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Last Updated : Oct 24, 2020 03:14 PM IST | Source: Moneycontrol.com

Moneycontrol Pro Weekender | The wealth of nations

India’s wealth will increase by 5-6 percent this year and around 9 percent in 2021, according to Credit Suisse

Dear Reader,

What pandemic? Credit Suisse’s annual Global Wealth Report, out this week, says that despite the pandemic, total global wealth in the middle of 2020 was higher than at the beginning of the year.

How on earth did that happen? The report lists three factors: ‘First, restricted consumption opportunities have translated into higher savings and then into higher financial assets or lower debts. Second, lower interest rates and relaxed credit conditions have supported asset prices, including house prices and the valuations of pension entitlements. Finally, there has been massive economic support by governments involving the transfer of many trillions of US dollars from the government sector to the private sector, and ultimately to households.’

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Yes, but what about the lost jobs, the shuttered businesses, the bankruptcies? What Credit Suisse is saying is another way of highlighting the gulf between the economy and asset prices. The report seems to think that a payback is inevitable and ‘reduced GDP and rising debt will result in long-term damage, so wealth growth will be depressed for the next couple of years, and likely longer.’

What’s more, if, as the report says, restricted consumption has led to higher savings that have flowed into financial markets, what happens when the opportunities for consumption come back---will that mean less funds in financial markets and therefore lower asset prices?

India too has done well. Credit Suisse believes India’s wealth will increase by 5-6 percent this year and around 9 percent in 2021. Of course, for some of us, it’s as if the pandemic didn’t happen, because this average figure conceals vast inequalities.

The report estimates that 72.8 percent of India’s adult population had total wealth less than USD 10,000 at the end of 2019, 24.9 percent had wealth between USD 10000 and USD 100000, 2.2 percent had wealth between USD 100,000 and USD 1 million, while 0.1 percent had over 1 million. The median wealth per adult was a mere USD 3943.

Compare that with China, where a much lower 19 percent of adults had wealth below USD 10,000; 66.6 percent between USD 10,000 and USD 100,000; 13.8 percent in the USD 100000-1 million bracket and 0.5 percent had wealth above USD 1million. Median wealth per adult was USD 25,758.

The report also projects growth of 3.9 percent in wealth for Germany this year. Will that prediction hold, now that a second wave of infection is spreading across Europe? Much depends on export growth, as the October Flash Purchasing Managers Index for German manufacturing came in at a very strong 64.9, supported by a resurgence in exports. The Eurozone Composite Flash PMI for the month though slipped back into contraction, at 49.4. Business contraction persisted in Japan, with its composite flash PMI for October at 46.7. A reading below 50 signifies contraction in activity from the preceding month. The UK flash composite PMI for October was 52.9, in expansionary territory but losing momentum.

In India, our recovery tracker showed lower unemployment and improving consumer sentiment. For firms, the shape of the recovery will depend, to a large extent, upon their size, although the biggest global tech firms have their share of problems. We brought you the FT’s take on the good, bad, and ugly of soaring global tech stocks.

Will the recovery translate into higher stock prices? We have two contrary viewpoints, with Kotak’s Sanjeev Prasad telling us that we’re in an expensive market, while Sunil Singhania is far more bullish.

Of course, much depends on the industry and on the outlook for individual companies. A case in point is the Bajaj Finance stock, which we argue should be switched in favour of HDFC Bank. Sticking to banks, we don’t see much downside in CSB Bank, while Federal Bank’s valuation is pricing in the current uncertainty about asset quality.

With the markets resurgent, questions about valuation loom large. For instance, while we find Avenue Supermart’s valuations a challenge, we draw comfort from HCL Tech’s valuation. Similarly, while we find L&T Infotech fully valued, we find both Hindustan Zinc and Phillips Carbon attractively valued. Relative and absolute valuations have improved for Colgate Palmolive, adding to its raw material tailwinds. On the other hand, Asian Paints trades well above its intrinsic value. For an expensive stock like HUL, however, its premium valuation is likely to sustain, but the lesson for FMCG investors lies in its margin.

What about the cyclical recovery? It seems to be underway in cement, with Ultratech positing excellent results and ACC structurally improving its profitability, with its cost saving programme yielding disproportionate benefits. But the outlook doesn’t look that good for L&T.

In autos and auto ancillaries, while we look for a V-shaped recovery in demand for Bajaj Auto, we also see a strong recovery for Ramkrishna Forgings, but argue that Hero MotoCorp needs to go beyond rural markets. We also tried to tone down a bit the hype around electric vehicles.

The US Presidential race has entered the home stretch and Biden has kept his lead, although Trump has recovered some ground, as our US election tracker says. We had two articles from FT on the subject, one a kind of devil's advocate piece on the case for re-electing Trump and another on the ‘do-nothing’ strategy ahead of the elections followed by some investors.

And finally, here’s this warning of a ‘long economic covid’ from FT.

Cheers,

Manas Chakravarty
First Published on Oct 24, 2020 03:14 pm
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