COLD WAR: AN EYE FOR AN EYE MAKES THE WHOLE WORLD BLIND
Even as the World has been grappling with the devastating economic effects of Covid-19 pandemic and is already seeing a 2nd wave in some parts, newer geo-political, societal, technological, and environmental risks have risen on the horizon. To name a few – sharp drop in cross-border trade activity, people mobility & foreign aid, heightened state surveillance, eroding social safety nets, cyberattacks & data fraud, and halting progress on climate action. Not to undermine that prolonged global recession and high unemployment still top the concerns. As if unbeknownst, so-called ‘Superpowers’ are battling for hegemony in a leaderless world, with Trump calling China and Russia as ‘revisionist powers’ and a threat to US pre-eminence. The Chinese Premier Xi is busy reinventing Chinese checkers, where only CPC wins, by engaging in active altercations in all directions – 10 nations at last count. Not to forget, both have a selfish intent to appeal to their domestic constituents, as US elections are in Nov-20 and there is growing disenchantment towards China. IT IS TIME TO CHANGE AND TO LIVE AND LET LIVE. MAY PEACE PREVAIL.
Second Corona wave coming: USA daily cases doubled in past 2 weeks, Europe too moving up very slightly; India, Brazil yet to see first wave peak
Source: WHO; 7DMA: 7 Days Moving Average
GLOBAL EQUITIES: THE GREAT DISCONNECT; TACTICALLY OW ON EMs
With Gambling Casinos shutdown due to Covid-19 social distancing, Equities seem to be the New Govt. Sponsored Casino on the block. Battle lines have been drawn between professional money managers and newbie traders. The Robinhood army of retail momentum gamblers with no jobs and idle time to trade are seeking the same thrill akin to sports betting and horse racing from equities. Lost in one-sided optimism, traders are panic-buying zombie companies like Hertz, JC Penny, and Luckin Coffee despite them having declared bankruptcy. The relentless surge has further widened the yawning gap not just between sombre reality and bubbly equity but also the haves and have-nots. The Fed-induced blast-off is one of the causes of the rising wealth-gap in US as top-10% income earners own 88% of the stock market. Retail sales have rebounded from the lows, but even Chapter-11 filings are on way to make record highs this year. No one knows how long this speculative fervour lasts, but one thing is sure – when the backstop magic stops, the hangover effect can be even more catastrophic. Hope for some sanity soon.
GDP impact to be higher for DMs -8% vs -3% for EM; whereas EMs to also see sharper bounce back to 6% vs 5% for DMs, led by Asia
EMs are placed relatively better when looked at basis Price/Book and Market Cap./GDP. Hence, we remain Overweight on EMs against the Strategic Allocation to EM.
GLOBAL FIXED INCOME: NOTHING MUST GO TO ‘0’ BUT INTEREST RATES
Have you ever thought of solving a debt problem with more debt? Defies logic, right? Unfortunately, given the Fed stopped the “debt reversion process” with the latest rounds of monetary interventions, nearly $4 of debt are required to create $1 of economic growth. This all but guarantees that future economic growth will be further retarded. The US Fed should be renamed ‘Federal Resurrection Board’ as it has committed to ensure asset prices do not fall and seem to have joined BoJ in making equity market its “3rd mandate”, alongside jobs and price stability. BoJ now owns ~8% of the Japanese stock market and 75% of all ETFs. Such interference in the process of ‘creative destruction’ begets more systemic risks and will eventually weigh on potential economic growth and productivity. With the entire financial ecosystem highly levered, the ‘instability of stability’ now remains the most significant risk.
Infinite QE: Major Central Banks have unleashed never-before-seen liquidity almost equal to 4x GFC crisis; even exceeding total QE of 2015-17
GLOBAL COMMODITIES: STAY OW ON GOLD
OPEC+ finally came around and decided to extend the historic oil production cuts of 9.6mn bpd by an additional month of Jul-20 to balance the global oil market. The cuts would continue thereafter but taper to 7.7mn bpd till Dec-20 and to 5.8mn bpd from Jan-21 to Apr-22. Industrial metals (especially Copper) & Agri commodities witnessed a bit of demand recovery but concerns of a 2nd wave are weighing heavy. Also, on a YoY basis the commodity index is down 24%. We raise our conviction on tactical OW Gold call given the global known-unknown risks and lower-for-longer interest rates.
