Moneycontrol Pro Panorama | To decouple or not to decouple, that is the question

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Dear Reader, 

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of. 

Since December 2, the Sensex has fallen every trading day barring one. From the start of the month, it’s down by 1.8 percent and today has also seen it open in the red although at 12.30 pm, it had retraced from losses to neutral territory. But extend the comparison out to a few months and this fall becomes trivial. From its level as of September 29, the Sensex is still up by a solid 10 percent.

The evidence does point to investors getting a bit chary of investing as usual in equities. Inflows into equity mutual funds have declined for two successive months now, writes Vatsala Kamat as she analyses what’s worrying investors and what lies ahead. One asset class is gaining. That too is a result of the central bank hiking rates, making debt returns more attractive. Banks are chasing deposits and your bank relationship manager (RM) may have called and sold FDs to you saying rates have gone higher. When RMs begin to push FDs and not the other fee-earning instruments in their arsenal, it’s a sign that something’s up. Also, blame that on credit growing ahead of deposit growth.

The domestic market appears to be sympathetic to what’s happening in the West. More so the Dow, but even the S&P 500 has seen a similar movement in December. Is this simply a coincidence or something else? We don’t know, yet. And it’s also early to call it a deep-rooted trend. But a common worry for both sets of investors is rising interest rates as their respective central banks battle entrenched inflation.

India’s Monetary Policy Committee of the RBI did bring down the rate hike tick size down to 35 basis points in its latest meeting. The US Fed, too, is widely expected to bring its own rate hike size down to 50 bps this week, from the earlier 75 bps. But the fight to tame inflation is expected to last longer than expected and hurt growth in the process. That markets are taking the situation coolly also makes life difficult for the Fed.

On the hard choices confronting the US Fed, Mohamed El-Erian writes in the FT​ (free to read for subscribers) that to bring inflation down to 2 percent without causing much harm to the economy and financial markets is difficult. He writes: “Signalling the pursuit of an objective while quietly heading in a different direction is a tactic in politics that is as old as it gets.” He then makes a case for the Fed maintaining its inflation target, but doing nothing adverse even if it remains above that level. In some ways, that’s similar to what India is doing as well, nothing dramatic to pin inflation back to the mandated range of 4 percent, plus or minus 2 percentage points. Procrastinators may approve, as what goes up will eventually come down is how they solve problems.

While the markets may be coupling, even if momentarily, the largest economies are fast moving towards decoupling, whether in areas such as industrial, services or energy supply chains. Self-sufficiency is becoming the new mantra and a country such as India is seen as a prime beneficiary of this shift, along with others in South East Asia. On the subject of decoupling, an interesting aside is another FT analysis, written by Rana Foroohar, (free to read for subscribers), that looks at how decoupling is seeing large corporations struggle to understand their supply chains, their vulnerabilities and the regulatory risks they face, even as they move to various models such as reshoring, nearshoring, friendshoring and the like. While transparency will improve, it also throws up new business for companies in the services and data businesses.​

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Technical Picks: Havells India, HDFC Bank, Copper, Dr Reddy’s, Nifty and USD-INR (These are published every trading day before markets open and can be read on the app).

Ravi Ananthanarayanan
Moneycontrol Pro