Dear Readers,
More than five months after the COVID-19 virus appeared in the country and after one of the world’s most stringent lockdowns, the number of daily new infections is rising rapidly.
As lockdowns have eased across the world, infections have started to rise. The US is one of the most egregious examples. But countries such as Israel and Japan are on second wave watch. Germany is readying tougher lockdown measures to ward off a second wave. There are reports that Manila may return to a lockdown as cases surge there. In India too, local lockdowns have been re-imposed in many places. The upshot: a stalling of the economic recovery.
The pace of recovery is slowing in many countries, including India, as our recovery tracker shows. Indeed, the rebound in India is likely to be slower than in many other Asian nations, as import data show. That could be the reason why a global survey found pessimism among Indian companies to be the worst among the major economies. Another reason is the lack of support from the government, which could delay the recovery, for example in the auto sector.
Small wonder then that RBI governor Shaktikanta Das warned that banks need to build their capital buffers to fight the wave of bad loans likely to hit them. Former governor of the RBI, Raghuram Rajan, made the same point. Nevertheless, high quality banks with a good franchise will always be in demand.
On the bright side, China’s GDP growth for the June quarter was 3.2 percent from a year ago, not only signalling a return to expansion, but also beating expectations. That’s good news for metal stocks. But even data out of China is far from being gung-ho. Consumer demand is still weak, as is private investment. Exports returned to growth in June, but with the rest of the world mired in recession, external demand is not going to help much. What’s pushing growth can be gauged from the fact that China’s overall debt/GDP ratio increased to 265.4 percent in the June quarter, compared to 258 percent in the March quarter, according to data compiled by Bloomberg. It isn't healthy growth.
Of course, that goes for the world as a whole -- data from the Institute of International Finance show that global debt to GDP hit a new record of 331 percent in the March quarter. It’s bound to get much worse.
In India, the silver lining is the monsoon, which has been good. That has sowed the seeds of hope for agrochemical company stocks. The fall in food inflation also raises the chances of another rate cut by the RBI. For the short-term, though, deflation is a bigger worry across the world, although there’s a debate whether the extraordinary burst of stimulus from central banks and governments will finally lead to inflation. This deflation/inflation debate could have huge implications for asset classes.
India’s long-term story received a big boost from the confidence shown in the country by Google’s decision to invest $10 billion, including a major investment in Jio Platforms, while RIL developing home-grown 5G technology is a game-changer.
As for the markets, BCA Research outlined the reasons for remaining optimistic. They said that while the pace of reopening will be slow, there is little appetite for the sort of extreme lockdown measures that were implemented in March and around the world both fiscal and monetary policy will remain accommodative, providing a supportive backdrop for stocks. This is, therefore, the right time for corporates and banks to tap the markets to fortify their balance sheets. The government too could take advantage of buoyant markets to push through disinvestment, but it needs to do so intelligently. Of course, not all companies will benefit by approaching the markets.
Infosys’ stellar quarter did much to rekindle enthusiasm about IT stocks and we had recommended two other IT stocks during the week. But we also recommended booking gains for another stock in the sector.
As always, we continued to focus on stocks in niche areas with moats around them, companies that have strong order books and a company having best-in-class margins. We also looked diligently for reasonably valued stocks riding on growth drivers.
For the longer term, we advised investors how to position their portfolios for the coming US elections and worried whether India’s 10 percent capitalism is good for growth.
I’ll leave you with this thought from money manager Jim Bianco. He points out that in the normal course, markets are supposed to be a reflection of the economy. A strong economy with high GDP growth is expected to lead to higher corporate earnings, which will boost equity markets. But now, with central banks supporting the markets and relying on the wealth effect to buoy the economy, what they are in effect saying is a strong market leads to higher spending, to higher GDP and to higher earnings. Bianco says that is why nobody is paying attention to valuations. It’s an argument admirably suited for a world where rising stock markets go hand in hand with new highs in daily infections.
Cheers,
Manas Chakravarty
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