Vijay Kumar Gaba

As I mentioned yesterday (see here), the current conditions are very different from the conditions in the 1980s when the US Federal Reserve under the chairmanship of Paul Volcker, managed to kill inflation with a deeper recession, but without pushing the world into an economic depression. But this does not imply that we have nothing to learn from history.

The present narrative in the global market is definitely not comforting. In the developed western economies, in particular, even the investors who took the classical moderate approach to asset allocation, e.g.,“100-age” (percent allocation to risk asset 100-investors’ age and the balance to fixed income) or “60:40” (60% risk assets and 40% fixed income for working people and vice versa for retirees) have witnessed material losses as both risk assets (equities, crypto, etc.) and fixed income (Bonds, REITS, etc.) have witnessed sharp correction. Reportedly, 60:40 Portfolio of US stocks and Bonds is down 21.6% in YTD2022, the worst performance since 1931. In India also, most balanced funds (funds that invest in a mix of equity and bonds) have yielded marginally positive or negative return YTD2022.

From whatever is happening around the world; and whatever is being prophesied about the future, at least the following five things are reasonably clear to me–

(i)    The economic growth is declining and it is not an immediate priority for the policy makers.

(ii)   The “innovative monetary policy” adopted post global financial crisis (GFC) has outlived their utility and is no longer effective. In fact the side effects of these policies are now appearing in most of the economies.

(iii)  No policy maker is in control of the economic events happening in their respective jurisdiction. Most have resorted to conventional means of policy management to tackle a situation which is largely created by unconventional policies, misplaced political aspirations; demographic transition; natural calamities; and egotistic pursuits of some political leaders.

(iv)   The cost of factors of production (wages, interest, material, and machines) is rising across the globe due to factors like demographic changes; under-investment in physical capacity building in the past 2 decades; climate change; and unwinding of unprecedented monetary stimulus.

(v)    The Indian markets are walking on a tightrope (of hope) passing through a deep valley of concerns like, worsening global macro; poor domestic macro; worsening valuation-corporate fundamental matrix; and tightening liquidity etc. The best case for markets is that it will cross the valley of concerns with no or little damage. The worst case is that it will lose balance and fall down. Generally speaking, the risk reward of investing in Indian markets is not very encouraging at this point in time.

In my view, the markets have already called the Central Bankers’ bluff, as I had expected five months ago (see Markets will call central bankers' bluff). There is no evidence of aggressive rate hikes leashing the prices; while growth has been crushed.

In the words of reputable William Hunt Gross (popularly known as Bill Gross), without interest rate “carry” (the positive difference between 2 and 10yr treasuries, for instance), our half-century-old, financed-based economy cannot thrive. In the 1980s the then Fed chairman Paul Volcker slayed 13% inflation by introducing a negative carry of 500bps or more for 3yrs. This resulted in a deep 3yr recession. Today central bankers are employing the same tactics, but our significantly higher levered economy cannot withstand the same amount of negative carry. The question is how much and for how long…..while inflation is the Fed’s seemingly solitary focus at the moment, economic growth and financial stability may soon gain equal importance……Recent events in UK, cracks in Chinese property based economy, war and a natural gas freeze in Europe, and a super strong dollar accelerating inflation in emerging market economies, point to the conclusion that today’s 2022 global economy in no way resembles Volcker’s in 1979. A negative carry of 500bps now would slay inflation but create a global depression."

Besides, Volcker tightened with the world progressing towards the end of the cold war era. Today, the world is entering an era of a fresh and perhaps more intensive cold war.

In India also, fissures have been reported in the Monetary Policy Committee. At least two members of the MPC have warned against unmindful rate hikes in the current circumstances.

My feeling is that central bankers would be forced to review their tactics and USD will revert to its rightful place. The only uncertainty is if this would happen well in time to avert a global depression.

Considering these circumstances, what should be the strategy of a small investor like me!

More on this tomorrow…

 Strategy review

1HFY23 Market performance

For the Indian markets, the first half of the current financial year (1HFY23) has been noteworthy in many respects. While the benchmark indices have remained boringly range bound (not unexpectedly see here), the shift in sector preferences has been material. Also as expected volatility has remained low to moderate and market breadth has narrowed down.

Some key highlights of the market performance in 1HFY23 could be listed as below:

Equity Markets

·         Benchmark Nifty lost 2.1%, sharply outperforming the peers from emerging as well as developed markets. For example, S&P500 (US) lost ~20% in this period; while STOXX600 (Euro Area) was down over 15%.

