The Glass is still Full

It has been a while since I put pen to paper. Or in this case, fingers to keypad. Much has transpired since then. A LinkedIn post I chanced upon in the interim said the following : Clarity is 80% thinking, 20% reading. It seemed like the author was speaking to me. Given that I spend considerable amount of time Reading, I figured I would give myself time to think.

I absolutely love learning something new and am constantly challenging myself to learn more and broaden my understanding of things around me. This, for me, is deeply exciting.

There are many adages in finance but one I have found quite fascinating is this : “when the shoeshine boys have tips, the market is too popular for it’s own good”. And I have experienced this multiple times over the last year, with one instance sticking out to me.?

I was on vacation with the family in India. At meal service, I engaged in conversation with our server. He asked what I did, and I said that I invested in the financial markets. He proceeded to pull out his phone and show me the app he used to track the stocks he followed. He then started talking about individual names and outlined his reasons for why they would go up and that I should consider them. I listened to him and asked him what about these companies he liked and why he believed they would go up. Among other questions.?

All of this helped me understand how broad the buy-in to the table had been since the markets began their incredible run up from the lows of the pandemic. In India alone, approximately 15 million new Demat accounts ( Dematerialzied accounts for Investment holdings held in a digital form ) were opened in 2020-2021 and that number touched approximately 30 million in 2021 - 2022. This number is staggering and a similar trend can be found across the world. While it is amazing to see so many begin to consider financial markets and the truly incredible scope for wealth creation, It is also cause for caution.?

The Champagne has stopped flowing?

In January of 2021, in a thought article I published on LinkedIn, I had posited that,

“ financial markets resembled a Champagne tower at a glitzy party. Central banks continue to pour champagne into the glass on top that fills all those that have been pyramided below it. I am deeply concerned with what would happen when Central banks stop pouring the champagne or the pyramid structure of the champagne tower is raised? That would be the equivalent of the Central Banks halting purchases of assets ( the act of which provides liquidity into the system that finds it’s way to other asset classes such as equities ) from the market or perhaps contemplating raising interest rates, adding a new variable into the structure.”?

This year, Central Banks have had to raise interest rates. They have raised the floodgates on liquidity pumped into the system, some of which was introduced during the pandemic, while in the case of the European Central Bank, was a continuation of a policy introduced in the Great Financial Crisis of 08-09.?

The effect of this has been magnified given the uncertainties caused by the geopolitical situation in East Europe on commodities.?

Shaky Hands

I am watching Canada, Thailand, Egypt, among other countries closely. As the USD continues to climb, emerging market currencies are being hammered.?

Thailand?

The US Dollar Thai Baht ( USDTHB )?pair is one I am watching closely. As of this writing on the 26th of Sep 2022, the USDTHB pair was trading at 37.97. It has traded at this level only a few times. With one of critical importance and of similar trajectory, during the Asian Financial Crisis of 1997. A similar trend appears to be forming as the Thai Baht weakens considerably. This is placing a significant strain on a government that subsidises diesel costs to the consumer among?other fiscal burdens.?

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A sign of this was seen in the most unlikely corner of the consumer market. In August, the government of Thailand approved the increase in price of Instant noodles. It’s first in 14 years. That speaks volumes on the challenges faced by the Thai economy as it went from 0 to fifth gear on a cold engine.?

The Thai consumer is also carrying a significant debt burden, accumulated during the pandemic. With rising interest rates, a currency that has weakened dramatically and inflation incredibly high, Thailand is a country I am watching closely for signs of stress and fiscal / monetary management. What is likely to help change this dynamic is a large swathe of foreign currency inflow, the likes of which a reopening China might provide. Until such time, Thailand is a keen watch. Much like Canada.?

Canada

According to Statistics Canada, household debt as a percentage of disposable income is at 181.7 for Q2 from 179.7 in Q1. Essentially, there’s $1.82 in debt to every $1 in disposable income. Canadian Household Debt as a % of GDP in June 2022 stood at 104.1%. ?

The consumer is starting to show signs of fatigue. Retail sales in July fell 2.5%. This is the first drop in seven months. Sales at gasoline stations fell 7%, while most other goods stores experienced between 3 and 6% fall in sales. This likely indicates that lower disposable income has started altering the consumer’s ability to purchase goods.

With interest rates this high and a consumer sitting on large amounts of debt, I expect consumption of goods and services to be lower as we round out the year. A large part of this is likely to be driven by falling home prices and a consumer household burdened with higher interest payments on account of mortgages taken during the height of the pandemic induced low rate environment.?

