was constructed. The rail route was electrified to increase the speed of trains. Then the highway was further widened to 6 lanes and rail over bridges were built over all railway crossings. A new wider bridge was built on Ganges to avert traffic jams. The Delhi Merrut Expressway has made the drive on Delhi-Hapur section a breeze.

The journey now is much safer and faster. The travel time now is about 5hrs, both by road and train. More importantly, this 5hr is highly predictable since there are very low chances of a traffic jam on railways crossing or bridge.

The power availability has improved significantly in past 25years with completion of plants like Rosa (1200MW), Anpara units 6 to 9 (2200MW). The availability of power also increased from the Tehri hydro project. The distribution of power was privatized in the region, resulting in better distribution infrastructure (fewer breakdowns) and lower losses.

Similarly, the Noida Agra expressway, Agra Lucknow expressway, Lucknow Faizabad Expressway and numerous other highways and infrastructure projects have been undertaken and completed in the state in the past 25years.

The most significant development project in the state has been the focus on girl education. Significant monetary and other incentives have been provided for the primary, secondary and higher education of girls, especially the girls from minority and backward communities. This has resulted in lower net fertility rate in the state and better labour participation in past one decade. We saw some glimpses of this in 2011 census data. The 2022 census data will definitely show a bigger picture.

It is pertinent to note that past 25yrs have seen BJP (1996-2002 and 2017-2022); SP (2002-2007 and 2012-2017); BSP (2002-2007) governments in the state and NDA (1998-2004 and 2014-2022) UPA (2004-2014) and United Front (1996-1998) governments at the center. The infrastructure improvement has been a consistent quotient during all regimes. No particular government can claim exclusivity in this context.

More than the highways, the roads built under the PMGSY scheme started by the NDA-1 government and consistently pursued by the subsequent governments have made a larger impact on the life of the predominantly rural population of the state. Because these roads have brought schools and hospitals within reach of the rural population.

The point I am trying to make is that the development in India has been a gradual process. It has gained momentum in the past 25yrs with increased participation of the private sector, improved regulatory and legal framework, and advancement in technology. For example, the change in land acquisition compensation policy (2013) has played a major role in faster execution of highway projects. Availability of better equipment, improved availability of essential raw material like steel and cement, and use of geospatial technology for mapping and monitoring etc. have also made execution efficient. The political parties have the right to lay claim on exclusivity of development in their regime, but the people, especially voters and investors must learn to believe what they see and experience, rather than what the political leaders tell them in their speeches.

The trajectory of economic development in India in present days is mostly a function of demand for infrastructure, availability of risk capital, and technology advancement. The political party in power usually has a minor role in the entire development process.

There are many things that have not changed in the state or worsened with each change in the regime. I would leave that discussion for some other time.

The First World War resulted in the decimation of some large empires like the Ottoman Empire, Russian Empire, and Austro-Hungarian Empire. By the end of the war, the map of Europe had changed dramatically. The communists had taken over power in Russia and neighboring smaller states to form the Union of Socialist Republics (USSR). Many other states in the Eastern Europe also saw the rise of communism. Germany and Italy fell for an ultra-nationalist (fascist) propaganda. The European imperialists like Portugal, Spain, France, Netherlands (Holland) and Britain started to lose their grip over their colonies in Asia and Africa. The Spanish Flu and the Great depression also shaped the politics of Europe in the post war period. This war also saw the emergence of the USA as a formidable global power.

The Second War completed the transition to the new world order with the decline of the British Empire, division of Germany and Korea, destruction of Japan and strengthening of the USA and USSR. The process of decolonization that started post second war resulted in about 3 dozen states in Asia and Africa gaining autonomy or independence.

Many new institutions were created and multilateral treaties were signed, palpably to maintain peace and accelerate the process of rebuilding the countries destroyed by deadly wars, natural disasters, and colonial exploitation, many global institutions. United Nations, International Monetary Fund, NATO, Bretton Woods, WTO, Warsaw Pact, Vienna Convention, Paris Peace Accord, Geneva Convention are some of the prominent institutions and treaties.

Within a decade of the end of WWII, the world became bi-polar with the USA and USSR holding the pole positions. The USA was leading the larger non-communist world, providing technological and strategic support to the countries. Its currency US Dollar (US$) obviously became the preferred medium of exchange and also store of value. The USSR was extending its influence in communist Eastern Europe and Central Asia.