·         The foreign flows were majorly negative in 5 out of 6 months. Overall foreign portfolio investors sold ~US$20bn worth of Indian equities. Most of this selling was absorbed by domestic institutions. However, on a net basis, institutions were sellers worth Rs100bn.

·         There was a clear shift in sector preference of investors, in accordance with the institutional flows. The momentum massively shifted to domestic consumer demand from global growth. The IT sector was a major loser with NIFTY IT losing over 25% in 1HFY23; whereas FMCG (+22%) and Auto (20%) were major gainers.

·         Commodities (-7%) also lost in line with the global trend; with metals losing over 10%.

·         Banks also sharply outperformed with the benchmark Bank Nifty gaining over 6%. PSBs (+10%) did better than their private sector peers (+8%).

·         The domestic growth trade did get massive support from investors with Nifty Gowth Sector 15 index gaining over 18%; however, Realty (-8.5%) and Infra (-1.2%) sectors ended lower as rate hikes accelerated.

·         Conventional investment style outperformed with Nifty100 Quality (+1.6%) gaining and Nifty Alpha 50 (-16.6%) losing. Small caps lost close to 10% while midcap gained over 3%. Overall market breadth was neutral.

Currency & Debt Markets

·         Bond yields in India rose sharply in line with the global trend. The benchmark 10yr Treasury bond yields rose 50bps from 6.9% at the end of March 2022 to over 7.4%.

·         The yield curve flattened materially, with the short term yields lifting more than 50% from below 4% to over 6%.

·         RBI has so far hiked the policy repo rates by 190bps in FY23.

·         USDINR depreciated over 8% from 75.95 at the end of FY22 to 82.35 presently.

Outlook and Strategy

As I stated in my last strategy review (see here), the investment environment continues to be very uncertain and complex. The geopolitical uncertainties, fiscal policy fatigue and monetary policy dilemma makes short term forecasts very complex. These factors further support the idea of keeping the investment strategy simple and giving preference to capital preservation over higher returns.

Market outlook

The market movement in the 1HFY23 has been mostly on the expected lines. Despite the ongoing conflict between Russia and Ukraine, and elevated energy prices, I do not see any reason to change my market outlook for the rest of FY23. I expect-

(a)   NIfty50 may move in a much larger range of 16200-18745 during 2HFY23.

(b)   I shall remain positive on IT Services, Financial Services, select capital goods, healthcare and consumer staples, and negative for commodities, chemicals, energy and discretionary consumption. For most other sectors the outlook is neutral.

(c)    Benchmark bond yields may average 7.25%+30bps for the year.

(d)   USDINR may average close to INR78.5-79/USD in 2H2023. Better growth and stable markets may attract decent flows to support INR.

(e)    Residential real estate prices may show a divergent trend in various geographies, but may generally remain stable. Commercial real estate may continue to remain strong.

Investment strategy

I shall continue to maintain my standard allocation in 2HFY23 and avoid active trading in my equity portfolio. I am keeping my target return for the overall financial asset portfolio for FY23 to 7%.

 One of the most important and fundamental principles of economics is that “in a ‘free market’ current price of anything having an economic value is a function of demand and supply of such things at that particular point in time.” Of course there could be multiple factors that may impact the demand and supply of a thing; but usually nothing impacts the “price” directly other than the factors demand and supply.

In a ‘controlled and/or manipulated market’ the prices of things are fixed by the controlling authorities (or forces); regardless of the demand and supply for such things. In such markets, usually demand and supply of things are controlled and/or manipulated; or demand and supply duly get adjusted to the fixed/manipulated prices.

If we apply this core principle of economics to the world around us, we may discover that a significantly large part of global markets is presently either controlled or manipulated. The free market may only be prevalent in textbooks, policy documents and political speeches.

In the modern world, money is arguably the largest factor of production in the world. The price of money (interest rate) should ideally be a function of demand and supply of money. In case of excess supply the interest rates should be lower and vice versa.

