Jeremy Grantham, famed investor and co-founder of asset management firm GMO, has long been warning that markets are in a bubble. The opening lines of his superb January 2021 essay titled ‘Waiting for the last dance’ succinctly sum up his position. Grantham wrote then, “The long, long bull market since 2009 has finally matured into a full-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behaviour, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea Bubble, 1929 and 2000.” And that was before Russia invaded Ukraine and the US declared an all-out economic war on Russia and China.
Small wonder then that Grantham now believes that we are in the final stages of the bubble. In a piece titled, ‘Entering the Superbubble’s Final Act’, he says what we just witnessed in the markets is a typical bear market rally and we must ‘Prepare for an Epic Finale’.
That dire warning, albeit not for the markets but for the economy, was also what came out from the Jackson Hole conference. Fed chair Powell talked of pain in store for the US economy and households. Bank for International Settlements general manager Agustin Carstens went much further, warning that the global economy was on the cusp of a historic change and the tailwinds that propelled growth in the last three decades had turned into headwinds. The upshot: investors need to be selective. And yet the markets seem to cling to the hope that Uncle Fed, who has given them their daily fix all these years, will not abandon them.
The global economy is slowing. The JP Morgan Global Manufacturing Purchasing Managers Index (PMI) for August came in at a 26-month low. That is going to take a toll on Indian IT companies. Chris Williamson, chief business economist at S&P Global Market Intelligence, said of the US Manufacturing PMI reading: “Barring the initial pandemic lockdown months, this is the steepest downturn in US manufacturing seen since the global financial crisis in 2009.” As for China, its mystifying zero COVID policy continues, with Chengdu, a city of 21 million residents, being locked down now. These lockdowns, together with the crisis in the country’s real estate sector, threaten to upend the Chinese economy, already buffeted by the economic war against it by the US and a crackdown on the tech sector at home. China’s mega corporations, once the darling of investors, are now in the doghouse. Cornered, the Chinese authorities have allowed US auditors to access the books of companies facing delisting.
There is one silver lining to the global growth slowdown, though. The latest data from the S&P Global Commodity Price & Supply Indicators show that global price pressures are the lowest in two years and supply shortages have eased to a 20-month low. Crude oil prices are near their lowest levels since January.
That will be music to the ears of central banks. India, for instance, currently seems to be having the best of both worlds, with manufacturing growth strong and inflation coming down, as seen from its manufacturing PMI for August. The icing on the cake is that animal spirits, or business sentiment, is the highest in six years, says the PMI survey. Consumer sentiment has continued to improve, as seen from our Economic Recovery Tracker.
Automobile sales for August have been robust and we recommended a pure play on growth in the Indian automotive industry, especially with Suzuki signalling its confidence in India. The real estate market too has picked up and we recommended a few stocks in the affordable housing segment and considered the attraction of REITs with the recovery in office property. In the steel sector, Arcelor Mittal’s acquisition of Essar Steel’s port and power assets will bolster its Indian steel operations. Higher steel production and the expected addition to capacity will benefit players in the refractory space, such as Vesuvius India. Reliance Industries’ AGM saw the announcement of major capex plans in high growth segments, with a focus on disruptive products and green technology. We analysed what RIL’s entry into the FMCG markets means for the incumbent players. We pointed out that Karur Vysya Bank’s valuations are undemanding even after the rally. With a renewed demand for coal-based power, we looked at how it benefits NTPC. The other companies we looked at during the week were SRF, IGL, CCL Products, and a potential IDBI Bank-CSB merger. This piece makes the case for stock selection, by pointing out that the vast majority of companies have given less than 10 percent compounded annual growth for shareholders.
Can the Indian markets fight the Fed? A strong economic recovery may not necessarily result in a market rally if valuations are high. Also, in today’s world of interconnected markets, the decoupling of the Indian market from the global is unlikely to last. The US Fed’s Quantitative Tightening (QT) programme is going to accelerate this month. The US housing sector is in trouble and this FT story, free to read for Moneycontrol Pro subscribers, says there are market risks in non-bank mortgage lenders that have financed the post-crisis housing boom. It adds, “Historically, US rate cycles typically only turn as the Fed is forced into easing by financial crisis. It is unlikely that this time will be different.” That is why investors may be better off in stocks where the downside risk is limited, such as this pharma company.
Even for the Indian economy, while the recovery has been strong, it’s best to keep in mind that GDP growth in the three years to June 2022 has been all of 3.8 percent. Our Monsoon Watch indicator says that the area covered under rice and pulses remains lower than last year. The Indian rupee is flirting with the 80 to the dollar level, but the RBI has been supporting it. Dollar strength and imported inflation is a worry for net importers such as India. Look at Japan, where the yen has slipped to 140 to the dollar for the first time since 1998. As RBI Deputy Governor Michael Patra said at the last Monetary Policy Committee meeting, “Each country is on its own - match the Fed or face currency depreciation, imported inflation, wider current account imbalances, capital outflows and reserve losses.”
Among other stories, we had a piece on India’s demographic dividend not paying out, whether our cities are ready for the flexi-work revolution, the hurdles in getting Indian bonds in international indices, the red flags investors must watch out for in start-ups, on India’s semiconductor push, on what Ghulam Nabi Azad’s exit means for the Congress, on the wider ramifications of the Supreme Court ruling on benami properties, in geopolitics on the importance of Iran, and in personal finance—whether UPI or cards are better. Our selections from FT include Ruchir Sharma’s on a post-dollar world, on Elon Musk and the fake twitter account controversy and on why we should stop bashing share buybacks.
Ironically, we have all but forgotten the Ukraine war. When will it end? Boris Kagarlitsky, Russian sociologist and dissident, says, “On the one hand, the events every day demonstrate more and more how incompetent and mediocre the people who dragged the country into the current catastrophe turned out to be; on the other hand, any attempt to get out of this impasse will require them to recognise the very fact of that failure - this inevitably raises the uncomfortable question of responsibility. Therefore, the people who now rule in our state are more comfortable sinking deeper and deeper into the catastrophe than trying to overcome it.”