Colonialism was now reinventing in the form of economic and strategic dependence. The wars were now more driven by economic maneuvering rather than the movement of troops. The global energy crisis triggered by the events in Iran in the 1970s, led to the USA denouncing the gold standard (free convertibility of US into defined quantity of Gold) in 1974. The US and Saudi Arabia deal to price its oil only in US$ terms established the greenback as unquestionable global reserve currency, as most post war financial institutions were already under US control and dealing in US$ mostly; and major commodity markets (CBOT, LME, NYMEX etc.) were already pricing global commodities in US$ terms. Post dismantling of the USSR in the 1990s and China joining the WTO in the 2000s, the position of US$ in global trade and finance strengthened further.

However, post the global financial crisis of 2008-09, the unprecedented expansion of the US Federal Reserve balance sheet (implying quantitative easing or printing of new money) has triggered a debate over sustainability of US$ as global reserve currency. Emerging global powers like China and India have also been aiming for a larger role in the global institutions like IMF, to the detriment of US influence over these institutions.

The currency (and tariff) wars between US and China and US and Europe in the past one decade are other manifestations of the global reset. China has also been motivating its trade partners to deal in CNY. Covid-19 pandemic caused recession and lockdown has allowed time to global powers to rethink their strategies and plan their futures.

The recent Russia-Ukraine war shall give further impetus to the Reset. Russia engaging in non USD denominated trade with partners like China, India, and Iran etc. Reportedly, China and Saudi Arabia are meeting to discuss pricing of oil in non USD terms.

It is not WWIII or the nuclear threat that investors should be worried about in this decade. It is the diminution of the USD as a global reserve currency. If the US cannot borrow in US$ to fund its profligate fiscal and monetary policies, the inflated asset prices will face a reality test almost immediately.

Insofar as India is concerned, I believe that it would be the first time in the past 200 years that India would be participating in a global reset from a position of strength. In all previous resets (colonization, industrial revolution, post war realignments, fiat currency, etc.), India was mostly the adversely affected party.

This time however our exposure to the global economy and geo-politics is much wider and deeper; and so would be the impact of any material change in the global order. It is critical that India demonstrates its competence and willingness to play a prominent role in the global affairs, economic, strategic as well as geo-political, to be accepted as a main player in the game.

In my view India will not be a water boy in the next game. It will be included in the final playing XI as an all-rounder, i.e., an economic, strategic and geo-political major. Look forward to good times ahead, and brace for the turbulence.

On the Monday, 7^th of March 2022, Nifty opened with a cut of ~380points (or 2.3%), and ended the trading session almost at the opening level. Not much new had happened over the weekend to warrant this kind of fall on Monday morning. The Russia-Ukraine conflict was intense throughout the previous week and the commodity prices were already rising. Many friends enquired what could be the reason for this sharp cut on Monday. I was not sure about it, so I started inquiring from various market participants whose numbers are stored in my phonebook. Unsurprisingly, none offered any convincing explanation. Some people however felt compelled to offer an explanation, for the fear of losing the “expert” status they enjoy in my opinion.

``The exit polls today evening may show the BJP losing UP elections”, was the most common explanation offered by the experts. When I asked, how do you know about exit polls, sitting far away from UP?, they indicated that they have “credible sources” reporting from the ground. Since, I myself had travelled to UP thrice to assess the people’s mood and my view was quite contrary to these sources, I decided to dig a little deeper. What came out was absolutely astonishing. Most of these “experts” were relying on a column published by Mr. S. A. Aiyar in the Sunday’s Times of India, and some studio experts who had “personally” witnessed an anti BJP wave in UP.

As an amateur politics enthusiast, I have been actively following elections for the past 3 decades. It has been my consistent view that economics in India is politics agnostic and as such has no direct correlation with the markets (for example see here and here). Therefore, learning that one column in a newspaper, based on prejudiced imaginary, could influence the markets so much is surprising to me. Anyways, the exit polls results that evening did not concur with Mr. Aiyar and most studio experts, and the markets recovered Monday's losses in the next couple of days. Thankfully, Mr. Aiyar also changed his opinion in his next column (Sunday, 13^th March 2022) and the studio experts have also offered a variety of explanations for the election's outcome.

Regardless of the opinions and views of experts and election outcome, I would like to reiterate that drawing economic and market inferences from the election outcome may not be useful. I continue to believe that the evolution of economic policy and hence the direction and trajectory of economic growth is incremental in India.

Since independence, all the political parties in India have pursued the same economic policies paradigm with incremental changes. Only twice a non-linear shift has occurred in the economic policy paradigm – First in 1991 when the economy was opened up to the global competition (presumably under the pressure of global agencies which bailed out India out of a balance of payment crisis); and in 1998-2000 when the government gave up many monopolies to seek larger private sector participation in the economic growth (presumably to counter the impact of global sanctions post 1998 nuclear test). In 1991 we had a Congress led minority government at the helm. In 1998-2000, we had a BJP led coalition government that comprised 27 regional parties of all shades.