In the past three years (2020-2022), nominal world GDP is estimated to have grown by less than 19%; whereas the money supply has increased by more than 50%. In spite of recent marginal contraction in money supply, the supply must be exceeding demand. Thus, there is no economic case for rise in interest rates; but it is happening. Obviously the money market is a controlled/manipulated market where central bankers and other major lenders may be controlling/manipulating the price of money to meet their other economic, political and/or geopolitical goals. (I refuse to accept the argument that money supply manipulation is happening to control inflation. There is no evidence of money supply impacting inflation in the past 15years at least. Else we should have 10% CPI inflation in 2010-12.) 

This distortion in the price of money has material repercussions in the market for goods and services across the world. It is impacting demand and supply (and therefore prices) of almost everything.

A significant part of the global trade is priced in terms of US dollar (USD). In a free market the price of USD (exchange rate) should also be a function of its demand and supply. In the past 33 months the supply of USD (M2) has increased by more than 50%, from $15.5trn at the end of 2020 to 21.7trn at the end of September 2022. In this period, we have seen global demand for USD diminishing, as reflected by the fall in global forex reserves. As per IMF the demand for USD by global central bankers is down to 25yr low. (see here) 

Under these circumstances the price (exchange rate) of USD must fall materially. To the contrary it has strengthened against most currencies. Obviously, the price of USD and some other dominant currencies is also manipulated.

Same argument could be extended to the prices of energy, gold, travel, wages in many jurisdictions, communication, education etc.

Under these circumstances I do not find it hard to believe that in the extant global order, ‘free market’ is a myth; and if we earnestly accept this premise, few things will remain the same insofar as the investment strategy and valuation methods are concerned.

I believe that we might soon need to adjust valuation models and investment strategy to factor in probabilities of frequent and strong state interventions; diminishing competition; radical policy shifts and sudden collapses.

Last week I travelled through three divisions of Western Uttar Pradesh and Garhwal division of Uttaranchal. The idea was to assess the current socio-economic conditions, especially in light of a deficient monsoon, inflation and accelerated public investment in infrastructure building. I may share some of the key take away as follows:

Crop plentiful

The crop, mainly sugarcane, appeared plentiful. The landscape was mostly lush green. However, many farmers suggested that they lost the investment in early sowing; and have again sown cash crops (vegetable etc.) after the late rains. These crops are also yielding much less as excess late rains have flooded the fields, particularly the smaller fields. Most of them are cautious about the rabi crop as the sowing for advance crop of potato is already delayed by 2-3weeks. However, if the current spell of rains ends in another week as forecasted, the rabi crop could be plentiful. Winter setting in early would also help rabi crops.

Vehicle and jewelry purchases deferred to next year

The impact of tighter availability of credit and prospects of a lower than usual Kharif earning has perhaps prompted deferment of decision to purchase personal vehicles, tractors and jewelry. Eight of the ten people I spoke to were positive that they will be making new purchases next year.

Expressways may not be making life easy

The highway infrastructure is being created at an accelerated pace in UP. It is common to see some old projects getting completed and some new projects being initiated in almost all parts of the states. However, two things remain constant. The quality of new expressways remains questionable. While the instances of damages to the newly constructed expressways in Eastern UP have hogged the media limelight in recent weeks; what has escaped the media scrutiny is the general quality of highways across the state. For example, on the newly built Saharanpur-Dehradun stretch of expressway, the permitted speed is in excess of 100kmph. However, the joints of most spans are so shabbily stitched that even the heavy vehicles get unbalanced at a speed of 80kmph. There was virtually no emergency rescue infrastructure on any of the expressways I travelled.

The NHAI and concessionaires have made absolutely no attempt to create awareness amongst the dwellers living on both sides of the expressways. Few people seem to be conscious of the fact that the speed of life around them has suddenly increased manifold. Most of them could be seen riding two wheelers on expressways without helmets. Wrong side driving to avoid long U turns and exits is blatantly common.

The knowledge to operate a vehicle is often accepted as driving skill. The road awareness and consciousness about the right of way and dangerous driving is almost absent in most village drivers of tractors and motorcycles.

The worst part is that the internal roads of villages and small towns were in absolute pathetic conditions in all the divisions I travelled. Even in the rich town/villages like Sardhana, Budhana, Shamli etc. the internal roads were not travel worthy. Obviously, the expressways are not providing any improvement to the ease of living to the people living alongside these expressways.

Cities expanding to swallow bypass

Numerous bypass roads have been constructed to ease the traffic congestion in major cities. The bypass roads allow the intercity traffic to cross major cities without entering the city, thus saving on precious time and fuel. However, there are instances (for example, Merrut bypass road) where the cities are expanding so fast that the bypass road is becoming part of the expanded city itself, thus defeating the very purpose of constructing the bypass itself.

