Moneycontrol Pro Weekender | Ten pointers to Armageddon

Representative Image (Illustration by Suneesh K.)

Dear Reader,

We all know the burning problems we face today. The Russian invasion of Ukraine, rampant inflation, monetary tightening by central banks, sky-high government debt, supply disruptions, a slowdown in growth and the antics of Elon Musk are the more salient ones. But, in the markets, we are often told to look beyond the depressing present and focus instead on the presumably sunny long-term.

What then does the long-term hold? The IMF, in its flagship publications this week, has sketched out some rather scary long-term scenarios. Here are ten of them:

1. The Ukraine war, and the draconian sanctions by the West on Russia, may split the world into two competing geopolitical blocs -- one led by the US and another by China and Russia.
2. This could lead to geopolitical blocs "with distinct technology standards, cross-border payment systems, and reserve currencies. Such a tectonic shift would entail high adjustment costs and long-run efficiency losses as supply chains and production networks are reconfigured". In other words, the sanctions can induce permanent dismantling of trade and supply chain linkages, entailing productivity and efficiency losses.
3. Such a denouement will be a major challenge to the framework that has governed international and economic relations for the last 70 years.
4. Increased global polarization will impede the cooperation essential for long-term prosperity. This could include derailing the urgent climate change agenda and undermining multilateral efforts to improve debt resolution frameworks, trade integration, and initiatives to avoid future pandemics.
5. Some 60 percent of low-income developing countries are already at high risk of debt distress. Moreover, past monetary tightening episodes occurred when large emerging markets—notably China—were expected to maintain high growth rates, with favourable spillovers. In contrast, the current tightening episode is unfolding amid slower potential growth than in previous episodes. Geopolitical tensions mean the external backdrop is also considerably more difficult.
6. Increased international polarization would hamper the global economic integration essential for long-term prosperity. Technological exchange may be limited, production networks and technology standards could coalesce into distinct blocks, and welfare gains from globalization could be reversed if countries adopt more protectionist policies.
7. Global emissions are very likely to overshoot the Paris Agreement temperature goals by the end of the century and lead to catastrophic climate change (with low-likelihood outcomes such as the ice sheet collapse, abrupt ocean circulation changes, and some extreme events and warming that cannot be ruled out).
8. Policy makers should note that the geopolitics of energy security may put climate transition at risk; the risk of fragmentation of capital markets and implications for the role of the US dollar; the risk of fragmentation in payment systems and the creation of blocs of central bank digital currencies; more widespread use of crypto assets in emerging markets; and more complex and bespoke asset allocations in an effort to pre-empt the possible imposition of sanctions.
9. The war in Ukraine has increased the probability of rising social tensions because of higher food and energy prices and large refugee inflows may exacerbate social tensions and fuel unrest. Look at Sri Lanka.
10. And here’s its conclusion: If these risks materialise, ‘the global economy will likely suffer through an unpredictable transition to a new political reality, with financial volatility, commodity price fluctuations, and dislocation of production and trade along the way.

On the other hand, as Monty Python told us, we must always look on the bright side of life. The war may get over soon, supply chain disruptions may get resolved, China could be wary of siding with a weakened Russia and central banks may manage a soft landing. Perhaps the digital spurt given by the pandemic may lead to productivity gains, while the war will increase investment in renewable energy.

As for India, we may succeed in cleverly playing off one bloc against the other, managing to get cheap oil and commodities while making sure the US backs us against China. After all, as Finance Minister Nirmala Sitharaman said in her Budget speech, we have entered Amrit Kaal.

We wrote at enormous length about the insights in the IMF reports this week, including on growth projections for India, on output gaps, supply chain networks, and the savings glut of the rich.

On China, we had an FT story (free to read for MC Pro subscribers) on the slowdown there, on what it means for investors and for those seeking safe assets, while The Eastern Window pointed out how the unholy mess in Sri Lanka and Pakistan has taken the shine off Xi Jinping’s Belt & Road Initiative.

On the Indian economy, our trusty Economic Recovery Tracker noticed a flagging of momentum. India, we found, is a bright spark in steel, but falling real rural wages could affect consumption and wholesale price data show manufacturers are passing on cost increases. We dissected India’s flawed export policy and worried about its balance of payments going haywire.

Virendra Mhaiskar, the CMD of IRB Infrastructure Developers, talked to us about why BOT projects are making a comeback. And we suggested bending the K-shaped recovery into a U-shaped one.

Among a torrent of IT results, we singled out Infosys, compared Infy with TCS, parsed the financials of HCL Tech, Mindtree, L&T Infotech, L&T Technology Services, pondered why L&T’s moves in IT have been short on ambition and why investors are dumping IT stocks.

Other stocks we analysed during the week included Kothari Petrochemicals, Amara Raja and IFGL Refractories. We looked at Nestle India’s pressure on margins, pharma companies mounting a solid defence against the slowdown, how high gross refining margins have bailed out refiners, prospects for the ICICI insurers—ICICI Prudential Life and ICICI Lombard General Insurance, HDFC Bank, rising costs at GM Breweries, Equitas Small Finance Bank’s headroom for re-rating, trouble spots at ACC and Delta Corp.

We also considered the implications of the new rules for NBFCs and Tata Power’s stake sale in its renewable energy business at lower-than-expected valuations. We sceptically underlined that digital cash does not a digital nation make.

We discussed what strategy investors should adopt as inflation shoots up; why looming interest rate hikes are so scary for the markets this time; about Fed tightening taking real yields to the brink of positive territory; and about the rotation from equities to hard assets.

In our regular features, we had Crypto Learn, GuruSpeak, Start-up Street, Algo Learn, Decoding PLI, Herd Immunity Tracker and Personal Finance.

Of course, there is another risk that we haven’t considered. American political scientist John Mearsheimer, persona non grata with the liberal establishment for his realist views, believes that the Ukraine war, which he says is actually a proxy war between the US and Russia, could last for years and even lead to a nuclear holocaust. The full transcript of his spine-chilling presentation is here. This might be the right time to recall that Russia has just tested its nuclear capable Sarmat missile, which Putin says is the world’s best. It’s no wonder then that this Bloomberg article says Putin’s nuclear threat makes Armageddon thinkable.

It gives a whole new meaning to Lord Keynes’ retort that "in the long-run, we are all dead".

Cheers,

Manas Chakravarty