Like all elections, the latest elections have also thrown some new jargon like Upyogi (UP+Yogi) and Labharthi (beneficiaries of government schemes) etc. A narrative is being created to imply that free ration, housing subsidy, LPG cylinder etc. have won the support of women voters for the incumbent government in UP; and the attempts of caste and religious polarization have been mostly rejected by the voters. I would like to draw the attention of readers to the following insight I gained from my numerous travels across the state of UP, Uttarakhand and Punjab.

1.    India is constitutionally a socialist country. No government in India can adopt an economic agenda that is against the principles of socialism. All governments in the country have pursued a socialist agenda and will continue to do so. The cash transfer schemes to farmers and urban poor, free LPG schemes, health insurance implemented by the incumbent governments are incremental improvements over the schemes being implemented since independence.

The factors like technology developments, financial inclusion, Aadhar and increased awareness due to social media, etc. have only made the delivery of schemes more efficient and transparent. This trend will continue in the foreseeable future. It may in fact accelerate as the citizens become more aware about the power of their franchise and become more demanding. Free internet data could be the next offering in this series.

2.    The development narrative of governments is mostly an appropriation of a consistent trend. The expressway construction program in UP started with the Golden Triangle 25yrs ago. Every government in the past 25years has taken the process forward. The pace was slower in the first decade due to multiple obstacles (mostly land acquisition). The implementation of new land acquisition policy (2x or 4x compensation and 80% acquisition prior to commencement of construction), and better technology and equipment has led to faster execution. Between the years 2012-17 the total installed electricity generation capacity in UP increased 81% from 13053MW to 23662MW. During 2017-21 it registered an increase of 18% from 23662 MW to 27896MW. The development of civil aviation infrastructure also started more than 2 decades ago when the NDA government decided to allow private airport operators. New airports and better air connectivity has been a consistent trend for the past two decades.

3.    The analysis of the latest elections has focused much on the emergence of “women vote bank”. It is being emphasized that the women have identified the PM with the benefit schemes of free ration, housing, LPG connection, health insurance etc. and therefore overwhelmingly voted for BJP. It is pertinent to note in this context:

(i)    Mrs. Indira Gandhi had successfully created a women vote bank with similar schemes. Charming Rajiv Gandhi had also attracted women votes in large chunks to make history in 1984 Lok Sabha elections.

(ii)   Punjabi women also got similar benefits as UP benefits, but did not vote for BJP.

I have highlighted this in many previous elections since 2014 that the women voters have become more assertive in the states like UP, Haryana, Punjab, Uttarakhand, Rajasthan and Bihar. Traditionally, in these states the women were seen to be voting as “directed” by the head of the family (usually husband or father) or community leaders (Khap, Maulvi, etc.)

The Anna Hazare movement in 2011-12 and subsequently Aam Aadmi Party campaign in 2013-14, brought the political discussion to the drawing rooms and kitchens of households, from the clubs and chaupals. The women of the house started asserting herself politically and rebelled against the dictates of their fathers and husbands. Losses suffered by the parties like INLD, RLD and BSP in the last decade are clear indications of women rebelling against the “male dictate” to vote.

It would be inappropriate to ignore the contribution of Ms. Mayawati in the area of girls education. I have been frequently highlighting how the rise in the number of girls going to school (walking or cycling for several kilometers daily) has been the most striking change in UP in the past 15years.

 Political state of affairs

The latest round of elections concluded with results of five state assemblies announced yesterday. BJP managed to retain their power in two states - Uttar Pradesh and Uttarakhand – with a comfortable majority, though the number of seats is lower than the outgoing assemblies. In two other states – Goa and Manipur - BJP is well placed to make a government. In Punjab, Aam Aadmi Party (AAP) has wiped out the traditional parties (SAD and Congress) in one of the major upsets.

Overall, the latest elections must be seen as continuation of some key political trends that started emerging in the past decade that saw emergence of BJP as a primary political party in the country and decimation of the Congress Party. BJP must be relieved after these elections that saw the entire central government, including the prime minister and home minister. Though less number of seats in Key states of UP and Punjab would mean that BJP leadership would have to remain busy till Presidential election in July are completed with a BJP candidate winning comfortably.

My key takeaways from the latest election are as follows:

·         AAP is well placed to replace Congress in national politics. In next 5years we may see AAP contesting to take Congress space in key states of Madhya Pradesh and Gujarat. That will make AAP a key national party.