Mussoorie – an impoverished queen

The visit to the Hill Queen Mussoorie after five years was a shocking experience. The town appeared a pale shadow of its glorious past. The infrastructure appeared to be collapsing. The roads were totally broken. The local vehicle population seems to have increased to an unsustainable level. The cacophony of motorbike horns was unbearable. The locals were always known for their simplicity and honesty. But many young people no longer adhere to the old value system. They do not mind fleecing the tourist for some quick gains; disregarding the reputation of the state as Dev Bhoomi (abode of gods).

There is little effort visible to showcase the local culture. Mussoorie has three Turkish Ice Cream Parlors, many Chinese, Tibetan, Punjabi and South Indian restaurants. But it is hard to find an exclusive local Garhwali cuisine restaurant, which is incidentally extremely tasty, healthy, and organic.

A strange thing was that almost all shops are accepting payment through UPI and wallets, but none was willing to accept credit card payment. The matter needs further exploration.

The composition of tourists has also changed completely. It was mostly budget tourists and some weekend visitors from Dehradun. The hill queen is certainly missing the Delhi and Merrut elites.

I feel the town needs to be completely shut down for outsiders for at last five years to let it rejuvenate and open in a new avatar.

Ppt slides about accomplished PIOs

It is very common to receive the lists (or graphics) depicting very successful persons of Indian origin (PIOs) on our social media timelines; email inboxes and even front pages of newspapers. Some of these lists contain names of people who are not necessarily of Indian origin, but whose names resemble Indian names like Tulsi. In some cases we do not even mind turning matriarchal, if the successful person has only a mother of Indian origin, e.g., Kamala Harris.

Recently, two such persons are prominently in the news – Rishi Sunak, who lost the race to the 10 Downing Street last month, and Suella Braveman, the newly appointed Home Secretary in Liz Truss cabinet. Both British politicians happen to be born to parents of Indian origin who migrated from India many decades ago. Both were born and brought up in the UK; own a passport issued in the name of the British Monarch; have never publicly shown any allegiance to India. Suella Braveman recently lamented that Indians form the largest group of VISA violators in the UK.

Many of the top global corporations, like Google, Microsoft, Adobe, Twitter, IBM, Cognizant, Nokia, Bata, Chanel, Starbucks, Micron etc. now have CEOs who were born and graduated from India. Many of them pursued higher studies abroad and worked there for many years before reaching the top. They all are global citizens, do not necessarily carry an Indian passport and have shown no specific commitment to development and growth of India.

I fear that most of these names may be under pressure to prove their allegiance to the country, whose name appears on the front page of their passports; or the companies which write their paychecks; even if it means taking decisions that are prejudicial to the Indian economy. They may hold tremendous respect for their motherland, alma mater, religion and culture. But the economy of India and welfare of a common Indian may not appear high in their list of priorities. In fact, people who are not of Indian origin may do much more for India than PIOs.

In fact, the more PIOs reach the pole positions in global corporations and politics, more worried we should be. Because, it not only strengthens the global lobby of influential people who may not like to be openly seen as biased towards India; it also reflects poorly on the weaknesses of our entrepreneurial ecosystem that is unable to retain top talent.

Having understood this, I shall now avoid investing in mutual funds and companies whose periodic presentations show the list of accomplished PIOs as a strength of the Indian economy and markets.

Running foreign policy from press conferences

Recently, one of the most celebrated video clips on social media in India has been the one where the external affair minister (EAM) of India is answering the questions of western media about India’s policy with regard to the Russia-Ukraine war, especially India’s decision to buy crude oil from Russia despite NATO sanctions. The stern and articulate response of the EAM won him millions of accolades. Many did not hesitate in terming him the most competent minister of PM Modi’s cabinet; a symbol of rising global power of India; and a worthy successor to PM Modi (whenever he decides to retire). Even some foreign experts have termed him one of the best diplomats in the world.

Inarguably, incumbent EAM is very articulate, confident and clear in his views. He also seems to have a clear mandate from the prime minister in the matters of foreign policy. But in recent times, there have been more failures than successes in foreign policy.

