Moneycontrol Pro Weekender | Tricky landing 

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Dear Reader,

Inflation releases were the highlights of the week. In India, year-on-year retail inflation for June came in at 7.01 percent, little changed from May’s 7.04 percent. In the US, consumer inflation for June was 9.1 percent, the highest in 41 years.

A closer look shows a clear moderation in Indian inflation. Month-on-month headline retail inflation has fallen from 1.43 percent in April to 0.94 percent in May and now to 0.52 percent in June. Even core inflation, (CPI excluding food, fuel & light, petrol and diesel for vehicles) eased month-on-month, according to CMIE data. The wholesale price index for June was flat compared to the previous month. Inflation expectations too are coming down — IIM Ahmedabad’s Business Inflation Expectations Survey for May 2022 saw a sharp fall. With continuing momentum in growth, the Finance Ministry’s report on the economy for June 2022 said, “In sum, at the margin, June and the first ten days of July were better for Indian macro than the first two months of the current financial year. That is some cause for relief and even cautious optimism in these times.”

In the US, although inflation moved up sharply in June, President Joe Biden pointed out that there has been a sharp fall in commodity prices this month, which should be reflected in future inflation prints.

The concern in the US is that high inflation will continue to drive tightening by the Federal Reserve, which in turn will lead to a recession. A Bulletin by the Bank for International Settlements this week took a look at the all-important question on whether there will be a hard or soft landing. The study finds that while output in advanced economies needs to drop between 1.3 to 2.6 percentage points below its full potential over the next two years to bring inflation down to central bank targets, in India the loss of output needed is much less — around 1 percentage point below potential. For the US, the drop is expected to be around 2.4 percentage points. But the study adds: “To the extent that non-core inflation wanes over time on its own as food and energy prices stabilise, bringing inflation back to target would imply a significantly smaller slowdown.”

Slowing growth in the US is already having an impact on Indian IT services companies, where raising prices is proving harder than expected. It’s no surprise then that there are worries about a de-rating of valuations for TCS, L&T Infotech and Mindtree after their results, although HCL Tech seems to be better placed. Defending Happiest Minds’ valuation is a tough task.

The US Fed’s policy seems to be of front-loading rate hikes and then pausing as inflation subsides. The BIS Bulletin says, “Front-loaded tightening cycles tend to be followed more frequently by soft landings.” That is what the markets are expecting — There is now an even chance of the Fed hiking rates by 100 basis points at its next meeting on the 27^th of this month, while the CME Fedwatch tool predicts the peak Fed Funds rate at 350-375 basis points, which will be achieved by December. As this FT story, free to read for MC Pro subscribers, said, “People are thinking ‘I want to get back to QE. How do we get back to the QE?’”

On the other hand, this FT piece by Martin Wolf, says, “Ratios of broad money to nominal gross domestic product are still at unprecedented levels, while real policy rates remain negative. It is quite possible that policy will have to tighten a great deal further in the months ahead.”

For India, much depends on the progress of the monsoon, which has seen a lopsided spatial distribution so far.

The rise and rise of the US dollar has been a worry for emerging markets. As John Connally, US Treasury Secretary under President Nixon, said, “The dollar is our currency, but it’s your problem.” Despite all the talk of moves away from the USD, it is likely to remain the only global reserve currency for the foreseeable future. That’s despite the US starting to resemble an emerging market, as this FT story argues. The RBI has stepped in to do some firefighting, but these measures may need to be supplemented with stronger medicine. As the rupee continues to tumble, we took a look at what it entails for investors.

At the moment, growth in India remains strong. Indeed, the OECD’s leading indicators for major economies shows that growth is losing momentum for most of them, except for India and Japan, which are showing stable growth. D-Mart, Thangamayil Jewellery, Delta Corp and Polycab India are some stocks that have a strong growth story. The sharp expansion in the Indian pharma market in June has surprised investors.

Our Economic Recovery Tracker, though, showed that growth momentum has slowed a bit. The June quarter results haven’t been too good for Tata Metaliks, Jyothy Labs and ACC, but Grauer and Weil’s valuations should provide support.

In this environment, our columnist Shyam Sekhar told us why defensive sectors may not be safe havens for investors while Ajay Bagga said, “We will need to see more depressed valuations, more evidence of slowing growth and pain in terms of unemployment, before we can surmise we are at or near the market bottom.”

There is one defensive sector though, which seems to be doing just fine — as my colleague Sachin Pal wrote, “The demand for country liquor remains solid despite the widespread concerns….”.

We also had stories on SpiceJet’s proposed cargo arm hive-off; M&M post the EV deal; private life insurers; the commercial property market; Maruti Suzuki; Himadri Speciality; and the prospect for bank earnings.

The Eastern Window this week looked at anti-China legacy of Shinzo Abe; GuruSpeak celebrated the success of a farmer’s son in equity trading; our Personal Finance section looked at whether a do-it-yourself approach for financial products works; and our Green Pivot series said India needs a strategic plan to secure raw materials for its EV industry. We also had stories on the lessons from the unedifying Uber saga; the gaping holes in the affordable housing market; the futility of the US efforts to curb Iran’s ambitions; whether Russia can win the war; and, in Strategy Lab, that backtests your trading strategies, we featured an options buying strategy that beats the market.

Slower global growth will continue to pressure commodity prices, which will lead to lower inflation, although Biden’s bid to cajole Riyadh to help lower oil prices may turn out to be ‘Mission Impossible’ according to this FT piece. Much depends on China’s growth, and while June quarter GDP growth of a mere 0.4 percent year on year is way below expectations, that raises the odds of another stimulus push by the Chinese authorities before the end-October Communist Party meeting anoints Xi Jinping as supreme leader for life. But that is not likely to be of much help for China’s property bubble, which is in imminent danger of collapse.

That bubble is one of many that have erupted as a consequence of the debt-fuelled excesses of the last decade, which have resulted in total global debt building up to 352 percent of GDP in the first quarter of the current year. As Gillian Tett writes, “But the really fascinating question is the bigger one: can a thrice-leveraged system ever really deleverage, without suffering a full-blown crisis (that is, mass default)?”

Cheers,

Manas Chakravarty