·         The Modi-Yogi model of BJP means leaders’ direct connection with the electorate. Historically BJP has relied on the cadres of RSS and VHP for their election campaign. This may allow BJP to gradually move towards centrist politics from the right of the center agenda.

·         Caste is still relevant in Indian politics but the manifestation is changing. The electorates are associating caste considerations more with the candidates rather than the political parties.

·         Digitalization of governance has resulted in closer association of leadership (CM and PM) with the beneficiaries of the government schemes. This trend may continue to benefit the incumbents for next few years, before it is fully internalized by the voters as status quo. In this election free ration during the pandemic has done for BJP in 2022 what MNREGA did for Cong in 2009. But in 2024 it could be the case of Dil Maange More.

·         Women are becoming a major vote bank. This is a positive consequence of rising female literacy and gradually increasing female participation in the labour force. Presently this vote bank is favoring the ruling parties like BJP, TMC, AAP, DMK and JDU etc. But in future elections we shall see all parties specifically targeting this vote bank. The most positive impact of this would be the fading of caste and religion agenda and rise in inclusive politics.

·         UP has seen mushrooming of sub-regional parties. It is becoming a replica of national politics of the 1990s. In the latest elections it was BJP (with 3 sub-regional parties) on one side and 12 sub-regional parties on the other side. The results indicate that most of these sub-regional parties may survive and even BSP may become a sub-regional party. This trend may warrant the splitting of UP into multiple states in future.

·         Post this election, we may see a material increase in the intensity of efforts to form a Non-BJP, Non-Cong and Non-AAP alliance of regional parties.

Economy

The escalation of the war between Russia and Ukraine has material implications for the global economy. The global growth that was anyways slowing down after the effect of pandemic related fiscal stimulus subsided and central banks have started to withdraw monetary stimulus, has taken a noticeable hit. Sharp spike in commodity prices, especially food and energy, is hitting the policymakers as well as the common people.

The Indian economy is also witnessing slowing growth momentum for the past couple of quarters. Rise in global energy prices present a formidable challenge to the economy. If the current level of energy prices sustains for more than a month, the macroeconomic indicators like inflation, current account deficit, currency, and bond yields will all be impacted adversely, putting further pressure on growth.

As per the rating agency ICRA—

·         The current account deficit (CAD) is likely to widen by ~US$14-15 billion (0.4% of GDP) for every US$10/bbl rise in the average price of the Indian crude basket. If the price averages US$130/bbl in FY2023, then the CAD will widen to 3.2% of GDP, crossing 3% for the first time in a decade.

·         If the Centre reinstates the excise duty on MS and HSD to the pre-pandemic rates, before April 1, 2022, followed by the budgeted rise of Rs. 2/litre each on unblended fuel in H2 FY2023, we estimate the revenue loss to the Centre in FY2023 at Rs. 0.9 trillion.

·         In addition to the cut in excise duty, the GoI’s budgeted fiscal deficit would also come under pressure from high fertiliser subsidy requirements and a hit to direct tax collections due to elevated margin pressure for corporates. However, modest nominal GDP growth and tax buoyancy assumptions, and the spillover of the LIC IPO to FY2023 would provide some cushion.

·         Crude oil spike could exacerbate the impact of higher-than-expected FY2023 market borrowings of the GoI on yields. We expect 10-year G-sec yield to range between 7.0-7.4% in H1 FY2023.

·         Large downside risks seen to FY2023 GDP growth forecast of 8.0%, with higher commodity prices to compress margins during the duration of conflict.

As per Kotak Research, “As mentioned in our report Crude cost of someone else’s war, an average crude price of US$120/bbl in FY2023 will (1) cost the Indian economy US$70 bn, (2) increase average CPI by 80 bps and (3) negatively impact growth.

Edelweiss Research notes, “In the Indian context, the indirect economic impact of the conflict would far outweigh the direct fallout in terms of trade flows between India and Russia/Ukraine, which is low to begin with (around 1.5% for Russia and 0.6% for Ukraine). The impact would be felt in the real economy and financial markets alike. Furthermore, the uncertainty and erosion of consumer and business confidence that the crisis brings along could push back the anticipated revival in private investments.”

Emkay Securities highlights, “Higher oil prices can impact growth through multiple channels: 1) higher inflation erodes purchasing power, weighing on consumer demand; 2) lower corporate profit margins due to rising input costs; and 3) deterioration of the twin deficit, with government spending capacity being constrained. Crude at $100/barrel and other commodity shocks in FY23 could shave off up to 80bps of real GDP growth, which could end up below 7.0%.”