So, Where is the party at??

Countries such as India, the UAE, Singapore and China are likely to experience reasonable growth over the next 12 to 18 months.?

India?

With so many new Demat accounts being opened, large swathes of Indian household balance sheets are starting to hold equities as assets. Capital is being transferred from traditional stores of wealth ; Gold, Real estate and the like to the equity markets.?Technology has enabled much of this as the barrier of trust has been cleared. The population has become comfortable using technology to transact and invest.?

Indian companies used the pandemic induced low interest rates to clean up their balance sheets, lower debt and digitise. A series of acts that have seen many companies produce stellar return on capital employed and profitability, driving investors to their stocks like honey bees to flowers.?

India is a beacon on the global stage. With India’s GDP crossing the $3.5 Trillion mark, it is only a matter of time before she reaches $5 Trillion. Like a rising tide, the growth in GDP is going to lift the value of the equity markets.?

The average run rate of GST ( Goods and Services Tax ) collected has been $20 Billion per month, reducing a significant burden on the fiscal budget. This has allowed the government to invest across the sectors that require investment for durable and sustained growth.?

Some of these include the Unified Logistics Interface Platform ( ULIP ) , the Coal Gasification program and the broadening of the acceptance of the Unified Payments Interface ( UPI ) across the world.?

The ULIP aims to reduce the cost of logistics in India. With this, the government hopes to bring it down from 16-18% of GDP to 10% of GDP. The reduction of this line expense on the government, companies and consumers’ income statement is likely to drive huge profitability.?

The Coal gasification program hopes to gasify coal into syngas, broadening India’s energy mix, reducing the effect of volatile energy markets on the consumer through a wider product mix and lowered currency impact.?

The UPI is perhaps the most interesting innovations to come out of India and one I am deeply proud to see go global. UAE, Singapore, Nepal, France, Bhutan are some of the countries that have accepted UPI as a payment mechanism. India is in talks with dozens of other countries to introduce UPI.?

I expect UPI of India to perhaps become one of the rails upon which monetary policy in certain countries is made as it allows for massive decentralisation of payment platforms and real time monitoring of the velocity of money.?

To provide context, UPI processed over 48 Billion transactions in real - time in 2021. The only country close to processing payments in that order of magnitude is China, which was over 2.5 times lower.?

I am, as ever, deeply bullish on India.

The Glass(es) are Still Full?

While the pouring has stopped, the glasses are still full. Most companies are sitting on excess inventory, a point I alluded to in a previous LinkedIn post earlier in the year. I expect companies to reduce inventory by running a wide and robust discount program going into the holiday season.?

This is likely to be great for a consumer who will be experiencing a fatigue akin to a marathoner midway through a race. A slight boost of sugar will help feed starved muscles and provide the energy to complete the race.?

Companies like Walmart, Target, Peloton are all great examples of companies that have issued profit warnings on account of large inventory gains and overhead expenses. Retail sales numbers for the holiday season are likely to be good on account of the great deals retailers are potentially going to announce to get consumers in the door.?

The next two quarters are going to be a real humdinger. With energy prices this high, it is anyone’s guess how consumers in the EU are likely to fare. Countries in the bloc and the UK have announced support measures. While of great magnitude, those support measures will need to be financed. With rising interest rates, the EURUSD and GBPUSD pairs reaching all time lows, those chicken will at some point come home to roost.?

I see incredible opportunities in the energy complex over the next decade.?I continue to believe management at consumer staples in countries like India, Canada and the US have done reasonably well to protect margins, manage inventory and maintain an even keel despite the obvious inflationary and supply chain pressures.?

With all this being said, I believe our best days are always ahead of us. There are many pockets in the global domain that are likely to remain resilient. Some of the great enduring innovations and businesses, think iPod, were conceptualised and released at the height of the technology bust in the 2000s. This time will be no different. Finding great businesses to buy into and holding with a very long term view will reap generational dividends. The glass will always be full.?

Ref :

July 2022, Retail Sales, Canada?: https://www150.statcan.gc.ca/n1/daily-quotidien/220923/dq220923a-eng.htm

Demat Account Statistics, India : https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1780999

Canada Household Debt vs. GDP : https://www.ceicdata.com/en/indicator/canada/household-debt--of-nominal-gdp

Disclaimer : Opinions expressed are solely my own and do not express the views or opinions of my employer.