Moneycontrol Pro Weekender: As good as it gets

Dear Reader,

Former chief economic adviser Arvind Subramanian says he is puzzled why the Indian stock market is so buoyant when the economy is in such dire straits. In a recent paper, he said the Indian economy ‘seems headed for the intensive care unit’. If Subramanian is right and the Indian economy is indeed in the throes of what he says is a Four Balance Sheet slowdown, then stocks are in la-la land.

Are investors following Baron Rothschild’s advice to ‘buy when there’s blood in the streets’ then? Far from it. There is no sign of any blood on Dalal Street, although quite a bit of it seems to be flowing in other streets in the country.

Instead, all that Arvind Subramanian has to do is look at the MSCI indices, which show India has not been doing as well as the MSCI Emerging Market Asia index. And, of course, there is the well-known fact that the rally is driven by a few frontline stocks - the midcap indices are nowhere near their highs.

As for the reasons why equities are rallying across the globe, it would have been a worry if they did not, what with United States President Donald Trump and US Fed Chair Jerome Powell playing Santa.

To be sure, the so-called phase 1 deal is still shrouded in secrecy and may well prove to be a fudge aimed at the US elections. We were accordingly suitably cautious about the deal and warned that a lot of ground needed to be covered before investors could be comfortably bullish.

And just in case that was not convincing, we tried to peep into Xi Jinping’s mind to buttress our case.

But who cares, when, as the Bank of America survey of global fund managers this month found, the percentage of fund managers overweight cash is the lowest since four years ago.

Cash levels remained at 4.2 percent, tied for the lowest level since May 2013. What’s more? Fund managers increased their allocation to equities by 10 percentage points this month, to a net 31 percent overweight. All that moolah is pouring into the equity markets and India is merely getting a share.

As for the economic fundamentals, do not worry, central banks are taking care of it - Bank of America says central banks across the world cut policy rates 51 times in the last six months, the greatest since the global financial crisis. What on earth are they scared of?

As BoA put it pithily, ‘central banks are cutting like it is a crisis.’ We looked at the Flash Purchasing Managers’ Indices for December to find the latest on the US, Eurozone and Japanese economies, in our on-going but so far futile effort to provide a fundamental justification for the rally.

Back home, November trade data showed that non-oil, non-gold imports were at their lowest in the last five years. And Unilever’s warning about sales growth, particularly in its Indian subsidiary HUL, sparks concern about consumption growth, which we argue would best be served by sacrificing margins.

Far more jaw-dropping was the week's corporate news, with the National Company Law Tribunal (NCLAT) judgment reinstating Cyrus Mistry as executive chairman of the Tata group. While Mistry is basking in the glow of victory, the Tatas will appeal to the Supreme Court. With the sword of Damocles hanging over the group, we discussed what investors should do.

As always, in a valiant effort to find pockets of value in the markets, this week we picked the microfinance sector, which is going great guns in an environment where overall credit growth has slumped dramatically. And, of course, we have a stock for you in this sector.

As you all know, the bond market has not shared the equity markets’ enthusiasm and bond yields remained stubbornly high. That is why the Reserve Bank of India (RBI) announced its version of the US Fed’s celebrated Operation Twist, buying long-term bonds and selling short-term ones, in an attempt to lower long-term yields.

Yields had gone up when the RBI’s Monetary Policy Committee (MPC) desisted from lowering the policy rate at its last meeting. Operation Twist has immediately lowered the long-term yield, but the big question is whether it will last and whether they will twist more if it does not.

Incidentally, the World Bank has come out with a study that shows debt in emerging and developing economies climbed to a record $55 trillion in 2018, ‘marking an eight-year surge that has been the largest, fastest, and most broad-based in nearly five decades.’

Ceyla Pazarbasioglu, the World Bank Group’s Vice President for Equitable Growth, Finance, and Institutions said, "History shows that large debt surges often coincide with financial crises in developing countries, at great cost to the population."

Since that is not really a thought suitable for the festive season, I will leave you with a quote from Stijn Claessens of the Bank for International Settlements, who, while praising the study, also wisecracked: "Just as it is easy for economies to get flooded by waves of debt, so it is easy for readers to drown in a sea of books and articles on debt."

Cheers,

Manas Chakravarty