SBI Economics cautioned, “The recent geopolitical conflict has brought the focus back on government finances that might be derailed as the conflict intensifies. Against the possible impact on Government finances, the markets are already apprehensive of a larger borrowings. The Government has been quick to clarify that it is unlikely to borrow in March. Beyond this, the RBI does have a host of unconventional measures to manage Government borrowings in FY23 and it is important that debt market understands such nuanced undertows and does not get into a frenzy as it is swirling currently with crude prices threatening to move beyond $120.”

Markets

The markets are witnessing the beginning of an earnings downgrade cycle that may accelerate if the inflation stays elevated and rates firm up.

Kotak Securities highlights, “Market multiples appear ‘expensive’ relative to (1) history and (2) bond yields, despite sharp correction in recent weeks. However, ‘consumption’ stocks may see earnings downgrades from higher-than-assumed crude prices and lower volumes and gross margins. ‘Growth’ stocks are trading at expensive valuations and may see further downside to their multiples; financial stocks, however, are looking reasonably attractive.”

Credit Suisse has tactically downgraded Indian equities stating, “Because of its strong structural prospects and robust EPS momentum, we will look for opportunities to re-enter the market, but today we tactically cut our India position from Overweight to Underweight. Higher oil prices hurt the current account, add to inflationary pressures and increase sensitivity to Fed rate hikes. If Brent crude remained at US$120/bbl, India’s current account would weaken by almost 3 pp of GDP. The market’s big P/E premium magnifies the risks.”

 In the decade of 2000s (2001 to 2010), gold gave superlative returns. The prices of yellow metal increased 3.8x (in USD terms) for the decade. This return had however come on the back of the negative returns for two successive decades (1981-1990 and 1991-2000). In the last decade (2011-2020) the precious metal yielded a return of 39%.

Traditionally it was believed that during periods of high inflation, geopolitical uncertainties, war, money debasement (due to quantitative easing or hyperinflation) etc. gold is a preferred refuge. However, this safe haven status of gold appears to have diminished in the latest episode of high global inflation, unprecedented quantitative easing, and geopolitical uncertainties.

The shortages of goods and skilled workers are troubling the global economy. Unprecedented borrowing and printing of currencies by the US Federal Reserve, Bank of Japan, and European Central Bank has eroded peoples’ trust in official currencies to some extent. As per the conventional wisdom, the situation is quite ripe for a super bull market in Gold. However, so far gold has not witnessed any extraordinary interest. Rather, independent digital assets (popularly known as cryptocurrencies and NFTs) have mushroomed world over to fill the trust vacuum. The new age investors have even preferred equities to hedge against debt and inflation rather than gold.

So far, the movement in gold appears to be driven more by technical trade rather than any fear psychosis, refuge seeking or hedging against risk of large scale war, hyperinflation, or money debasement due to excessive and/or unsustainable debt.

Despite the massive volatility in the exchange rate of Russian Ruble, Shutdown of Russian markets, sanctions on many large Russian global energy corporations, and freezing of billions of dollars in Russian foreign assets, the gold is higher by -11% YTD 2022 in international markets. This is in sharp contrast to the crisis in peripheral Europe (Greece, Iceland, Portugal) in 2011. The prospective default of Greece was less than US$50bn, but gold had spiked more than 30% higher in 2011.

The opinion of market participants is vertically divided on the prospects of an imminent gold bull market similar to the 1970s and 2000s. But I would like to draw attention of the readers to following points:

·         Gold traditionally been a refuge in the periods of crisis, but in recent years the preference for gold has been diminishing.

·         During the decade of 1970s (1971-1980), significant turmoil was witnessed in the global economy. That was perhaps the best decade ever for gold prices. The gold prices recorded an increase of 9x in that decade. But most of that increase came in the last two years of the decade when global crude prices witnessed a sharp increase. In the following two years (1981-1982) the gold gave up 2/3^rd of these gains.

·         During the decade of 2000s (2001-2010) the gold prices increased 3.8x as the world struggled with an unprecedented financial crisis. But most of the gains came in last two years of the decade (2009-2010); and almost the entire crisis time gains were given up in the next five years. Again the rise in gold prices coincided with the sharp spurt in oil prices.

·         Gold has gained about 39% in the decade of 2010s (2011-2020). But ~75% of the gains have come in just 9 months of 2020 when the world was shut down due to the pandemic.

·         The Gold has lost ~11% in the current decade.

·         The gold has shown strong correlation with the oil prices; though correlation with USD and Copper has weakened in recent years. Given the global trend towards clean energy, it is possible that the relevance of gold as a safe haven also diminishes with the use of fossil fuels.

Thus, it could be reasonably assumed that gold continues to be one of the safe havens but much less volatility. The risk reward profile of gold is definitely worsening with the time.

