Arth-Samvaad - The monthly market commentary

“At all times, in all markets, in all parts of the world, the tiniest change in rates changes the value of every financial asset.” ~ Warren Buffet?

The month saw UK going through a pensive mood; the demise of the queen seems to have set the departure of lady luck to the country and to the British Pound. The incoming PM, Truss’s announcement of mini-budget?(large spendings & unfunded tax-cuts) kicked up a storm?resulting in a free-fall of Pound, probably making the actual/real Brexit happening now. The BOE had to intervene to soothe the rampaging markets by promising an unlimited purchase of Gilts, an action which could be termed as?Quantitative Easing(QE) contrary to what the US Fed is doing.?

The crash put the GBP among the worst performing currencies for the month/year, worse than some of the?‘third-world’?countries. Of course,?no central bank or currency is immune to this dollar anaemic pandemic.?All asset classes were withered by the dollar as Fed provided any respite. Japan intervened in the foreign-exchange market for the?first time since ‘98,?allowing a brief rally in the Yen. Another case of policy divergence from the US is by China which is experiencing de-growth has accelerated its stimulus spending.

It’s not just the pace or quantum of interest rate hikes but the Quantitative Tightening (QT - Fed’s balance sheet reduction) that could upset the asset markets more. In an increasingly?de-globalising and weaponised?(of finance, energy, food)?world, all are rushing for a perceivably safer avenue in USD which saw a generational high with a two standard deviation move. This has resulted in bearishness in the asset markets, clearly indicating the scarcity of US$.?

We’ve complained enough about the wrong diagnosis and the applied medication to the current crisis but it would only end by hurting the global growth.?Unfortunately, the cure could be worse than the ailment itself.?Of course,?the obvious solution is the end of the war, is?not a probable?one.?Europe & the UK are certainly in recession while the US might venture there officially soon and China hurting itself with its own policies. The extent of the recession in the EU region would be dependent upon the intensity of the winter.?

The Fed’s changed attitude of “whatever it takes for the inflation to go up” to “increase rates?as long as the prices come down” has left counties scrambling for cover. For the Fed, the only brighter aspect is the tight labor market with unemployment rate near a 50-year low, job-vacancies near historical highs and elevated wage growth. The administration has made it clear that US forces would defend Taiwan from an unprecedented attack, further escalating concerns on the weaponisation of forex reserves.

Amongst this India still stands tall though the?Rupee’s resistance to the US had faded?and is now almost at similar levels as the peers. But, India doesn’t have the overhang of higher fiscal/monetary spending during covid or untenable inflation ravaging the economy, which allows it to recover quicker while contracting less. Though the FII flows have weakened, the domestic macros only compel them to come back sooner and stronger.

“The upward course of a nation’s history is due in the long run to the soundness of heart of its average men and women. ~ Queen Elizabeth II

What’s in it for you:

Equity:?The?higher global inflation exported by the US due to the stronger US$?can’t be exempt for India. The markets are?unable to discount?these changes as the?impact of the monetary policy are non-linear. This keeps the equity markets on tinter hooks with an added dose of volatility.

The changing dynamics in manufacturing (data suggest majority production in India vs almost nil two years back in certain sectors), the growing income/consumption levels and the PLI schemes along with the competitive taxation for the newer units makes for a compelling rationale in favour of India in the medium to long term.?

We continue with Manufacturing, Auto, Banking & Financial Services as an?overweight?with?contra?calls on Pharma & IT. A?staggered approach?to this asset class while adding in dips with a three or more years of horizon is recommended.?

Debt:?If the central banks models failed to forecast inflation, they would certainly fail to assess the peak inflation. The relation of the monetary policy with growth is directly proportional and the?pace of policy tightening has been consistent with a recession. India could wait a little longer for the inclusion to MSCI world bond inclusion even as the candidacy has only improved.?

There’s a growing voice that RBI could refrain from hiking the interest rate as the underlying phenomenon is different than others. But, the strong US$ with further rate hike prospects only forces the hands of most central banks including India. Certainly the possibility of quantum and the pace of hike could be minimised in the coming quarters with?possible domestic rates peaking in less than six months.?However, the evolving situation of the Ukraine war defines the course going forward.

Cash and Cash equivalents are better off at this juncture.?Floating rate?is better suited with the next 6-9 month horizon along with any instruments in the shorter end of the curve. This is also an opportunist time for a?dynamic bond fund?allocation albeit staggered for investors with a?medium to high risk appetite.

Crypto:?The ground breaking software upgrade for Ether (Ethereum) which allows the token to slash the network’s energy use. This long-awaited?shift to proof-of-stake?from?proof-of-work?was carried out with almost no glitches while the network was off for a few hours. This demonstrates not only the environmental foot print the network reduces but also the capability to undergo major upgrades without hiccups.?

Jamie Dimon, the chief execute of JP Morgan has described crypto as a ponzi scheme during a two-day hearing on the Capitol Hill about the state of economy and macros in the US.