NATO countries have tacitly imposed travel sanctions (inordinate delays in VISA issuance) against India for supporting Russia. Businesses and students are suffering from long delays in VISA issuance. China is cementing its position in Ladakh. The US is giving arms and money to Pakistan. We have not been able to get Pakistan black listed by FATF. There is little progress on key issues like membership of UNSC and NSG. There is little improvement in relationships with other neighbors. The UK home secretary has spoken openly against India and the trade deal has been delayed. The Canadian government is seen openly supporting anti India (Khalistan) elements. Despite claims of 30-35% cheaper oil from Russia, the price of our basket of oil is not much different from the benchmark Brent Crude. Belt Road and CPEC are progressing steadily.

I would rather prefer that no one knows about our EAM or see him on TV. Let him be an anonymous person and work behind curtains and show results. The job of making fun of western media and giving blunt responses to western diplomats is best left to the innocuous full timers like Tharoors and Swamis.

This summer Americans drove less than the summer of 2020 when many office goers were working from home and the economy was partially shut down. The situation is no better in Europe. Higher fuel and food cost is driving the cost of living higher in most of the world, significantly disturbing the household budgets.

Many emerging and underdeveloped markets were struggling with higher inflation even before the pandemic. But pandemic and adverse weather conditions in the past two and half years have made the situation worse.

Whereas many emerging markets, especially in Africa and Latin America, have been struggling with higher inflation and rise in the cost of living for a couple of decades, it is a relatively new phenomenon for the post 1980s developed western economies. The present generation in these economies had gotten used to cheap and easily available money and marginal food and fuel inflation in the past two decades. For them this sudden and sharp rise in basic cost of living is nothing less than a major shock. Most of them may not be financially sufficient, economically trained, socially skilled and/or mentally prepared to deal with this problem.

On the other hand, the modern asset pricing models may also not be suitable to the situation where interest rates are rising at record pace. Many valuation models used for making investments in "startups" - having very long payback period in terms of conventional asset pricing techniques; not differentiating between revenue and capital cashflows for operating purposes; usually funded by professional private equity investors with little own skin in the game; and having high leverage debt as the ultimate source of funding – may not work at all in a scenario where USD is depreciating and cost of USD borrowing is running in excess of 6%.

The current spike and persistence of inflation has been attributed to the logistic constraints due to the pandemic; adverse weather conditions; Russia-Ukraine war and fiscal support extended by various governments to mitigate the hardships faced by the citizens. Initially most central bankers believed that the inflation is transitory and will wane as these conditions change. However, in the past six months a realization seems to be dawning upon them that the trillions of dollars in new money, printed over the course of the past 2yrs, may also have a key role to play in this episode of high inflation. Apparently, it took 215yrs for the US government debt to reach US$7trn. It has added the same amount in just the past 27months.

Inarguably, the problem of inflation has many more dimensions. Hiking rates and withdrawing quantitative tightening will take more than 25yrs to reach a sustainable level of debt. Manufacturing a recession by sharp hikes will only destroy demand for various commodities and weaken the inflation. However, the inflationary forces will keep coming back, much stronger than now, as and when the growth begins to revive.

A sharp USD and EUR devaluation could perhaps be one of the more viable solutions left to (i) reduce the public debt materially in a short period of time; (ii) complete restructuring of the global terms of trade; (iii) rationalization of the global commodity prices especially energy; (iv) catalyze a new investment cycle led by US and European exports.

The investors in USD denominated assets would obviously suffer tremendous losses. No wonder large investors like the Chinese government have materially reduced their holdings of US treasury and USD. India is also trying hard to diversify its trade to include other currencies like Ruble, Riyal and Yuan, to contain its exposure to USD.

The questions that beg answer are:

(a)   What shall be the safe haven in case of a sudden USD decline. Whether it would be the traditional asset like Gold; a new age asset like digital currencies or traditional safe havens like CHF, CNY, SGD etc.?

(b)   Is there any actionable for a small investor, if this speculation does come true?

 “Fourth Industrial Revolution” is one of the most popular buzzwords these days. One gets to hear this almost every day in one context or the other. Business leaders, administrators, policy makers and money managers etc. have been using it in their presentations and interactions. In some cases it is used as a cliché, without intending any specific trend or opportunity. However, in most cases it is used to imply that new technologies and applications being used in the areas like manufacturing, mobility, communication, healthcare, education etc. are bringing remarkable change in the ways we are used to function. Metaverse, Clean Fuels, 5G, Drones, Artificial Intelligence, Convergence of Technologies, Blockchain, etc. are some of the pieces that are putting this revolution together.

