While both growth and inflation numbers are being rapidly revised higher for the developed economies, RBI’s Monetary Policy Committee has lowered its growth estimate for the current fiscal year and slightly raised its inflation forecast.
The hot topic in global markets is all about a strong recovery accompanied by a resurgence of inflation and whether the US Fed would be forced, much against its will, to start withdrawing its monetary methadone, although Friday’s lower than expected US non-farm payroll data may assuage those fears, for now.
In India, while the PMI data show the services sector contracted in May, the focus is now firmly on the recovery from the second wave. The manufacturing sector has been surprisingly resilient, as have been exports. Our recovery tracker shows a rebound, with all weekly indicators flashing green. Monsoon prospects continue to be upbeat. To be sure, there are also many worries -- credit growth remains stubbornly sluggish and the slump in Indian home prices is the worst in the world, according to the Bank for International Settlements. And the ILO says unemployment in South Asia will remain higher in 2022 than in 2019. But, on the other hand, there’s the example of the rapid recovery from the first wave, with January-March 2021 GDP growth reaching pre-pandemic levels.
It’s likely to be another tale of two halves. RBI has pruned its growth forecasts for the first two quarters of the current fiscal year, while raising it in the last two quarters. Vimal Kejriwal, MD & CEO of KEC International, told us pretty much the same thing. But note that the bounce in the second half isn’t expected to offset the lower growth in the first.
The markets seem to be pretty sure that growth will surprise on the upside. Their confidence stems from listed companies having gained market share and having grabbed the opportunity offered by the pandemic to become lean and fighting fit.
Even global institutional money managers are facing one of the trickiest investing landscapes in history, as this FT story points out. Our stock picks this week reflect these hopes and fears.
For instance, we warned that higher COVID-19 infections in semi-urban and rural areas are likely to affect near-term demand for V-Mart Retail. We listed the short-term challenges to the auto industry. We looked at stocks that can convert the pandemic into opportunity, such as Muthoot Finance and Aurobindo Pharma.
We scoured the corporate landscape for defensive cash-rich stocks such as Divi’s Labs and stocks such as Dollar Industries and Rupa Company on the not unreasonable premise that people will need underwear, come what may. We said investors should take some profits off the table in Rossari Biotech and advised caution on Siemens and Cummins India. We told investors that much optimism is already baked into GMM Pfaudler’s valuations.
When the short-term looks dicey, the long term is our only hope. L&T CFO R Shankar Raman told us that revenues should double in five years, without compromising on profitability. Aditya Birla Fashion and Retail and Suryoday Small Finance Bank are stocks we recommended for the long term while Polycab India, Motherson Sumi and City Union Bank are buy-the-dips candidates.
We also looked at Sun Pharma, M&M, Dixon Technologies and IPCA Labs. ITC, which has been such a disappointment to so many, deserved a special analysis.
Global growth is roaring back and the JP Morgan Global Composite PMI release for May had the headline, ‘Global Economic Growth hits 15-year high as rapid expansions in US and Europe offset subdued Asia region’. They added, “Demand outstripping supply also led to increased price inflation. Input costs rose to the greatest extent since August 2008 and output charges at the quickest rate on record (since at least October 2009).”
The sharp rise in prices has led the FT to ask whether inflation is coming back for good, heralding a new economic era. Another sharp piece asked whether the pre-pandemic inflation gauges were relevant post-pandemic, as consumption patterns have changed. It’s not just oil and industrial commodity prices that are moving up—global food prices too are near their previous peak.
Back home, the RBI has chosen to ignore rapidly rising inflation expectations. The central bank’s household inflation expectations survey for May shows that median 3-month inflation expectations are the highest since September 2014. The median one-year ahead inflation expectations are the highest since September 2016. Households are not buying the central bank’s benign inflation outlook.
But what throws cold water on the hopes of a quick recovery is the RBI’s consumer confidence survey for May 2021. The current situation index came in at its lowest ever reading, below its previous low in September last year. The Future Expectation index of consumer confidence also was at an all-time low in May 2021, reflecting pessimism about any improvement in the next one year.
One year ahead expectations about discretionary spending were the second lowest ever, though better than the reading in July last year, during the nation-wide lockdown. Only 42.5 per cent of those surveyed expect their incomes to be higher a year later.
But it’s the job market that is perceived to be even worse than during the height of the first wave. The RBI’s May survey shows that 82.1 per cent said their job prospects had worsened compared to a year ago while only 35.4 per cent expect prospects to get better in the next one year. The readings on the job situation are the worst since the series began in September 2012.
These record levels of pessimism among consumers could weigh on the recovery unless sentiment can be turned around through faster vaccination. Our herd immunity tracker expects the pace of vaccination to pick up in the next couple of months.