Moneycontrol Pro Weekender | Bedtime story for the markets

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Dear Reader,

November saw a big increase in net inflows into equity mutual funds and the recent omicron scare has been yet another occasion to buy the dip. The markets have, as a result, rebounded swiftly. It’s Buy Every Dip time, Bedtime for short, a strategy that has never failed since the central bank put made its appearance. Bedtime describes the process rather well, given that the mental effort needed to make money in such markets has been minimal.

The correction has been welcomed by our independent research team and we have spotted deep value in some stocks. The sharp fall in the Nazara Technologies scrip led to it being chosen as our weekly tactical pick. This railway stock has fallen to attractive levels. We argue that the underperformance of Shriram Transport Finance offers an opportunity for investors.

But we were also cautious, telling investors the Metro Brands IPO valuation provides little margin of safety, that ITC may gain little by listing its infotech division and that Ashok Leyland may have hit a speed bump.

The Reserve Bank of India provided fuel for the rally this week, by doing nothing to rock the boat. They decided to continue with the policy described by many as tightening by stealth, slowly sucking out excess liquidity from the market. While that policy has led to bond yields inching up, financial conditions in India, according to the Goldman Sachs index, are still very loose. Add to that the fact that inequality in India is very high, with the top 10 percent getting 57 percent of the country’s total income, and retail flows are likely to remain strong, particularly when interest rates are so low. An earlier Credit Suisse study had said the top 1 percent of Indians own 40.5 percent of the nation’s wealth, which inspired us to take a peek into how India’s wealthy individuals invest.

But the RBI may have had little choice but to continue with the status quo, given omicron and also the fragile consumer sentiment in the country, as RBI surveys show. If many people are worried about their jobs and their income, as the survey tells us, why will they spend? Our economic recovery tracker also showed a pause in momentum this week.

We underlined the importance of vaccination to fight the omicron variant and our Herd Immunity Tracker pointed out that, going by the current run rate, it would take another three months to vaccinate the entire adult population. Forget booster doses or vaccinating kids.

Elsewhere, though, belief in bedtime stories is under strain. Inflation continues to rise, the latest data showing that Japan’s wholesale prices reached an all-time high. The Citi Global Inflation Surprise Index hit a record high in November. Fed chair Jerome Powell has made another pivot, this time to say that inflation could be less transitory than he previously thought. He should be careful, he runs the risk of being dubbed Pivoting Powell by the media, or, even worse, Pirouetting Powell.

Some emerging market currencies have been savaged, raising fears about another taper tantrum, although India has remained insulated so far. Brazil’s central bank recently hiked its policy rate by 1.5 percentage points. USD/INR has hit levels seen in June last year, at the height of the first wave of the pandemic. Economists are predicting an accelerated tapering of bond buying, as this FT story says.

The upshot: the CME Fedwatch tool now says there’s over 60 percent probability that the Fed Funds target rate will be 75-100 basis points or even higher in a year. Jim Bianco of Bianco Research says the market expects three rate hikes in 2022, a 37 percent chance they start in March and a 42 percent chance of a fourth hike in February 2023.

That worry is gnawing at the markets, particularly as growth may be hit as the furloughs and stimulus cheques end. Splashy debuts followed by stock price dips suggest investors are growing more selective, as this FT story says. Foreign investment in emerging market stocks and bonds outside China has come to an abrupt halt. After all, the underlying reason for the success of the bedtime story was the sea of liquidity pumped out by central banks. If that liquidity is withdrawn, will growth falter and will buy every dip become sell every rally, especially at these elevated valuations?

Back home, though, the corporate mood continues to be upbeat. Cummins India expects private sector capex to improve, as Ajay Patil, CFO, told us in this interview. Keki Mistry, vice-chairman and CEO, HDFC, says there could be rate hikes next year, but demand for housing will remain strong. Among other companies, we believe the growth momentum seen by GMM Pfaudler in India is likely to continue; Galaxy Surfactants is looking forward to life beyond raw material inflation; Home First Finance is poised to grow without the need to raise fresh capital; the growth tailwinds at SBI Life are getting stronger; and the railway engineering sector could be on a structural uptrend.

The gush of IPOs continues. We analysed the prospects of the MapmyIndia, Shriram Properties and RateGain Technologies issues. We thought SIS would gain market share from smaller competitors hit badly by the pandemic. We looked at Eris Lifesciences’ diabetes portfolio. We wondered which stock to pick — Bosch or Wabco — from the auto ancillary pack.

Our Start-Up Street section asked why some Indian start-ups are quitting India. Our continuing coverage of the crypto universe looked at DAOs and smart contracts. We considered what the Bank for International Settlements had to say on DeFi. In our Personal Finance section, we wrote about the three cornerstones for a sound retirement portfolio. And we started the Algo Rhythm section this week, to track algo trading and how to profit from it.

Creative destruction continues, with Big Tech eating the traditional media’s lunch, and those at the receiving end in traditional media may not feel it’s very creative. Competitively priced electric two-wheelers in India could rapidly turn the tables on traditional IC (internal combustion engine) vehicles.

Our Eastern Window looked at how the West is countering China’s Belt & Road programme. Incidentally, the Chinese markets moved up after the Peoples Bank of China cut banks’ reserve requirement ratio, freeing up liquidity. It could be a signal that, when it comes to the crunch, central banks will make haste slowly while tightening liquidity.

In other news, the supply crunch has gotten so bad that the Aussies are facing a beer drought for Christmas. It’s the worst kind of liquidity withdrawal.

As for bedtime stories, this one from Madonna, about the joys of the unconscious world, is so good that the video is displayed at the Museum of Modern Art in New York.

Cheers,

Manas Chakravarty