For the youngest generation, the changes this revolution is bringing to their lifestyle might not appear stark. They were born in a world where technological changes have been fast, dramatic and disruptive. For the older generation, however, the experience is overwhelming.

The pandemic has added another dimension to the extant global development paradigm. A larger number of people are now looking for evidence to assess if we human being were less “happy” before we started to study and research the functioning of universe, cosmic events, natural phenomena like gravity & relativity, adopted the modern science and technology to carry out our day to day functions, trade and commerce, etc. In fact, if we do honestly assume "happiness" as the "ultimate goal" of all our social and economic activities; then most parts of modern science and technology may appear redundant to us.

An esoteric explanation of the fourth industrial revolution could be that we as a scientifically evolved society are trying to complete the circle by connecting the present to the point where it all started. Some indicators of this endeavor could be seen from the following trends:

·         We are increasingly accepting the Sun and Water as the primary source of energy and nutrition. Terms like chemical free, carbon free, etc. command the highest premium. Smoke rising from chimneys that symbolized earlier industrial revolution is considered regressive now.

·         We are increasingly preferring to stay in our respective caves, leaving the job of hunting and bringing food to few warriors (ecommerce, food delivery, work from home, video conferencing etc.)

·         The commitment to family and society is diminishing. “Individual” rather than the “community”, is becoming the focus of most activities, including sales & marketing, politics, religion, etc.

·         “Tribes” are becoming smaller and inward focused.

·         Procreation is not a priority for a significant proportion of the global population. In the next five decades we might see the global population stagnating or even declining.

·         The laws of the jungle have gained acceptance in most jurisdictions. The interest of the strong is accepted as justice even in the most developed societies. Lions and Elephants act at will while the rabbits and deer wait in horror to be devoured.

 In the past one month, the bond yields in most of the developed world have risen sharply, devastating the bond portfolios, especially the leveraged portfolios. Even most emerging markets have seen their bonds declining in value. Consequently, the global currency markets have also seen high volatility. The USD index has reached the highest level in two decades, as JPY, EUR and GBP have declined to lowest levels in decades. Even PoBC is cutting the reference range for CNY sharply and USDINR is at historic lows.

The sharp rate hikes in most parts of the world, and tighter money markets have so far not been able to rein the runaway inflation. It is expected that the central banker may continue hiking aggressively for another quarter at least. Accordingly, the forecast of a severe recession in 2023 in most parts of the western world on both sides of the Atlantic is fast becoming a consensus.

Poor demand outlook due to recessionary conditions is causing severe correction in the commodities markets. Industrial metals and crude oil have corrected sharply. The shipping container rates have also collapsed. Even if we normalize the commodity prices and container rates for the Covid related abnormalities, we are heading towards prices lower than the average of 2018-19.

In all this global turmoil, the most puzzling piece is precious metals. Both gold and silver have not behaved in the expected manner. Traditionally, during periods of high inflation, geopolitical uncertainties, war, money-debasement (due to quantitative easing or hyperinflation) etc. gold and silver had provided a safe haven, protecting the wealth of investors. In the latest episode of crises, precious metals have actually belied their safe haven status.

Despite, inflation ruling at four decade high level; Russia-Ukraine war; tension in the China Sea; and massive money debasement (US Fed alone printing US$7trn in the past 30months), international gold prices have actually fallen over 10% since January 2021 in nominal USD terms. In real terms, the losses are even more. Though, in GBP and EUR terms gold prices are higher, but certainly not commensurate with the circumstances and historical trends.

The trend in gold prices becomes even more intriguing, when we factor in the requirements under Basel III regulations that may require much higher holdings of physical gold by the global central banks. In fact a number of central banks like Bundesbank, PoBC, Central Bank of Russian Federation, RBI, etc. have increased their holdings of physical gold in the past 4years.

A few months ago, I had expressed my apprehension that yellow metal might be losing its luster (see here). The recent trend further strengthens my fear that in the new global order that is emerging post the pandemic, Gold may not be a key component. Declining consumption demand (the share of gold & silver ornaments has fallen below 1% in Indian household savings, from 1.7% just 5yrs ago, see here); competition from digital currencies; higher security risk and higher cost of security; and rising cost of production etc. are some factors that seem to be working against the gold.

