Moneycontrol Pro Weekender | Return of the Very Old Normal 

That may happen in the short term, but the draconian sanctions have underlined the resurgence of geopolitical risk. The era of hyper globalisation is over and countries will turn inwards, building up their capabilities rather than blindly trust the West. That mistrust could extend to the West’s corporates, which are being used as weapons, and its media, which has orchestrated a massive propaganda campaign, while companies such as Google and Twitter censor dissenting voices. Jefferies’ Chris Wood’s Greed & Fear newsletter talks about the move to freeze the Russian central bank’s assets and wonders, “How other countries with large foreign exchange reserves will view the matter if, one day, they are suddenly deemed to be out of favour in Washington. GREED & fear is not just thinking of China ($3.2 trillion of foreign exchange reserves) but also, for example, of Saudi Arabia ($447 billion of reserves) and India ($632 billion of reserves).”

Growth in trade is likely to slow down. Defence spending will certainly go up — China, Sweden and Germany have already announced higher defence budgets. That is one reason why we recommended this undervalued defence stock.

But these effects will happen slowly, over a period of time, which is perhaps why the markets are not particularly concerned. In India, the government has been prescient, kicking off its Aatmanirbharta or campaign for self-reliance long ago, the Production-Linked Incentive (PLI) scheme being a major initiative. This week, in our Decoding PLI series, we looked at how the incentives for the pharma sector are working.

The immediate impact of the Ukraine war will be to America’s advantage. But the long-term impact, especially if it cements a Sino-Russian bloc, is less clear. The SWIFT ban, for instance, may be a double-edged sword, although this FT story (free to read for MC Pro subscribers) points out that the search for alternative payment systems will increase the fragmentation of the world economy.

US Intelligence has said the world has become multi-polar and warns of “the growing spectre of great power conflict”. That smacks not so much of a new normal, as the very old normal of the first decades of the last century and earlier centuries. The difference in great power rivalry then and now is that they’re all armed with nuclear weapons now.

The markets are also worried about monetary tightening by central banks, with the European Central Bank starting tapering of asset purchases. The consensus is not only that the global economy’s recovery from the pandemic will be postponed, but we’ll see slower growth with higher inflation — in India as well. A hawkish Fed may well be a bigger threat to the rupee than the Ukraine war.

It’s not just a question of disrupted supply chains. Investment in hydrocarbons has been low globally, which is why it’s likely that crude oil and coal prices could remain higher for longer. Bank of America has said crude oil prices could go up to $200 a barrel if the blockade of Russian oil is broadened. Metal prices too were already rising before the Ukraine war and although a resolution of the conflict will see a correction, they are likely to remain at elevated levels in the short term, given the supply disruptions and higher energy prices. Some argue it’s a new normal for commodities. Mohamed A El-Erian, chief economic adviser at Allianz, has said many countries, especially fragile developing countries, will face pressures such as adverse terms of trade, a strengthened US dollar, reduced global demand, and financial-market instability.

The collateral damage of the war and sanctions will affect the poorest economies the hardest, particularly from soaring food prices. The FAO Food Price index has risen sharply to an all-time high. Back home, FMCG food companies are already feeling the pinch.

Rising inflation has affected consumer sentiment, as our Economic Recovery Tracker shows. Thankfully, as our Herd Immunity Tracker indicates, the threat of COVID-19 has been receding, at least in India.

The biggest threat to India’s economic recovery, of course, is the rise in oil prices. A hike in petrol and diesel prices is imminent and the question is how far will they rise. We offered some solutions on what the government could do to mitigate the impact.

On the other hand, the conflict could boost our wheat exports, although, if the war continues for long, selective government intervention may be needed. The Eastern Window looked at how the Ukraine war and Russia’s isolation will affect India’s ties with China. We also looked at the outlook for the rupee.

The clouded macro picture has had an impact on company bottom lines. For example, Maruti, which was just getting its act together, now faces several external risks. With many good stocks trading at a significant discount to their long-term average valuations, we sniffed out opportunities for investors, one of them being Endurance Tech. The Russian sanctions could lead to a shortage of graphite electrodes, which is where a stock like HEG becomes attractive. Insecticides (India) is a value bet on a normal monsoon. For the long-term investor, we picked MapmyIndia, IndiaMart Intermesh, Thangamayil Jewellery and these luggage stocks. We suggested investors should add to SIS Ltd on declines, while we argued that the Dixon Technologies stock is still running ahead of its fundamentals. We also analysed the UPL buyback.

In crisis situations like the current one, though, it is the macro picture that is most important. That is why we tried to gauge just how close is the bottom for the market and what market screeners investors can use in this market. We had a piece that looked past the current volatility and a two-fold strategy when interest rates are set to rise.

Our usual columns -- Crypto Conversations, Start-up Street, Crypto Learn and Algo Rhythm-- were all there this week. We also started offering readers technical analysis on commodities every morning.

Finally, we come to the results of the state elections. The results are ground-breaking, especially in Uttar Pradesh, where the BJP’s vote share has increased. Note that this is despite the weak economy, high unemployment, mismanagement during the COVID second wave, the farmers’ agitation, the dismal state of small and micro firms and a host of other problems. The BJP has been able to use a combination of welfare measures, a law and order platform, its Hindutva ideology and strong and popular leadership to transcend caste differences and win a big majority. Its victories in Goa and Manipur confirm its pan-India footprint.

For the markets, the fact that the BJP has been able to win even under such unfavourable circumstances is a powerful signal that business-friendly policies and reforms will continue for the foreseeable future. It is also a big relief, as it will ensure that we have political stability during these turbulent times.

Cheers,

Manas Chakravarty