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Last Updated : Jul 11, 2020 12:29 PM IST | Source: Moneycontrol.com

Moneycontrol Pro Weekender | Beware of simple narratives

The stall in global stock rally suggests that investors have suddenly become wiser about the dangers lurking in the background

Dear Reader,

The global stock rally paused a bit this week, as the virus continued its ravages in the new hotspots of the US and Latin America and, increasingly, in India. US bond yields fell and gold prices raced to an eight-year high. Global holdings in gold-backed exchange traded funds hit a record. Is this one of those rare moments of lucidity when investors suddenly become aware of the dangers lurking in the background, or is it just a pause that refreshes in the onward and upward march of the stock market?

The OECD said its leading indicators for June for most major economies are finally seeing a recovery. Unfortunately, its indicator for India is still very weak. And our COVID-19 death rate, while lower than in the US, Europe, the UK and Latin America, is higher than many of the countries in our region. Our recovery tracker continues to show improvement, though it appears to have stalled a bit recently. That’s true for the US as well, because of a renewed surge of infections.

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The Bank for International Settlements warned that a recovery was more likely to be a U or a W, rather than the fervently hoped for V. In India, credit rating agencies continue to merrily downgrade corporate debt and they have even sought to withdraw ratings, on the plea that the issuer is not providing them enough information. That’s a red flag for banks. Bankers know the risks, which is why they prefer to park their funds in safe government securities rather than lend.

But it’s not just hope of a quick recovery that is pushing up stocks. In the US, Mohamed A El-Erian, chief economic adviser at Allianz, said tech stocks were doing well because they were seen to be defensive, with their strong balance sheets, as well as being growth stocks. Back home, this IT stock is likely to be a beneficiary of an expected strong surge in technology spending. On the other hand, even a good defensive stock such as HUL may have some hiccups.

Some investment in stocks is simply because returns from fixed income, especially bank deposits, have become too low for comfort. But perhaps the biggest factor moving stocks now is the rise of the retail investor, or rather the retail trader, who has taken to playing the market with gusto. Analysts have pointed out that the percentage of shares traded on the NSE for delivery is very low. It’s a global trend---consider the army of Robinhood traders in the US.

The Chinese stock markets have been on fire this week, prompting the authorities to intervene to cool down the euphoria. Shares of QuantumCTek, a developer of quantum communications products, surged 924 percent higher than the initial offer price on its market debut. On the flip side, Chinese government bonds saw a brutal sell-off. Is this what will happen to Indian stocks and bonds once the recovery gathers steam?

At present, though, investors seemed to be worried whether markets have got ahead of themselves, leading to hefty redemptions from equity funds in June. The rally has led to premium valuations for good stocks, which is why it may be time to book profits in some of them. The opportunity from the attempt to curb imports from China continues, although, at least in 5G technology, we need to tread cautiously, keeping our own interests in mind rather than US pressures.

The airlines industry is one of the worst affected by the lockdowns and the pandemic. Will it prove to be an opportunity for the Tatas, in buying out the Malaysian group’s Air Asia stake? They will of course, take into account the Economist’s story that 2015-19 was the first time since 1903 when the airline industry covered its cost of capital. Indeed, Warren Buffet, commenting on the epoch-making flight of Orville Wright, had said, ‘if a farsighted capitalist had been at Kitty Hawk, he would have done his successors a favour by shooting Orville down.’

The markets will no doubt continue to surprise us, as seen in Hong Kong, where there were concerns of capital flight after China imposed restrictions on democracy and free speech. Well, guess what, global investors are pouring cash into the city, as they gear up to subscribe to the 20 IPOs there this month. In fact, Hong Kong’s monetary authority had to step into the currency markets to weaken the local currency after the gush of funds. That’s not all. Despite all the talk of a US-China decoupling, foreign buying of mainland China stocks has had to be suspended in some cases as they reached the limits on overseas ownership. The moral of the story: business and politics don’t mix; and beware of simple narratives.

And while there’s absolutely no doubt that China should respect the rights of Hong Kong citizens and indeed mainland Chinese citizens as well, it’s worth recalling that, as ex-banker and economist Tony Norfield points out, the British stole Hong Kong from China after the first Opium War and Kowloon after the second Opium War. What’s more, democracy in Hong Kong began with partial elections to the Legislative Council in 1985, with full elections in 1995. Before 1985, the members of the Council were government officials reporting to the British governor of Hong Kong. In 1984, Margaret Thatcher agreed to hand over Hong Kong and its neighbouring regions to China, after it agreed to have ‘One country, two systems’ for 50 years after 1997. To be sure, China has reneged on its promise. But where was the British respect for democracy in Hong Kong before 1984?

Cheers,

Manas Chakravarty
First Published on Jul 11, 2020 12:29 pm
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