I received quite a few WhatsApp messages on the direction of the market and the best markers there are. While the yield graph explanation was the most plausible and rational (and one that I am aware of), there were quite a few that were wacky but enticing. One was a very adult themed diagnostic mechanism, another depended on the “wise monkey” and store shelf space used by household products (this was an innovative one). What is clear is that the markets have made many jittery. And why not? The drop has been sharp. The crystal gazers are prophesising doomsday but don’t know when. As the ebb and flow of visuals from the White House and China and the rest of the world come into our senses, the brain is hard pressed to correctly decipher these mountain of data and information.
So where are we and where are the markets headed???
The India outlook: In the long run, if the GDP sustains its pace, if consumption remains upbeat and if companies find ways to deliver superior growth, then UP. Over the longer end of the curve, it seems the past 15 years average market growth can be an average expectation. There is a significant effort by our government to hike imports from the US specifically in energy and some serious talks on other important industries. Notwithstanding these, the situation is quite hazy. Even though other currencies have rallied significantly against the USD, the INR HAS NOT. In fact the INR is losing ground again.
It is the shorter end that worries me and the issues are:::
The trade war is a bummer and it is a 700 billion USD thingy just with the US and China. A serious one for the United States, China, and the rest of us. And it is the biggest fish in the economy pond so we cannot ignore it and on top of it, it has taken upon itself the task of straightening out Number 2, CHINA. And Canada. And Mexico. And the Eurozone. Seems like a bit too much it has on its hand. Effectively the position of trust and respect that all the smart US governments did before has vanished. And add to that the yo-yo announcements. On one day-off the other. This can seriously upset global supply chains, manufacturing and employment cycles developed over decades. Not to mention, freight and transportation sectors.
The US Currency is the BIG worry. as they have a larger than size determinant footprint on fund flows (in and out of india and emerging markets). and currency means the USD-INR only. If the USD loses value, which seem very likely, the global fund flows to markets and asset classes all over the world will be affected. Severely. Even though China devalues, the other major currencies are rising. And the dollar index is below 100. And falling. For the first time in 1500 days. The sell-off in treasury and bonds is really serious. The 10-year yields have risen by nearly 50% (from 3.4% to 4.4%) and the path seems to be on the upside. This has got the entire global monetarists in a tizzy. Will this butcher currencies, central bank’s interest rate management and indeed the global liquidity?
Flight to gold …will that continue??? and will the Chinese, Japanese and Russian banks keep the flow against fed reserve/US T bills/USD into gold and silver??? This can potentially create/recreate new billionaires and destroy some established ones and create hitherto forgotten ones like those in the business of precious metals and rare earth. With China controlling nearly 80% of global rare earth and imposing an export ban of these to the US, a serious impact on multiple segments – technology, auto, defense to name the prominent ones is on the cards.
Is the US inflation rate going to be in check??? Inspite of sanctions and tariffs!! The manufacturers, for now, have decided to absorb a large part of the costs but it is only a question of time before they spread them out to the consumers. Even if the rest of the world (minus China i.e.) have been given a reprieve of 90 days and hectic parleys are going on all over the world, it remains to be seen how well the talks pan out and sense returns to the powers that be. It has been estimated that just energy costs and food bills in the US will see a rise of 4000 USD annually. This is a substantial burden which will see consumers delay or cancel mostly discretionary and focus only on basic survival purchases. The world’s biggest discretionary market could slow down and make a meaningful dent in the global manufacturing and transportation framework.
As of now, we should not panic. Whenever a glimmer of hope comes through, the markets here rebound. Going forward, I am fully convinced that the world will settle down but at a lower level of equilibrium. Till that time, do not be hasty and don’t sway with every signal from the media and your friends. No matter what, I am sure the leaders will do their all to not rock the World Boat so much that we need to abandon ship.
India represents challenges because of and inspite of the tariff war. I will post my views on this soon.