Nonetheless, I am inclined to believe that we may get a very good trading opportunity in gold sometime in the next twelve months. I shall look to allocate some tactical money towards gold, if it falls another 8-10%.

The latest edition of the Handbook on Indian Statistics released by the Reserve Bank of India (RBI) depicts some interesting trends in domestic savings. Gross Domestic Savings (GDS), which was recovering steadily post demonetization, has again declined post Covid. However, the decline since FY17 is entirely due to lower savings in the corporate sector. The household savings have actually risen sharply, especially during Covid.

Contrary to popular perception, the Indian households are allocating much less to the capital market products (shares and bonds) post Covid. Even contributions to the provident funds have declined materially, indicating lower employment in the organized sector. Bank deposits have seen an increase. The contribution of Indian households to Investments (Gross Capital Formation) is stable at the elevated levels seen post demonetization, implying a rising trend towards self-employment.

Key trends

·         Gross Domestic Savings (GDS) in India that had recovered from Rs48.2trn in FY17 to Rs 60trn in FY19, declined to Rs55.9trn in FY21.

·         Household’s share in GDS increased from 58% in FY17 to 79% in FY21. During Covid it increased from 65% in FY20 to 79% in FY21. At the same time the share of the private corporate sector in GDS declined from 34% in FY17 to 30.6% in FY21.

·         The share of financial assets in household’s total savings has seen an increase from 41% in FY17 to 52.5% in FY21. In the same period the share of physical assets declined from 57.2% to 46.7%; and the share of gold and silver ornaments fell from 1.7% to 0.9%.

·         Contrary to popular perception the share of allocation to capital markets (shares and debentures) fell from a high of 9% in FY17 to 3% in FY21.

·         Household share in investment has increased from 32% in FY17 to 38% in FY21.

Indications

Post demonetization and GST, the private sector profitability (hence savings) have been impacted.

Households are increasingly becoming cautious. They are controlling their consumption and adding to savings.

Employment conditions may have worsened. More households are engaging in self-employment.

Deployment of savings in physical assets like personal vehicles, housing etc. is being avoided to maintain liquidity.

Risk appetite has been impacted adversely; and households are preferring safer bank deposits over riskier capital market assets.

 One of the earliest expressway projects in India was the golden triangle expressway connecting the tourist circuit of Delhi-Agra-Jaipur. The project was completed years before the National Highway Development Project (NHDP) was announced in late 1990s. It is only appropriate that the government has planned India’s first National Highway for Electric Vehicles in this golden triangle. Last week, a trial run of NHEV was conducted on a 248km highway between Delhi and Jaipur.

Agra-Delhi-Jaipur will be the first 500km EV corridor programmed and to be operated by Advance Services on Social and Administrative Reforms (ASSAR). ASSAR would be operating 12 such corridors marked by the Union Power Ministry. On all these corridors, vehicles, chargers, civil & electrical infrastructure, fleet & station utilities and all other components would be engaged together on Annuity Hybrid E-Mobility (AHEM) model with single capex spend from PSUs and Banks.

Agra-Delhi-Jaipur NHEV marks the beginning of an exciting journey towards the goal of full Zero Emission Transportation (ZET) over the next 3 decades.

Recently, India’s premier policy research institution, NITI Aayog, and RMI, an independent nonprofit that transforms global energy systems through market-driven solutions, published a detailed report outlining a roadmap for achieving complete ZET in the freight road transport sector by the year 2050. The report titled “Transforming Trucking in India – Pathways to Zero-Emission Truck Deployment” highlights the roadmap for making India a crucial player in the inevitable transition to zero-emission freight vehicles.  

The key points highlighted in the report include the following:

1.    ZETs can lead to sustained logistics cost savings. Transportation costs are a major driver (62%) of overall logistics costs in India, accounting for 14% of India’s GDP.5 Since diesel fuel costs account for the overwhelming majority of transportation costs, ZET adoption can dramatically lower associated fuel costs by up to 46% over the vehicle's lifetime, with broad implications for the Indian economy.

2.    A robust domestic ZET market can transform India into a global green hub for battery manufacturing. ZETs would be a significant source of demand for domestically produced batteries (up to 4,000 gigawatt-hours [GWh] cumulative through 2050), supporting and underpinning the National Energy Storage Mission and providing the impetus for the nation to become a low-cost and low-carbon manufacturing hub.

