How high can you build on shaky foundations? Those weak foundations are what Nikhil Gupta, chief economist at Motilal Oswal, recently chronicled in a series of remarkable research studies. His thesis: Much of the economic recovery in India is confined to the listed corporates, central government finances and well-off households.
What are the implications of this top-heavy recovery? Nikhil says a strong economic recovery is not possible without the participation of the unlisted corporate sector, state governments, medium and small firms and the self-employed. By way of example, he points out that while the central government’s capex has increased to a 14-year high in the first nine months of FY22, state governments’ capex has fallen to an 18-year low.
The impact on consumption is very clear. My colleague Ravi Ananthanarayanan says unambiguously of the HUL results, “High inflation leading to rising product prices is seeing consumers cut back on consumption.” CMIE’s analysis of the first batch of non-financial corporate results for the March quarter shows a sharp fall in inflation-adjusted sales growth.
The same thing is happening globally, as inflation soars. This FT story, which MC Pro subscribers can read for free, talks of the threat of a global ‘buying strike’. In India, with low labour force participation and a lack of good jobs on the one hand and high inflation on the other, the masses are caught between the two pincers.
William White, former economic adviser at the Bank for International Settlements, who predicted the Global Financial Crisis, had this to say in a recent article: ‘What is needed are structural reforms that rebalance power between capital and labour, reverse the concentration of market power, redefine the role and operation of corporations, restructure debt where needed, make production systems and consumption preferences more nature friendly, redesign the social contract to benefit the majority, make our governance mechanisms more accessible and transparent, and incentivise politicians to work for the common good.’ But rather than confronting these difficult structural challenges, politicians have chosen the easier route of monetary stimulus, says White. The upshot: rampant inflation.
High input prices are having an impact on companies across the board, including such stalwarts as HUL, Atul, Mahindra CIE, Bhansali Engineering, Tata Metaliks, Philips Carbon Black, Rallis India, Hindustan Zinc and Bajaj Auto, but many of them have been able to shore up profits through price hikes. No wonder India is pretty high up on the Misery Index. Even the corporate sector is now feeling the heat.
Talking of heat brings us to the latest reason why food inflation may remain high -- the heat wave is threatening the wheat harvest. The RBI State of the Economy report for April had pointed out, ‘an area of concern that we would flag is the currently raging heat wave. Temperatures are breaking all-time records in many pockets of the country. The country as a whole saw the hottest March (average maximum temperature) in the last 122 years’. Indonesia’s palm oil export ban will add to the upward pressure on prices.
Indeed, high commodity prices are at the root of the turmoil in the markets. Market expert and MC Pro columnist Ajay Bagga looked at what happened in previous episodes of interest rate tightening and concluded that this time could be very different because the headwinds are much stronger. His conclusion: ‘There is a rainbow beyond the storm, but the storm of the next 12 to 24 months has to be survived first.’ We took a look at how many Fed rate hikes are priced in.
So far, though, in spite of the negative GDP growth rate for the US in the first quarter, the PMI numbers for April show that a combination of pent-up demand and opening up after COVID is propping up growth, while at the same time leading to a steep rise in inflation. Our Economic Recovery Tracker is shining bright green, probably due to the same reasons.
Indian Hotels has been a key beneficiary of the demand surge. Other bright spots include Trent, Macrotech Developers and defence stocks. The Ambuja Cements stock has surged on anticipation of Holcim’s stake sale. And there is a glimmer of light at the end of the long tunnel through which the discoms are passing.
Among financials, we recommended Axis Bank and AU Small Finance Bank as long-term winners, considered whether ICICI Bank is the new HDFC Bank, argued that credit cards are a good carrot for NBFCs amid tightening regulation, looked at the good, the bad and the ugly of Bajaj Finance’s valuation, and cast a sceptical eye on having digital banking units at district headquarters.
In the IT sector, we liked Cyient so much we analysed it twice, here and here, and took a bird’s eye view of the sector, wondering whether it was an export success or a domestic missed opportunity. We also took a close look at the auto sector.
Elon Musk’s takeover of Twitter was reason for joy among some and outrage among others and we waded gleefully into the controversy, debating the implications for free speech, investor activism, and what the deal means for Tesla.
Martin Wolf writes in this FT story about the many-sided economic shock from the Ukraine war, consoling himself with the thought that, ‘the one upside of recent disasters is that absolute dictatorship is being discredited’. While agreeing that Putin was smoking something very strong when he decided to invade Ukraine and Xi’s zero-COVID policy is terribly silly, we are not so sure that the US policy of insisting on fighting to the last Ukrainian standing is free from ulterior motives.
In our constant endeavour to expand our bouquet of stories, this week MC Pro introduced a new Learn series on foreign exchange trading.
And finally, my colleague Sachin Pal wrote a fascinating piece on the plunging Japanese yen and the risks of it being a precursor to a bigger economic crisis. As if on cue, USD/JPY blasted above 130 on Thursday. With China trying to prop up growth via an easy money policy, USD/CNH shot up to 6.66, an 18-month high.
On a completely unrelated note, the number 666 is widely seen as the mark of the devil.