I continue to maintain my stance on Gold. In my view, a new global order will definitely emerge out of the pandemic and subsequent geopolitical events. The new order will address sustainability and equity issues. Gold will not be a key component of the new order. USD may retain its dominance but it shall face serious challenges from other currencies, including the digital currencies.

You may read in detail here:

Gold is not the end game

Bretton Wood is not about Gold

In the past two years, the quintessential argumentative Indian in me, like most of my fellow countrymen, has assumed “expert” status in many diverse fields such as Virology, Epidemiology, Medicine, Macroeconomics, Geopolitics, Defense strategy, nuclear weaponry, History etc. This is besides the Politics, Spirituality, Religion, Astrology and Memelogy (the art and science of making jokes for every important and serious issue) which have been the domains of our expertise for a long time.

Recently, we have been discussing (or trying to direct, if you will) the geopolitical and war strategies of Europe. The government of India may have chosen to stay neutral in the conflict between Russia and Ukraine; but the people have taken sides. More than the countries, we are taking sides of the leaders - The Russian president Vladimir Putin and Ukrainian President Volodymyr Zelenskyy.

Supporters of Putin are mostly playing the “old friendship” card. They are vehemently arguing that Russia is our old and tested friend, while Ukraine has always opposed us at UN and other international fora. It is therefore appropriate for Indians to support the Russians in this war. In their argument, they are happy to omit the issues of human rights; wide scale destruction of civil infrastructure; plight of foreigners caught in the crossfire; and the suffering of the poor in Eastern Europe and Africa who were already suffering from the effects of the pandemic and are now facing food shortages and prohibitive inflation. They are also missing the point that in their support for Russia, they are also (even if unwittingly) supporting a war that has the potential to become a much wider conflict involving the use of weapons of mass destruction. These people are also not recognizing the very close Ukrainian connection of at least three of the USSR premiers (Khrushchev, Brezhnev and Gorbachev) who had taken our side at the time of Goa liberation and Bangladesh independence.

The supporters of Zelenskyy are mostly concerned with the hardships that the common Ukrainians are facing in this war of the unequal. They feel that the acts committed by Russia are a violation of human rights and international laws. By extending their moral support to Ukraine, these people are in fact glamourizing war. They are happy to share pictures of the Ukrainian women in uniform carrying guns and Zelenskyy sharing meals with soldiers. Many of these supporters are just cheering for an underdog, as if it were a game of soccer between the top-ranked Brazil and the bottom-ranked Samoa. These cheerleaders are conveniently ignoring the blatant foreign policy mistakes of Ukraine in the past three decades which may have pushed this beautiful and prosperous country into a perennial conflict, just like Afghanistan and Palestine.

I am against any kind of war that is fought merely to plunder territory, wealth, and/or power. Sometimes wars do become essential to establish the rule of Dharma (righteousness). For instance, the War of Mahabharata, in which neutrality was not an option, everyone must choose a side.

Speaking of Mahabharata, I feel that there is a need to examine whether ‘Hitler’ is a common noun, or a proper noun. Or is it just a title given to an overzealous or despot administrator/governor, who does not mind using inhumane methods to enforce his ideology and practices? I am sure most of us have used this title for a strict teacher, hostel warden, parent, or boss!

Even after 77 years of his death, people all over the world are enthralled to see ‘Hitler’ getting defeated again and again; just like we like burning of the effigy of Ravana every year. Hundreds of successful movies have been made on WWII, reminding us of the consequences of war and the fallacies of the methods and principles of bigotry and fascism. Even young children are fascinated to see Thanos, a super villain comic character having a twisted moral compass and his actions to eliminate a large part of humanity, getting defeated in his misdemeanors over and over again. Many Zelenskyy supporters are even commonly using this title for the Russian president. While we all like seeing ‘Hitler’ defeated and destroyed in fiction, we hardly make an effort to acknowledge the Hitlerian tendencies in the people around us.

A social media survey conducted by me yesterday indicated that a majority of people concur with the thought that ‘Hitler’ is a common noun, representing a person who sincerely believes that they are empowered and authorized to use force to make people believe in their ideas on the ideal socio-political and/or religious order.

Prior to the German Chancellor Adolf Hitler’s attempt to establish the racial superiority of his people, many Greek, Roman, Turkish, British, French, Mongol, Japanese and other rulers had used the methods of genocide and enslavement to establish the superiority of their clan, race and/or ideologies.

The British enslaved half the world – destroying ancient cultures and plundering wealth. Mongols, Hun, Greeks also invaded the Indian subcontinent, destroyed places of worship, raped and kidnapped women, and killed millions of natives.

