The story of the week was undoubtedly the storming of the US Capitol by Trump supporters, which seems to have rattled the Western media no end. What riled them the most seems to have been the end of the cherished notion that attacks on the seat of democracy happen only in the Third World. There were loud cries about the damage to American democracy. Not to be outdone, we chimed in with comparisons to Adolf Hitler. A more down-to-earth assessment of the farce was provided by American writer and activist Mike Davis, who wrote: ‘What was essentially a big biker gang dressed as circus performers and war-surplus barbarians – including the guy with a painted face posing as horned bison in a fur coat – stormed the ultimate country club, squatted on Pence’s throne, chased Senators into the sewers, casually picked their noses and rifled files and, above all, shot endless selfies to send to the dudes back home. Otherwise they didn’t have a clue.’
The markets shrugged off the comical insurrection with contempt, racing to fresh highs as the Democrats bagged the two Senate seats in Georgia. Last year, the markets had celebrated a Republican senate, the narrative being that Biden would not be able to put through his plans to raise taxes. The excuse for the rally this time is that Biden will now be able to pass an even bigger stimulus for the US economy. Economists are already revising their GDP estimates upwards—Deutsche Bank, for example, has lifted its US GDP forecast by 2 percentage points, while JP Morgan has raised it by 1.5 percentage points. We now have new reasons for the rally to continue. As Mohamed A El-Erian says, ‘When so many narratives are being used to justify price action, it tells you that the price action reflects something else completely.’
But it’s not just a US recovery. The Global Composite Purchasing Managers Index for December came in at 52.7, signifying solid expansion from the previous month, albeit at a slower pace. The US Composite PMI for December was much better, at 55.3.
For India, the Composite PMI was at a strong 54.9, although there were some worries about a slowing of momentum in services. Our trusty recovery tracker is, after a long time, showing most weekly indicators in the green. The government’s advance estimates of GDP for 2020-21 show that growth in gross value added at constant prices is likely to turn positive in the second half of the year, at 0.3 percent, although much of the growth will be due to government spending. In the beaten down real estate sector, the upcycle in home sales seems to be commencing. Indian IT is also set to build on pandemic-era gains.
We pointed out that the signs of a pick-up in growth were clear from the wholesale data on autos for December. Add to that the drive for localisation, which should benefit the auto components industry. The revival is also reflected in Marico’s strong growth in volumes and in Titan’s shining performance.
In our Discovery series, where we zero in on stocks that we didn’t cover earlier, we looked at Bajaj Healthcare, whose profits grew more than five-fold in the first half of FY21; at GNA Axles, which has seen a strong recovery post the pandemic-related disruptions; at Axtel, a promising player in the food processing industry with a healthy financial track record; and at CCL Products (India), whose retail business is likely to turn around in FY22.
Among buoyant financial sector stocks, we analysed the pre-earnings business updates for Bajaj Finance and HDFC Bank. We underlined that a merger between HDFC and HDFC Bank would be a win-win for both. And we said that Ujjivan Small Finance Bank will be a big beneficiary if the vaccine rally gets more widespread.
Indeed, the inoculation drive is a huge source of optimism. We considered what investors should look for from India’s vaccine rollout. Although Serum Institute has taken the lead, opportunity still exists for others.
Markets continue to race ahead, throwing caution to the winds, while Bitcoin hit USD 40000 for the first time ever and Elon Musk became the world’s richest man. The confidence is based not just on improving fundamentals and the vaccines, but also on the almost religious belief that the central banks cannot allow the stock bubble to burst because of its effect on the economy.
This FT piece calls it a rational bubble. GMO’s Jeremy Grantham, on the other hand, calls it ‘a fully fledged epic bubble.’ SocGen’s perma bear Albert Edwards wrote, ‘For people like Jeremy Grantham, Fred Hickey and myself, the idea that the Fed is omnipotent is bunk…..Sure, they can kick the can down the road for a long while but eventually that can will hit a brick wall to rebound and hit them right back in their faces.’ The US 10-year Treasury yield has already gone above 1 percent. If it continues its upward journey because of a bigger fiscal stimulus, stretched equity valuations could be in trouble.
What are investors to do? ‘It’s different this time’, is hardly a comforting notion. Nevertheless, a higher US fiscal stimulus will lead to a lower USD, which is good for emerging markets. Grantham says, ‘Emerging Market equities are at 1 of their 3, more or less co-equal, relative lows against the U.S. of the last 50 years. Not surprisingly, we believe it is in the overlap of these two ideas, Value and Emerging, that your relative bets should go, along with the greatest avoidance of U.S. Growth stocks that your career and business risk will allow.’ Back home, Mihir Vora, CIO of Max Life Insurance, told us that returns this year may be in the low double-digits or high-single digits for the overall market, but there is money to be made by astute sector and stock picking.
Ending on a lighter note, here’s what we recommend the finance minister should do in her upcoming budget speech.