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Moneycontrol Pro Weekender | The reflation trade

Inflation undercurrents remain globally, but in India, the premium is on growth

February 13, 2021 / 09:39 AM IST
(Image: Shuttershock)

(Image: Shuttershock)

Dear Reader,

What markets dread most is the return of inflation. It’s easy to see why -- if inflation rises, central banks may be forced to raise rates and that could be the end of the bull run in equities. No wonder then that the few bears that have survived the bull charge are pinning their thinning hopes on inflation. Societe Generale’s resident perma bear Albert Edwards tweeted, “The Fed should start tapering right now as the FAO reports food prices continue to surge in January.”

Crude oil prices too have been moving up and Brent crude crossed $60 a barrel. But is it sustainable? Christopher Wood, Global Head of Equity Strategy at Jefferies, says in his Greed & Fear newsletter, “Oil stocks, along with airline stocks, are as good a way as any to play the reopening trade.”

The latest inflation prints, though, have been benign. China’s consumer prices in January fell 0.3 percent from a year earlier, in the Euro area consumer price inflation was 0.9 percent, in the US it was a lower-than-expected 1.4 percent. But as Grant’s Interest Rate Observer’s e-letter says, the US Treasury curve has steepened markedly, with the long bond (30-year) yield rising above 2 percent.

Back home, January consumer price inflation came in at 4.06 percent, dipping from 4.59 percent in December. That should be a relief for the RBI, battling to contain the fallout of the massive borrowing programme announced in the Budget. Thanks to central bank intervention, India’s 10-year government bond yield, which had spiked temporarily after the Budget, is now back below 6 percent. But core inflation remains high, which is as it should be if growth is coming back. Also, the January inflation print owes much to a base effect, which should wane next month.


In India, though, the focus is now firmly on growth. Our recovery tracker showed continuing improvement in most high-frequency indicators, as did banks’ financial results for the December quarter. The belief that this year’s Budget was a watershed moment was reinforced by Prime Minister Modi’s speech defending private enterprise in the Lok Sabha, a turning point in the nation’s political economy. As for the high fiscal deficit, a Modern Monetary Theory view of the Budget says concern over the deficit is pure paranoia. Small wonder then that Venugopal Garre, MD and India strategist at Sanford C Bernstein, believes the rally still has some steam left. Anuj Kapoor, head of UBS Global Banking, India, also feels there’s no bubble, but concedes valuations are expensive.

Many of our stock picks this week reflect this tussle between growth prospects and high valuations. The ABB stock, for example, looks expensive, considering that private capex is unlikely to come back in a hurry. Dalmia Bharat, on the other hand, will benefit from the infrastructure tailwinds. Adani Ports & SEZ’s December quarter results have been excellent and growth is likely to get stronger. Adani Ports and Concor are also plays on the trade recovery, with privatisation being an additional trigger for Concor. Higher aluminium prices, part of the global reflation trade, have supported Hindalco’s earnings. The rural demand story continues with M&M and Hero MotoCorp. Thanks to higher steel prices, Tata Steel’s results easily beat Street expectations, although the end-game in Europe is something to watch out for. As Chris Wood says, “India looks right now Asia’s best Covid recovery story.” Why, even NBFCs are being snapped up by billionaires.

The rotation to cyclical stocks has been a major theme in the markets, with bank stocks on fire. What does that mean for tried and tested consumer favourites such as HUL, especially with a change in its strategy? Higher India margins supported Godrej Consumer Products’ performance. Long-term structural growth drivers continue to operate for Crompton Consumer. Titan continued its glittering performance. But Berger Paints’ valuations leave no room for comfort. Britannia and ITC disappointed, but we believe they still have much value.

There is, of course, another side to the story. The Reserve Bank of India’s January surveys show the economy mending slowly, but it will take time for the scars of the pandemic to heal. Outflows from equity mutual funds continued in January.

We pointed out the many ifs and buts of the proposed development financial institution. The cancellation of power purchase agreements for the Dholera project shows the whimsical ways of state governments. As the lights dim at BHEL, the government may have already missed the bus on disinvestment in the company. Auto production is being affected by the semiconductor shortage. And we looked at the tragedy in Uttarakhand and reflected whether India is prepared for the challenges the environment is going to throw at us with increasing frequency.

The worries about overheated markets continue, with this FT piece saying that world economies and markets are precariously positioned. Another wondered whether the party was over for the big tech stocks. And a couple of FT articles argued forcefully that Robinhood is actually backed by the Sheriff of Nottingham and the GameStop saga is a reflection of disturbing underlying trends in the economy.

One shouldn’t forget that among the plucky little traders taking on the mighty hedge funds was the Swiss National Bank, which had shares worth $2.5 million in GameStop. Among the $141 billion it has invested in US equities is a stake in Tesla, which, as we all know, invested $1.5 billion in Bitcoin, propelling the cryptocurrency to fresh highs. This must be the first instance of a central bank putting its money, albeit indirectly, in Bitcoin.

And finally, if the Bloomberg report that junk-bond investors are “calling up companies and pressing them to borrow, instead of waiting for bankers to bring new deals to them” is correct, then we are living in extraordinarily effervescent times.


Manas Chakravarty
Manas Chakravarty

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