Moneycontrol Pro Weekender: Dragons, AI, global economy, and markets

Dear Reader,

"In the realm of AI's vast potential,

Story continues below Advertisement

Remove Ad

It solves puzzles quite consequential.

With algorithms bright,

It shines a guiding light,

Story continues below Advertisement

Remove Ad

In the digital future, it's essential!’’

That silly little doggerel is the result of giving the prompt “Write a limerick about the potential of AI” to ChatGPT. Nevertheless, the sentiment in the poem reflects what has propelled the Nvidia stock to stratospheric heights, giving a 239 percent return over the past one year. The company has posted 265 percent revenue growth in the last year. Bank of America chief investment strategist Michael Hartnett says the company's market cap is now equal to that of all Chinese companies listed on the Hong Kong Stock Exchange. This FT article, free to read for MC Pro subscribers, tells us what makes the company so attractive.

Nvidia is part of the select group of technology stocks that are spearheading the rise in the US stock markets, so much so that Harvard University’s investments in technology stocks are now a wondrous 98 percent of its portfolio.

Story continues below Advertisement

Remove Ad

But while tech may be pushing the US market to new peaks, that isn’t true of other markets. The Indian equity market is at an all-time high, STOXX Europe 600 is at an all-time high and, best of all, the Nikkei 225 has made a new high after—hold your breath—1989. Whatever happened to the so-called Japanification of the world?

The euphoria in the markets is the result of the stubborn refusal of economies to slip into recession, despite dire predictions. Consider, for instance, the latest Flash Purchasing Managers Indices (PMIs) for February. For the US, while the Flash Composite PMI fell a bit from the January level, the survey said “the pace of expansion was the second-fastest since July 2023”. For the UK, the Flash Composite PMI came in at a 9-month high. For the Eurozone, the Flash PMI shows the downturn easing.

The strength of the US economy has led to expectations of a Fed rate cut being pushed back to June. A month ago, the markets were pricing in a 46 percent probability that the Fed would cut its policy rate by 25 basis points in March—now, that probability is down to a negligible 2.5 percent. The upshot: the yield on the 2-year US Treasury note is up to 4.7 percent, from 4.1 percent in early January.

As for India, we had pointed out that the Flash PMI for February shows the best of both worlds—strong growth and low inflation. The RBI Bulletin’s state of the economy report for February said the global economy is getting better, while growth in India remains robust.

Inflation is decelerating, although policymakers worldwide have drawn attention to the difficulty of navigating the ‘last mile’ in disinflation. At the last meeting of the Monetary Policy Committee, for instance, Governor Shaktikanta Das said, “Policy imperative at the current juncture is to remain focused on achieving the 4 per cent inflation target on a durable basis, keeping in mind the objective of growth.” MPC dissenter Jayanth Varma pointed out, however, that “Inflation is projected to average 4.5% in 2024-25, and, therefore, the current policy rate of 6.5% translates into a real rate of 2%. I do not believe that such a high real rate is required at this stage to drive inflation down to the target of 4%. It is true that economic growth is holding up well, but there is no evidence at all that the economy is overheating.” What’s holding back rate cuts in India is unpredictable food inflation, which holds RBI policy hostage.

One big reason why inflation, especially core inflation, is muted is because of low commodity prices, as we pointed out here. This has also enabled companies to maintain good profit margins, allowing earnings growth even though sales growth has been sluggish. And one reason why commodity prices have been low is because of the problems being faced by the Chinese economy. The US Bureau of Labour Statistics said, “Prices for imports from China decreased 0.3 percent in January, the largest 1-month decline since July 2023. The price index for imports from China last increased on a monthly basis in October 2022. Import prices from China fell 2.9 percent from January 2023 to January 2024.” Unlike the rest of the world, which is worried about inflation, China’s problem is deflation, with consumer prices falling by 0.8 percent from a year ago in January 2024.

China, in short, is exporting much-needed disinflation to the world. Add the diversification of supply chains and the change in geopolitics and it’s clear that China’s current woes are a blessing for many countries, including India. Here’s a translation of an article in a WeChat blog by Bob Chen, translated on the Baiguan substack, titled ‘The world tastes the sweetness of Chinese decoupling’. It says very clearly: “The pie that originally belonged to one will be divided among many, and labour will get a larger share of the pie. The 300 million Chinese middle-class people could be replaced by the future middle class of a billion people in emerging markets worldwide. This is actually quite good for everyone [except for China]!” It is even better for countries such as India, which have the size to be an alternative to China, which benefit from the low commodity and oil prices due to sluggish Chinese growth and which do not depend on Chinese markets for their exports.

It is no wonder then that the Chinese authorities have pulled out all the stops to prop up the Chinese economy, including a rate cut, curbs on short-selling and government support for the equity market. The Shanghai Composite index has seen a steep climb from its depths in the last few days.

But the consensus is that China is suffering a structural problem, which will take years to fix. Even more importantly, there is bipartisan support for China-bashing in the US. That is good for markets that have benefited from the diversion of funds away from China, such as Japan, which has seen huge fund inflows despite anaemic economic growth.

In the Indian markets, the good news on the China+1 factor and the buoyant domestic economy has long been priced in. We said that “the sustainability of the bull run is the key question in every investor’s mind”. Christy Mathai, Fund Manager-Equity at Quantum Mutual Fund, wrote that “one can be optimistic on the earnings growth front but not on valuations”. Perhaps it’s time, as our columnist Ananya Roy says, "to look at the second-order impact of the upcoming pick-up in private capex”. High valuations in markets such as India make them vulnerable to any repositioning of funds on China.

Much will depend, therefore, on how the Year of the Dragon pans out. This site says the dragon holds a significant place as an auspicious and extraordinary creature, unparalleled in talent and excellence. It symbolises power, nobility, honour, luck, and success. The last time a momentous event happened during a year of the dragon in China was in 1976, when Chairman Mao died, paving the way for capitalism in the Dragon Kingdom.

For markets that are euphoric about AI, though, perhaps the worry is that the year 2000, which ended the doctom bubble, was also a year of the dragon.

But that is not what OpenAI thinks. ChatGPT says:

“In the year of the dragon so grand,

Fortune smiled upon the land.

With scales that gleam,

In the lunar dream,

Good luck and prosperity fanned!”

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

MC Pro Election 2024 portfolio, Will Grasim’s entry disrupt the paint industry? Paytm, GPT Healthcare, PG Electroplast, Safari Industries, VIP Industries, Protean Tech, Aditya Birla Capital, Hindalco—Novelis listing in the offing, Juniper Hotels, SJS Enterprises, CGD sector, EIH, Cochin Shipyard, eMudhra, Bosch, Weekly tactical pick, Trent, Godrej Consumer