Moneycontrol Pro Weekender | Testing times 

Dear Reader,

The World Bank’s flagship publication, ‘Global Economic Prospects’ says global growth will decelerate in 2022 and 2023 as the effects of the extraordinary stimulus, both monetary and fiscal, start to fade. In accordance with that view, it expects commodity prices and inflation to gradually decline in the second half of the year, as supply bottlenecks ease and commodity prices come down.

The question though is: If growth is going to come down and inflation to moderate, for how long will the US Fed and other developed country central banks continue with their current predilection for tightening the monetary policy?

That is why many market mavens believe the US Fed will do another pivot or a pirouette or simply not raise rates much, which could explain the rather blasé reaction of the markets to the news that retail inflation in the US has reached 7 percent, the highest level in four decades.

That hasn’t stopped a sell-off in the US tech sector, perhaps a result of surging real bond yields. No wonder there’s a stampede to raise debt by companies before rates go up further. As this FT article (free to read for MC Pro subscribers) says, ‘The Nasdaq has dropped 10 percent from its early November record, and high-growth stocks have done considerably worse.’ The piece adds ‘there is plenty of scope for the market to take a bigger bite out of the most inflated valuations.’ In India, Paytm comes readily to mind.

Indian IT stocks are on a very different wicket, as we argue here, here and here. Among the IT results announced, we found Infosys stealing the thunder, TCS a good stock to add with modest return expectations, Wipro a buy on declines and Mindtree, though expensive, a long-term winner. Our Tech Mantra section took a look at the growth drivers of the ‘flourishing and glorious’ future for the sector.

But it’s not just Indian IT that’s expected to do well. In spite of slower global growth, the World Bank says the Indian GDP growth will accelerate in 2023. The government’s advance estimates for FY22 told us how far the Indian economy is above the pre-pandemic level—in the second half of FY22, government estimates put GDP at 6.7 percent over the second half of FY20.

The government continues to give top priority to infrastructure, and we considered how investors could profit from that trend. We also said expansion of existing airports and new projects provide a growth runway for GMR Infra.

Our Economic Recovery Tracker is seeing the first signs of the impact of the Omicron wave. It has already taken a toll on the recovery in the premium hotels sector. Given the uncertainties about the new wave and the fact that headline inflation is in accordance with the predicted trajectory, the RBI may defer moving up the reverse repo rate to April. In fact, they already seem to have slowed down their liquidity absorption.

The worldwide surge in infections and the tendency of the Chinese authorities to shut down cities at the drop of an omicron have once again led to supply disruptions. But there is a silver lining for domestic aluminium producers, though we don’t know how long it’ll last. And our Herd Immunity tracker predicts this Omicron wave will be short and less disruptive.

With the third quarter results trickling in, we analysed the performance of Delta Corp, GM Breweries, MSTC and Avenue Supermarts. Anand Rathi Wealth posted a strong performance in Q3, but we weren’t so sure it could keep the sparkle.

With the Union Budget round the corner, we kicked off a daily data-based take on various issues that pertain to budget-making, starting by comparing India’s fragile fiscal parameters and the sorry state of healthcare spending with other nations. We also looked at whether FII flows will fuel markets post-Budget and whether the pre-Budget move in the markets foretells market direction after the event. And we wondered whether the time has come for a Green Budget.

We recommended a drastic rethink of the government’s short-sighted ethanol policy. And we wrote about what’s at stake for the BJP in the UP polls. Several brokerages have underlined the point that a poor showing by the ruling party would be bad news for the markets.

The record high December inflows show robust appetite for equity mutual funds. At the same time, the share buyback data reveal an overpriced market. Investors worried about volatility could use the new mid-cap index derivative as a good hedging option. And just in case you thought it would be a good idea to diversify into Chinese stocks, do consider what our The Eastern Window has to say about them. Perhaps a silver ETF would be a better idea.

This week, we recommended a defensive pick, we said Divi’s Lab’s green chemistry will be a key differentiator, analysed the implications of the government becoming the largest shareholder in Vodafone-Idea, and said that the weakness in the Equitas SFB stock is an accumulation opportunity for long-term investors.

We continued with our usual Crypto Conversations, Crypto Learn and Algo Rhythm sections, and our Personal Finance column told investors why real, post-inflation returns are absolutely vital for a healthy portfolio. Our Start-up Street section warned about the various kinds of frauds that start-ups do, in the wake of the Elizabeth Holmes scandal in the US.

We also wrote about a new NBER paper that, swimming valiantly against the tide, said that inequality in India had decreased during the pandemic, in spite of everybody, including the World Bank saying the exact opposite. It also flies in the face of our own analysis of FMCG volume growth.

But then, economist Michael Roberts writes in his blog that, at the Allied Social Science Associations’ recent meeting (ASSA 2022), well-known economist Lawrence Summers summed up the confusion currently prevailing among his professional fraternity by saying that while Biden’s proposed fiscal boosts were “the boldest policy experiment of the last 40 years”, they “could lead to rapid growth, stagflation, or recession – each with more or less equal probability.”

This is going to be the year when all these theories – whether inflation will be transitory, whether the central banks have the guts to tighten, whether growth will continue even when the stimulus is withdrawn, whether the markets manage a soft landing – will be tested.

Cheers,

Manas Chakravarty