Negative yielding debt has shown a high correlation with Gold prices
INDIA MACRO: 100 DAYS OF LOCKDOWN – A MIXED BAG OF OUTCOMES
In 100 days of Covid-19 lockdowns, daily new positive cases crossed 20,000 mark from around 8,000 at the start of Jun-20 on absolute basis. Though the positive sample rate has more than doubled to ~8% now vs 4% in Apr-20, good news is positive cases doubling rate increased from 15 days in June to 25 days now. Total cases doubling rate too increased from 11 days at May-20 beginning to 20 days now. The lockdowns did successfully push forward the peak and lowered fatality rate but did not invert the curve yet. Also, our public health and social infra is now expected to be better equipped to avoid triage. On policy front, Centre extended the free food grain distribution by 5 months benefiting 800mn people with an additional outlay of INR 900bn. Launch of an employment-cum-rural public works campaign targeted at 6 states with an outlay of INR 500bn likely to boost livelihood opportunities for returnee migrant workers
A silver lining: Total Kharif sowing up 104% YoY led by Oilseeds and Cotton
Source: Ministry of Agriculture
Border tensions came to roost as China breached the LAC ensuing loss of lives on both sides. India retorted by banning 59 Chinese mobile apps and disqualifying Chinese companies from bidding for infra projects. Given our import dependency on China across several industries for key raw materials and intermediate goods, a more diplomatic but stern response is need of hour. As envisaged earlier, Indigenization seems to be the need of the hour for revival of jobs, economy and reducing external dependencies
Unemployment rate has steadily come down to ~10-11% levels with Unlock 1.0 from highs of 23-24% in Apr-May; pre-Covid levels were at 8-9%
Some green shoots are also becoming visible MoM as we re-open slowly and steadily be it unemployment, auto volumes, GST collections, toll payments, fuel, and power consumption, though YoY the picture is still gloomy. Our rural hinterland is shining bright and standing out as seen in the doubling of Kharif sowing YoY driven by record Rabi harvest, Normal monsoon forecasts, MSP hikes and Govt. buying. Even tractor, fertiliser and FMCG volumes are showing strong YoY growth. One needs to now look out for spatial distribution of rains.
The Stock Market is a device for transferring money from the IMPATIENT to the PATIENT – Warren Buffet
INDIA EQUITIES: TIME TO THROW IN THE TOWEL? NEUTRAL EQUITY/LARGE
The global exuberance spilled over to Indian Equities which stayed buoyant on expectations of a good monsoon and optimism towards a potential Covid-19 vaccine. FII participation in quality QIPs, OFSs and marquee deals also supported. Though lumpsum equity MF flows turned negative, SIPs and other DIIs stayed strong. As elsewhere, even India saw large number of new demat and trading account openings in last quarter. TINA (There Is No Alternative) factor also played its role as other asset class yields have dropped sharply. As markets are forward looking, analysts are now discounting FY22-23 EPS estimates to drive price targets. We believe one can’t keep building on a castle of sand and a cautious & prudent path to long-term investing is appropriate.
Trailing PE moved above +1SD as markets went up swiftly in Apr-Jun in-line with global equities
As indicated in our last communication, we turned Neutral on Equities vs Bonds as Nifty 50 breached 10,300 levels in early June. With valuations back to froth territory, we remain Neutral and would wait for macro or micro signs to signal strength. Within Equities too, we turn Neutral on Large Caps vs Mid Caps, as liquidity support for Large is offset by technical favouring Mid Caps.
