Moneycontrol Pro Weekender | Chaos Theory

It seems the ultimate Batman villain, the Joker, is writing the script for the US Presidential elections. As if it was not chaotic or messy enough, President Donald Trump has declared that he and the first lady of the United States have tested COVID-19 positive.

That’s the cue for global markets to dive and they duly complied. Not only stocks fell, but oil futures too shed value – Brent is at a three and half month low - as the demand for safe haven assets rose.

This follows a rather sedate September when the S&P 500 index lost 4 percent, its first monthly fall since March. That was not only because technology stocks, which led the decline, were perceived to be expensive, but also politics.

In the US Congress, the Democrats and Republicans have been unable to reach an agreement on a second stimulus. Meanwhile, Trump has refused to commit to a peaceful transfer of power to Joe Biden citing his problems with mail-in ballots and alleging fraud in such voting. Now, the President testing positive has added a new twist because Trump, 74, is in an age group that is considered vulnerable to COVID-19 complications.

A delayed or close election, which could lead to a round of legal wrangles, is the last thing nervous investors want especially when COVID-19 cases are still rising and the US economy’s recovery is questionable with unemployment at 8.4 percent in August. As investors choose to take risk off the table, the US dollar is strengthening.

The volatility in global markets will, of course, cause ripples in Indian stocks as well. This is happening at a time when some green shoots are visible in India as the unlocking widens and more businesses come back on stream.

The India Manufacturing Purchasing Managers Index (PMI) for September rose to 56.8 from 52 in August. Steel output rose for the first time since COVID-19 struck. Goods and Services tax collections were strong in August and the highest since March. E-way bills, a measure of goods movement across the country, surpassed February’s number at 57.4 million. Unemployment had fallen to 5.84 percent by the end of September, while vehicle sales too are buoyant, as our economic recovery tracker showed.

These numbers should come as music to ears of investors, like for example, in GMR Infrastructure which is heavily dependent on a recovery. They have implications for firms such as Transport Corporation of India and Shriram Transport.

Overall, the rise in high frequency indicators portend well for the economic gloom to lift in the coming festival season. When the India Services PMI numbers are released next week, we will get more clarity.

Still, it is too soon to be popping a bottle of champagne. Despite the recovery, India’s economic output is set to shrink this financial year. The consensus among pundits calls for a second round of stimulus, especially since the first round that relied on bank lending doesn’t quite seem to be working (look here and here). But we don’t know when that will happen. The government’s fiscal space is shrinking. It needs to find out ways to augment revenue quickly, which it seems confident of doing so given that the borrowing plan for this year remains unchanged at Rs 12 lakh crore.

The obvious way to do so will be to raise money from disinvestment. The primary markets in India have been doing quite well with issues such as Mazgaon Dock Shipbuilders and UTI Asset Management Co (read here and here) getting a good response. Reliance Retail’s fund raising continues with General Atlantic, Silver Lake and Mubadala becoming the latest investors to pick a stake.

Thus, the time is ripe for the government to raise big money from the markets. We had written on BPCL’s strategic sale and why it is important, but the Centre has deferred it citing the COVID-19 pandemic.

This is the fourth deadline extension. Given that the government also could not seem to appoint three members to the Reserve Bank of India’s rate setting panel, because of which a monetary policy review was postponed, we pondered whether it has a blasé attitude towards economic policymaking. Moreover, the fact that Harley Davidson quit India (even if owing to internal compulsions) also does not look good for the nation. On the flip side, though Harley’s exit spells new opportunities for the Royal Enfield division of Eicher Motors.

The divestment of the Life Insurance Corporation of India remains the silver bullet for the government. One hopes that goes through quickly. The farm bills continue to remain a hot button issue and we called the reforms “a valiant attempt to integrate agriculture with capitalist development in the rest of the economy.” The reforms are also positive for staples companies although such firms face the near-term risk of flagging sales in urban markets. The other politically tough reform is that of electricity distribution where some baby steps for privatisation have been taken.

The coming week will see the release of the minutes of the US Federal Reserve’s meeting. TCS will set the ball rolling for the July to September earnings season. For the retail investor, disciplined investment is the key, says Nilesh Shah in an exclusive interview.

Stay safe. Don’t be like Donald and wear a mask.

Cheers

Ravi Krishnan

P.S. Your regular correspondent Manas Chakravarty is on leave. He will return soon.