I certainly do not intend to hurt anyone’s feelings and apologize beforehand if it happens so. At the risk of sounding blasphemous, I would nonetheless like to examine the following with an open mind:

Whether the killing of all the Kshtriyas 21 times by Parashuram, because he believed that Kshtriyas had begun to abuse their power, take what belonged to others by force and tyrannize people, tantamount to a Dharma Yudh or genocide?

How was the Kalinga War, in which the mighty army of Mauryan King Ashoka killed 2,50,000 Kalinga soldiers and citizens, different from the present Russian-Ukraine conflict? Did Ashoka the Great also have Hitlerian traits before turning to Buddhism for penance?

Rodion Raskolnikov, the protagonist of Crime and Punishment (Fyodor Dostoyevsky, 1866), also had the belief that he was entitled to kill people – a Hitlerian trait. But later he learned like Ashoka that salvation is possible through atonement.

History is replete with instances of people with Hitlerian traits. The point, therefore, is that ‘Hitler’ is not a proper, but a common noun.

Society shall do much better if we could incorporate methods and practices in our education system that would guide children to become better human beings by curbing their Hitlerian tendencies and develop compassion, empathy, tolerance and acceptance.

इशरत-ए-क़तरा है दरिया में फ़ना हो जाना 

दर्द का हद से गुज़रना है दवा हो जाना

— मिर्ज़ा ग़ालिब

(Aspiration of every drop of water is to get extinguished by immersing itself into the ocean. For a person who is hurt in love, extreme pain is the only relief.)

I interacted with a small but reasonably representative sample of investors in the past few days. The interactions were in person meetings, discussions over telephone and WhatsApp chats. We discussed a wide range of topics that are current in investors’ memory. The idea was to understand their current outlook on markets. From my discussions I have concluded that currently a majority of investors are ambivalent about their investment outlook and strategy. They are perplexed, greedy, fearful and relieved all at the same time.

The following are some random thoughts based on my latest interaction with a sample of investors.

Some random thoughts

It is customary to read and quote investment classics during market turbulences. However, in my view these classics are more relevant in the times that could be explained by rational thinking. For market situations where the investors’ psyche is overwhelmed by greed, fear, anger, disillusionment, delusion, etc., philosophy (of life not money) provides better answers. I find that the present market situation is one of those situations where investors’ may be better looking for guidance in philosophy books.

In this digital era of human civilization, the life of common people is significantly influenced by the media, especially social media. Our brains are increasingly becoming like RAM (Random Access Memory) of our computers. It is a playground of active dataset, which gets erased as soon as the new dataset becomes active. It works strictly on GIGO basis (Garbage in Garbage Out). If the feedback of my sample is any indication, the activity of investors in the markets is aptly represented by the messages they send/share on their social media timelines or chat boards.

The activity of a common man on social media is a good indicator of his current state of mind. I find an unusual rise in funny memes relating to the markets, portfolios and investors’ misery. Even seasoned investors and advisors are sharing jokes and memes about the serious drawdown in their portfolios; as if they are vindicating what legendary Mirza Ghalib said 200 years ago. Once the drawdown in the investment portfolio goes beyond the tolerance limit, it becomes a relief.

Many younger investors are perplexed; especially those who have started investing on their own in the past 2years, and experiencing their first major market correction. These youngsters who have been learning investment from the benevolent guides on social media and star investors frequently seen on electronic media, are already questioning what they have learned in the past couple of years. For example, consider the following inquisitions:

·         I was told that the markets are decoupled from macroeconomics. But now all experts are warning about inflation, current account deficit, policy rates, USDINR, GDP growth etc.

·         I was told that this decade belongs to India. The Indian economy is the fastest growing economy and the pace of growth will accelerate even further. The government of India is doing all the right things to ensure faster growth in the coming decade. But the experts who were telling this are worried about the ruling party losing election in one state and advising caution.

·         I was told that Electric mobility, ESG standards, clean energy etc. are the power themes that will drive markets in this decade. However, two weeks of spike in fossil fuel prices has made these themes redundant, rather than strengthening belief in them.

·         I was told “Zomato, one of the top 5 unicorns of India, is a platform company which has successfully solved for convenience by connecting restaurants with customers. By using technology and a fleet of delivery partners, Zomato has created a capital light compounding machine which creates an eco-system wherein the best of the restaurants will make more money (as Zomato brings more customers driven by quality reviews/ratings) while customers enjoy convenience along-with right-quality product and delivery partners enjoy part-time income. Platform companies have ruled wealth creation globally. We believe, Zomato, as a platform and being category leader, will continue to drive outperformance in the food services industry in India.” But the stock is down over 25% from my buying price and now experts are telling me to sell.