3.    If produced at scale, the total cost of ownership (TCO) for ZETs in the MDT segment can be less than diesel trucks, and TCO parity can be reached in the HDT segment by 2027. Currently, ZETs have a higher upfront cost compared to diesel trucks, but ZETs also have significantly lower per-kilometre operating costs.

4.    With supportive policies ZETs can achieve an 85% sales penetration by 2050. With cost competitiveness, and technology maturity, nearly 9 in 10 trucks sold in 2050 can be ZETs

5.    ZETs can help shift India off oil import dependency, supporting the vision of a self-reliant India. Today, road freight accounts for more than 25% of oil import expenditures—and is expected to grow over 4x by 2050. ZET adoption can eliminate a cumulative total of 838 billion litres of diesel consumption by 2050, which would reduce oil expenditures by ₹116 lakh crore through 2050.

6.    Widespread ZET adoption could reduce cumulative trucking particulate matter (PM) and nitrous oxide (NOx) pollution by ~40% by 2050, substantially improving air quality in India. Today, trucks represent just 3% of the total vehicle fleet (including both passenger and freight) yet are responsible for 53% of PM emissions.6 A purposeful transition to ZETs can lead to considerable improvements in air quality and benefit citizens’ public health.

7.    Widespread ZET adoption could reduce annual trucking carbon emissions 46% by 2050, lowering the nation’s greenhouse gas (GHG) emissions. The trucking sector is responsible for one-third of transport-related CO2 emissions in India. A determined transition to ZETs can lead to 2.8–3.8 gigatonnes of cumulative CO2 savings through 2050, which is equal to or greater than India’s entire economy-wide annual GHG emissions today.

8.    The early state of the overall ZET market in India requires a coordinated ecosystem approach spanning the public and private sectors. Such an approach can help overcome challenges such as the upfront capital needed to make the ZET transition through a combination of finance, technology, infrastructure, and policy strategies.

Indubitably, this remarkable transformation to ZET will present a once in a century type investment opportunity for both businesses as well as investors.

 “Higher interest rates, slower growth and a softening labor market are all painful for the public that we serve, but they’re not as painful as failing to restore price stability and having to come back and do it down the road again.” – Jerome Powell, Chairman of the US Federal Reserve

The Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed) decided to hike the policy rate by another 75bps taking the federal fund rate to 3.0%-3.25% range; the highest level since 2008.

In the post meeting press statement, the Fed chairman Jerome Powell reiterated Fed’s commitment to bring down the inflation to its target level of 2%. The Fed officials indicated that the Fed would keep hiking rates further till the terminal rate of 4.6% is reached next year. This implies another possible 75bps hike in November, followed by a couple of smaller hikes in the two subsequent meetings. Quelling the market expectations of a cut next year, the fed officials hinted that no cut is seen in 2023.

Six of the nineteen FOMC members even see the terminal rates at 4.75%-5%, implying a 175bps further hike till 2023 end, before the Fed begins to scale down in 2024, bringing the rates back to below 3% only in 2025.

It is pertinent to note that there is no precedence of Fed hiking so aggressively since 1990 when the overnight funds rate was adopted as its primary policy tool. In 1994, Fed had hiked 2.25%, resorting to cuts the very next year. US Inflation had probably peaked at 9.1% ( CPI, yoy) in June, before easing to 8.3% in August.

Indicating a recession-like condition in 2023, in their quarterly estimate of rate and economic outlook, FOMC stated that unemployment rate may rise sharply to 4.4% in 2023 from the present 3.7%. FOMC scaled down its estimates for economic growth in 2023 to 1.2% and 1.7% in 2024, reflecting a bigger impact from tighter monetary policy.

From this month, the Fed has also accelerated its quantitative tightening program with US$95bn/month reduction in its US$8.9trn balance sheet.

The Fed decision did not bring any surprise for the market, as the consensus was for a 75bps hike, with a minority expecting even a 100bps hike.

·         The US benchmark indices ended the day with sharp cuts after a highly volatile session.

·         USD Index (DXY) strengthened to over 111, its highest level since April 2002.

·         Industrial metals and crude ended with over 1% cut, while Silver (2.2%) and Gold (0.6%) were higher. Bitcoin lost over 2%.

·         Bond markets quickly priced in the growing risk of a recession as the Treasury yield curve further inverted. The 2-year treasury yield over 10-year Treasury yield inverted to beyond 50-basis points.

Indian markets are also expected to open with a cut of about 1%.