(Image: Thomas Lefebvre via Unsplash)
Dear Reader,
The tug-of-war between the bulls and the bears isn’t just confined to punters in stocks. This week, it spilled over to central bankers as well. US Fed Chair Jerome Powell made sure in his press conference that the markets got his hawkish message. He said, “Incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.” Bank of England chief Andrew Bailey, on the other hand, explicitly said further increases in the Bank Rate would be to “a peak lower than priced into financial markets’’. Both central bankers hiked their policy rates by 75 basis points each, but their messages to the market were very different.
Faced with conflicting signals, this FT story titled ‘How to be Bullish?’, free to read for Moneycontrol Pro subscribers, listed the reasons for being bullish on global markets, while another piece, titled, ‘How to be a Bear’, laid out the bear case. My colleague Anubhav Sahu cut through the fog to write about the implications of Powell’s ‘’higher for longer’’ policy stance and what investors in India should do now.
‘’Slower, longer, higher’’ sums up Powell’s stance on rate hikes nicely. Its sobering conclusion: “Restrictive monetary policy—however gradually delivered—slows the economy, squeezes margins, and increases bankruptcies and defaults.”
The global slowdown is already under way. The Composite Purchasing Managers Indices (PMI) for October, a yardstick of change in economic activity from the preceding month, showed that in the Eurozone, output shrank at the sharpest rate in almost two years; in the US, economic activity contracted for the second consecutive month; in the UK, output contracted for the third successive month and in China, thanks to its incredibly mindless zero-COVID policy, economic activity continued to shrink. In the UK, its recent monetary policy statement said, “GDP is projected to continue to fall throughout 2023 and 2024 H1, as high energy prices and materially tighter financial conditions weigh on spending.” That will be another nail in the coffin that the UK has so assiduously prepared for itself.
Among the large economies, only Japan and India PMIs showed expansion, with India’s being far stronger, of course. But inflationary pressures are building in Japan because of a rapidly depreciating yen and the Japanese miracle, so far kept barely alive on monetary and fiscal ventilators, may finally come to an inglorious end.
In India, though, not only is growth picking up momentum, inflationary pressures too are muted, which turned our thoughts towards India being a Goldilocks economy — not too hot, not too cold, just right.
The PMI survey said “there were signs of substantial capacity pressures at Indian goods producers”, which should be good for capex and capital goods companies. With input price pressure easing, a strong order book and a revival in domestic capex, the second half of the fiscal year is expected to be even better for L&T, says our analyst Bharat Gianani.
The pick-up in economic momentum is reflected in the Q2 results of banks and financial companies such as Mahindra Finance, in the re-rating of our conviction pick Mas Financial and Cholamandalam Investment and Finance Company, although the CSB Bank stock is likely to stay range-bound, while Bandhan Bank’s performance has been pretty disastrous. Perhaps Bandhan Bank’s asset quality woes reflect the much-talked about K-shaped recovery, which is seen also in the clear shift in preference towards premium two-wheelers. However, the recovery in the auto sector makes Maruti a long-term bet. In real estate, DLF’s next valuation trigger could come from its REIT issue.
Nevertheless, at the overall level, if the banking and finance sector is excluded, the initial Q2 corporate results do show that profits are under stress. Kotak Institutional Equities says the weak corporate results reflect a sluggish macro environment. It says, ‘’2QFY23 results of consumption-related companies provide further evidence of a tepid economic recovery. Three-year volume CAGR of autos and consumer staples and revenues of consumer durables companies suggest demand conditions are still to recover fully from COVID-inflicted negatives on household income and balance sheets. We see a low probability of earnings upgrades until growth finds a higher gear, which may be difficult in the current macro environment.” It adds that “market multiples are rich both on a historical basis and versus bond yields”.
There is, after all, no dearth of headwinds. To take some of the stocks we covered this week, elevated fuel costs remain a concern for Dalmia Bharat; pressure on earnings is expected to persist for the next couple of quarters for Relaxo Footwear; Cognizant’s guidance cut has a cautionary message for Indian IT companies; Voltas’ sales were muted due to intense competition and high commodity inflation; Tech Mahindra faces a challenging macro scenario. The next leg of the market downturn could come from the bond markets, which may be a global Achilles’ Heel. There’s also the uncertainty for the market on account of the US mid-term elections. And a report by Motilal Oswal points out that India’s market cap to GDP ratio, Warren Buffett’s favourite valuation yardstick, stands at 107 percent of FY23 estimated GDP, well above the long-term average.
The Indian markets, however, show scant regard for such niggling doubts. As this piece points out, “It is important to note that the Nifty has sustained above 18000 despite negative global cues after the US Fed indicated a potentially higher terminal rate.” FIIs have once again turned net buyers of Indian equities. Perhaps, they feel that better times lie ahead, with input costs coming down. Perhaps what matters in these trying times is not whether an economy is going great guns, but simply whether it is doing better than the miserable performance put in by most of the others. As the proverb goes, you don’t have to outrun the bear, you just have to outrun the others.
As for valuations, perhaps investors have to be mindful of what our columnist Harish Krishnan says: “Large re-rating gains are in some sense taken from the future, and one must prepare for long investing horizons to enjoy the fruits of investing in such companies at such lofty valuations.”
On the other hand, there’s also the fact that stocks, sectors, and markets that are in vogue always overshoot and India is turning out to be, as Prime Minister Narendra Modi said “the bright spot” in the global crisis.
Here are some of our other stories this week:
Extreme market events put regulators to the test
A red flag for the markets that can’t be ignored
Gold waits for a weaker dollar
Is the slowdown in start-ups a passing phase?
The Eastern Window: should investors start nibbling at Chinese stocks?
Voters must be told the true cost of every political free lunch
SEBI’s new settlement scheme may buy peace, but at what cost?
No need to panic over falling forex reserves and the depreciating rupee
Healthtech needs a policy push
Start-up Street: To be rich or to be king—an entrepreneur’s dilemma
Why Amul should go public
Marketing Musings: Emerging market consumers are not children of a lesser god
On climate change, follow the good example set by Brazil
Sprite’s billion dollar success comes with mountains of unwanted sugar
COP27: focus on the money