INDIA FIXED INCOME: QUALITY IS PARAMOUNT; PREFER CORPS/SHORT-TERM
RBI MPC minutes showcased that it remains nimble and ready to act in response to macro deterioration and inflation is not much of a concern. We believe, RBI would adopt calibrated easing to the tune of 50-60bps in this cycle as new data comes to light. Under the ECLGS, banks have sanctioned INR 754bn to MSMEs but disbursed less than half of it with skewness towards PSBs. With loans under moratorium too hitting 50-60% for PSBs, time is not far away for another recapitalization. Post Moody’s sovereign downgrade to BBB-, S&P and Fitch rating re-affirmation provided some relief though the latter revised outlook from stable to negative. Rating firms have sought to withdraw nearly 50% of India debt ratings as issuers do not provide enough information. ICRA also highlighted that corporate credit rating upgrades have dried up and average monthly downgrades are up 22%.
Moratoriums have been higher for NBFCs and MFIs all of whom have not got the same relief from their lenders; PSBs too higher than Private banks
OMOs have not yet tamed the long-end G-Secs due to supply concerns whereas risk aversion is keeping long-term Corp bond spreads elevated. We prefer, for 1-3M horizon: Liquid Funds; 3M–1Yr: Arbitrage/high quality UST/Low Duration/; 1Yr Plus: Short Duration Funds, high quality Banking & PSU/Roll Down Funds/Bharat Bond ETFs. Return of Capital should be key.
CURRENCY: EVEN STEVENS; STAY NEUTRAL ON USD-INR
Risk-reward seems balanced for the USD-INR pair. India’s resilience on its external account is seen from its much lower external debt-to-GDP relative to EM peers, record-high FX reserves (>USD 500bn), strong FDI flows and minor surplus on current account (+0.1% of GDP). The risks are negative rating actions if growth fails to recover and FII outflows. Though, USD retains its safe-haven appeal the dollar index could witness pressure (as seen in last month) from further Fed stimulus and rising US deficits. Hence, stay Neutral.
India is relatively healthy vs EM peers on external debt front
Source: CEIC, Mar-20 for India, Dec-19 for Other Countries
TACTICAL ASSET ALLOCATION (TAA) VIEWS & PERFORMANCE
Source: Bloomberg. Assuming a 6% annualized yield for cash.
GLOBAL ASSET PERFORMANCE SNAPSHOT
Source: Bloomberg Equity/Fixed Income Returns/Yields in local currencies. Commodities in USD. Numbers for Fixed Income are Yields. As of 30-June-20.
ROUTES TO MARKETS: MODEL ALLOCATIONS
Fed: United States Federal Reserve Board; OW: Overweight; EM: Emerging Market; DM: Developed Market; Covid-19: Coronavirus Disease 2019; GDP: Gross Domestic Product; GFC: Global Financial Crisis; ETF: Exchange Traded Fund; RBI: Reserve Bank of India; FY: Fiscal Year; QIP: Qualified Institutional Placement; MPC: Monetary Policy Committee, bps: basis points (100 bps = 1%); PSU: Public Sector Undertaking; USD: United States Dollar; INR: Indian Rupee; FII: Foreign Institutional Investors; DII: Domestic Institutional Investors; FDI: Foreign Direct Investment; YoY: Year on Year; MoM: Month on Month; FX: Foreign Exchange; US: United States; MSME: Micro Small & Medium Enterprises; ECLGS: Emergency Credit Line Guarantee Scheme; CPC: Communist Party of China; PE: Price-Earnings; BoJ: Bank of Japan; OPEC: Organization of the Petroleum Exporting Countries; bpd: Barrels per day; LAC: Line of Actual Control; GST: Goods and Service Tax; FMCG: Fast-Moving Consumer Goods; OFS: Offer for Sale; MF: Mutual Fund; SIP: Systematic Investment Plan; EPS: Earnings per share; PSB: Public Sector Bank; NBFC: Non-Banking Financial Company; HFC: Housing Finance Company; BE: Budget Estimate; OMO: Open Market Operation; G-Sec: Government Securities; Corp: Corporate; UST: Ultra Short Term; EMDE: Emerging Markets and Developing Economies; CB: Central Bank; QE: Quantitative Easing; ECB: European Central Bank; SD: Standard Deviation; MFI: Microfinance Institution