Moneycontrol Pro Weekender: Climbing Mount 20k

Dear Reader,

The tsunami of foreign portfolio funds into the Indian markets continues unabated. These inflows have led to the rapid conquest of Mount 19k by the Nifty and an assault on Mount 20k. Fund tracker EPFR said inflows into Indian equity funds hit their highest level since the second quarter of 2015. Nor was the euphoria confined to equities—inflows into India bond funds hit a new weekly record in the week to July 12.

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One big reason is de-Sinofication, or the turning away of the West from China, often politely referred to as de-globalisation. As Louis-Vincent Gave, founding partner, Gavekal Research, put in this interview, “If you’re in India, if you live in Dubai, if you live in Indonesia, if you live in Mexico, it doesn’t feel like your world is deglobalizing at all. Your world is globalizing at an accelerated pace. People in Mexico are complaining of the number of expats who have moved in. India all of a sudden is getting Apple factories. So deglobalization, I guess it all depends where you stand...”

In the near term, the shift in flows has been driven by disappointment about China’s recovery. This FT article, free to read for MC Pro subscribers, says foreign investors have sidestepped China in a rush into Asian stocks. Indeed, Societe Generale strategist Albert Edwards says we may be close to a Chinese ‘Minsky moment’ as the country’s GDP deflator has fallen into deep deflation, well below its June retail inflation print of zero percent year-on-year. As this article says, Xi Jinping needs a Plan B for China’s economy.

Also, we pointed out here that a fall in the dollar index is bullish for emerging markets. Much depends, then, on where the USD is headed, relative to its peers. Stephen Jen, originator of the famous ‘dollar smile’ theory, says the US dollar is likely to weaken further. The dollar smile theory says the USD strengthens when the global economy is in turmoil, as the dollar becomes a safe haven; and when the US economy does exceptionally well, leaving its competitors in the dust. These are the two ends of the smile. But when the global and the US economy muddle along, the USD weakens.

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Jen said in this Marketwatch article, “As the US economy decelerates and other economies settle down after exiting from the unique pandemic shock, it is likely that the major economies will cluster together in terms of their economic growth rates, like the peloton in the Tour de France, with no clear ‘winner’. That is the classic setting for the ‘trough’ of the Dollar Smile.”

The question is: when will demand pressures subside and the rate hikes start having their lagged impact? The US economy is still going strong and the long-awaited recession seems to have been postponed yet again. The San Francisco Fed had estimated that the handouts to the US public during the pandemic are likely “to support personal spending at least into the fourth quarter of 2023”. That should ensure the economy remains supported and part of that excess savings continues to find its way into emerging markets.

The consensus on the Street is that a soft landing for the US economy is on the cards. And while Fed Funds futures are pricing in an almost 100 percent probability of a 25 basis point increase in the Fed Funds rate at the Federal Open Market Committee meet on July 26, a rate cut is expected by March next year.

The bullish case is that, if a recession is avoided, the markets will start looking for an earnings upside in 2024. And more and more investors are being pulled in by the strength of this soft landing narrative. As our columnist Ajay Bagga writes, “Market sentiment has moved from ‘extreme bearishness’ to ‘FOMO bordering on euphoria’, as all walls of worry have been scaled, or rather, pole-vaulted over, by retail investor armies. Institutional money and portfolio managers are still cautious, but underperformance forces many hands, ultimately.”

Remember also that the US presidential election is in 2024 and the administration will do all it can to ensure that Goldilocks remains in the US till then.

Similarly, with the general elections next year, the Indian government will do its best to keep food prices from rising, its latest move being to ban the export of non-basmati rice.

Naturally, with the market moving up so fast so quickly, the spotlight has again shifted to valuations. Many of our stock recommendations, such as Polycab, IndusInd Bank, and Infosys, are for buying on weakness or consolidation. Some, such as D-Mart, Havells and L&T Technology Services, we considered too expensive. In others, such as Himadri Specialty, we recommended taking some profits off the table. But we also took a call that premium valuations would be sustained in stocks such as Coforge and ICICI Lombard. And we believe that stocks such as Navneet Education and HDFC Bank are reasonably priced. This article said it may be time for a downshift in valuations in the auto sector.

Our analysis of HUL’s June quarter results showed that, despite a good start to the kharif season, volumes are expected to recover only gradually, as it takes time for the effects of high inflation in previous quarters to wane. We pointed out that if the volume recovery is too gradual, investor attention may shift to ITC. Indeed, this article said, “The grim outlook on consumer demand could potentially put a dent in investor sentiment".

That view received some support from this month’s State of the Economy report in the RBI Bulletin. While being very upbeat in general, the report also says, “Consumption expenditure continues to be hamstrung by lingering memories of elevated price pressures. This is reflected in lower levels of spending on discretionary items such as personal care and confectionary. Spending on beverages has been held back by unseasonal rains.” It also said, “The expectations of continuing slowdown in sales growth raises concerns about the sustainability of the current pace of growth of corporate profitability.”

But then, the current rally has been driven by fund flows from abroad. And with the MSCI Emerging Markets Index ex-China up 8.3 percent year to date (as on July 20) while the World Index is up 16.4 percent, there’s plenty of scope for a rebalancing to emerging markets, with India continuing to get a large share of those fund flows.

As for the Nifty climbing to Mount 20k, in Miley Cyrus’s memorable words:

‘Ain't about how fast I get there
Ain't about what's waiting on the other side
It's the climb

Yeah, yeah

Keep on moving, keep climbing
Keep the faith, baby
It's all about, it's all about the climb.’

Cheers,

Manas Chakravarty

Here are some of the other stories and insights we published this week, apart from our technical picks in the equity, commodity and forex markets:

Stocks

Karur Vysya Bank, Weekly tactical pick, CIE Automotive, LTI Mindtree, Rallis India, Netweb Technolgies, Senco Gold, Bandhan Bank

Financial Times

Tata/JLR: Tata’s battery project looks expensive and hard to pull off

Private credit’s special sauce