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Dear Reader,
Goldilocks has come to the markets. With inflation fading and growth firming up, conditions are, as the much-quoted-in-the-financial-media Goldilocks would say, neither hot nor cold, but just right. The big difference with the fairy tale is that no bear is shouting, ‘Who’s been sitting in my chair?’ — instead, they are all scampering for cover.
Why should Goldilocks hog all the quotes? Here’s one from Cinderella’s fairy godmother: “Even miracles take a little time.” After all, despite the pandemic, decades of ultra-loose monetary policy, a war, geopolitical sabre-rattling, sky-high government debt, could the Fed and the central banks in the major advanced economies really manage a soft landing? It seems impossible, but then, as the White Queen told Alice, “sometimes I’ve believed as many as six impossible things before breakfast”. Or perhaps, the markets believe central banks don’t have the gumption to continue with monetary tightening.
This FT story, free to read for MC Pro subscribers, quotes Torsten Slok, chief economist at Apollo Global Management, as saying he fears a deep recession is imminent. “We are waiting for Godot, and I do believe Godot will eventually arrive,” says Slok. The markets –the Nifty is within sniffing distance of its all-time high — would retort that in the play Godot never shows up. The bears are like Eeyore saying, “Could be worse. Not sure how. But could be.”
Nobody seems to believe the US Fed when it projects the Fed Funds rate at the end of the year at 5.6 percent, arguing that if more tightening is needed, why did the central bank press the pause button? The consensus seems to be that the Fed is done hiking, especially as there’s a presidential election next year and the economy needs to be in great shape then. As Cinderella said, “If you keep on believing, the dream that you wish will come true.”
This FT story has a lot of economists arguing the Fed will raise rates at the July meeting. The markets have a different point of view and perhaps the bears should listen to Winnie the Pooh when he said, “When you are a Bear of Very Little Brain, and you Think of Things, you find sometimes that a Thing which seemed very Thingish inside you is quite different when it gets out into the open and has other people looking at it.” We deconstructed what the markets thought about the Fed pause and how investors should position themselves.
Back home, some of us have made it a habit to get up every morning and say, “Magic Mirror on the wall, who’s the fairest economy of them all?” and smirk when the answer is ‘India’. It’s from Snow White, of course, but what we forget is it’s the evil queen’s line. Nevertheless, there’s a lot of truth in that answer, and with deflation deepening in wholesale prices, retail inflation should follow suit, boosting consumption and the economy. Our Pro Economic Tracker showed rising fuel consumption while the index of industrial consumption for April showed stronger growth in manufacturing. This Chart of the Day points out that India Inc’s working capital management is the best since 2010.
The ghost at this feast is El Nino. It’s like the Big Bad Wolf in ‘The Three Little Pigs’ who said, “I’ll huff and I’ll puff and I’ll blow your house in!” We did our best to point out that El Nino may not be a disaster if, like the third pig’s house, the economy was built solidly. Our Monsoon Watch column, however, said we should brace for a sub-par monsoon. Just how bad El Nino is for the global economy was brought out admirably in this column by market maven and MC Pro columnist Ajay Bagga.
Not everybody agrees with Peter Pan that “All the world is made of faith, trust, and pixie dust”. This piece argues that the current rally doesn’t carry much conviction. Shyam Sekhar advises investors to be cautious and take the opportunity to liquidate expensive stocks. And Vivek Kelkar wrote that gathering the capital for the green energy push will not be a cakewalk for India. As Winnie the Pooh would have said, “Oh, bother!”
Among stocks, we said Nestle India will face the El Nino challenge. But there were also many growth stories, in stocks such as V-Guard, Devyani International and Endurance Tech, while Rohit Jawa, HUL’s new CEO, is likely to face a problem of plenty. The main problem for many stocks remains valuations, and we talked of railway engineering stocks in this context.
And then there’s Artificial Intelligence, which is expected to boost productivity and expand profitability. It has all the hallmarks of a bubble in the making, one that will grow much bigger. This article warns of the creative destruction that will accompany AI, and this one warned of its distortionary impact on the economy. Clearly, AI is a big bad wolf and, like Little Red Riding Hood, we are merely pointing out, “Grandma, what big teeth you have!” before AI responds, “The better to eat you with.” Our columnist Prosenjit Datta was more practical, writing about what it takes for India to build an Open AI rival.
Let’s keep quotes from Beauty and the Beast, The Ugly Duckling, Sleeping Beauty, The Frog Prince and the Wizard of Oz for another time.
At the moment, the market seems to be convinced we’ll live happily ever after.
Cheers,
Manas Chakravarty
Here are some of the other stories and insights we published this week, apart from our technical picks in the equity, commodity and forex markets:
Stocks
IEX, BSE, Saregama, Relaxo Footwears, Zee Entertainment, Muthoot Finance, Hyderabad Industries, Heritage Foods, Weekly tactical pick, Stake sale in UTI AMC, Repco Home Finance
Financial Times
Developing countries have hit the financial rocks
Green shoots on Wall Street
What the price of an ancient Roman nail tells us about value
Why geopolitical tensions don’t threaten a fresh surge in inflation
Geopolitics
The Eastern Window: US backs Japan’s chip war against China
Markets
In the Money—using Vega
Companies and sectors
MRF, Bank margins, Pharma market growth, US drug shortages and Indian pharma, Glenmark, Indian fertiliser sector,
Economy
Are services exports slowing down too?
PSU banks show first signs of market share gains
Politics
BJP looks for new alliances in run-up to 2024 elections
BJP vs AIADMK spat
Policy
Data security: the citizen is the loser
Does the PLI programme need a renewed push?
RBI new rules on wilful defaulters
Climate crisis: Water security
Investment advisers face risk of untimely demise
Will fine-tuning the PLI scheme help?
Others
Personal Finance: Would you like to build a startup portfolio?
Startup Street: Micromanaging founders can kill their own startups
Marketing Musings: Fat cats in India’s booming pet economy
Should monthly salaries be replaced by weekly paychecks?
Lending isn’t everyone’s cup of tea
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