A deeper inquiry suggested that most of these investors were overweight on new economy stocks, which have been the worst affected in this correction. They are not sure whether they should sell their current holdings at prices 30-40% lower than the cost of acquisition, or just stay put.

Many seasoned investors who started the discussion with the question “what should be done?”, were found swinging between “greed” and “fear”. From their experience they know that these are temporary turbulences and eventually markets will be alright. Thus they are seeking opportunities in this fall. However, the persistently negative news flow is making them fearful. The fear of losing capital due to further sharp drawdown is overwhelming. These people are thinking about selling and buying in the same breath.

Some of the global institutional investors who were “structurally” bullish on Indian equities are suddenly discovering that many developed markets may be offering relatively much better valuations than India. Some domestic fund managers are the most ambivalent at this point in time. They cannot afford to give a “sell” call publicly but in private discussions they are scared since the new “skin in the game” rule has put their own money at stake.

Overall, it appears that the process of bottom forming has already started. The fear (and indifference) shall soon overwhelm the greed and capitulation would befall. Till then enjoy the memes:

 A barrage of bad news has made the market mood rather despondent in the past one month. The enthusiasm created by the “path breaking” budget did not last even for a whole week. Issues like macroeconomics (growth, inflation, current account, yields, INR), geopolitics (Russia-Ukraine), politics (state elections) and persistent selling by foreign portfolio investors (FPIs) have dominated the market narrative in the past one month. The trends in corporate earnings also did not help the cause of market participants.

While from their respective all time high levels recorded between October 2021 and January 2022, the benchmark Nifty is down ~11%; the second most popular benchmark Nifty Bank is down ~16%, the Nifty Midcap 100 is down ~14% and the Nifty Smallcap 100 is down ~17%.

In strict technical terms, Indian markets are still some distance away from a bear market. However, if I may use the Weatherman’s phrase “Indices are in correction mode, but feels like bear market”.

The tendency of the benchmark Nifty in the past one month indicates that the markets are putting up a strong resistance against the persistent selling pressure. So far a precipitous fall has been avoided; and the trends are not showing that Nifty will give up its resistance anytime soon. However, the same cannot be said, with as much assurance, about the small cap stocks, where the probability of sharp earnings downgrades (basically normalization of irrational exuberance) is decent.

One clear sign that the markets may not be anywhere close to entering the bear territory is the outperformance of cyclicals like metals, energy, textile, sugar, automobile etc. over the defensive Pharma, IT services and FMCG. Even if we look stock specific, the underperformance of traditional safe havens like HDFC group, Asian paints, Piddilite, Hindustan Unilever, Colgate, MNC Pharma, etc. indicates enduring risk appetite of the investors.

It could be argued that these safe havens are bearing the brunt of heavy FPI selling, who over owned these companies. But this argument may not fully sustain, since most domestic funds also like and own these stocks. They have however preferred to add cyclicals in their portfolios, indicating a higher risk appetite.

Another argument could be about valuation. Most of these safe havens were trading at relatively higher valuation, when raw material inflation and erosion of pricing power impacted their margins. A de-rating was therefore considered in order. This is a valid point but cannot fully explain the market trend. Most metal, textile and sugar stocks are also trading close to their peak margin and peak valuations. IT Services stocks have been sold heavily precisely on this logic.

Obviously, the market participants in India are not in a risk off mood as yet. How long this trend will continue is tough to predict at this point in time as the situation is too fluid and the negative factors clearly outweigh the positive factors.

My personal view is that once the global news flow gets fully assimilated and volatility subsides in next 6 to 8weeks, we are more likely to witness a “boring” market rather than a “bear” market in India.

The indices may get confined in a narrow range and market breadth also narrow down materially. The market activity that got spread out to 1200-1300 stocks in the past couple of years may constrict to 200-250 stocks.

The compounders or the boring safe havens are offering a decent valuation now after the correction. These may again return to favour. A few good men in the broader markets may get separated from the crowd of rogue boys and get the attention of the investors. There may be no clear sectoral trend. The leaders from all sectors may get favoured.

The giant wheel (continuous upper circuits followed by lower circuits) and roller coaster (high volatility) that excites the traders may stop, until it starts operating again once the sentiments and finances of traders are repaired.

The National Statistical Office (NSO) recently released national income estimates for 3QFY22 and advance estimates for the entire year FY22. The key highlights of the GDP data are as follows:

 As I indicated last week (see here) to me markets are not looking good, at least for now. And it is definitely not only due to the latest episode of Russia-Ukraine conflict. This conflict has only added to the caution. My primary problem is the lack of adequate growth drivers for the Indian economy.