Talking Points This Week: Everything But Equities
In ‘Talking Points This Week’, Niraj Shah studies how top business leaders and market makers are navigating the fast-changing financial landscape.
From interest rates to inflation, prices of oil and gas to volatility, the dollar index to bond yields–everything went up this week. What came down were equities. The talking points this week range from the U.S. Federal Reserve and the Reserve Bank of India, and the cuts the equity markets have taken, to the happenings in the oil and gas space. This week marked the earnings release of the big boy Reliance Industries Ltd. as well as the earnings of all the group companies of the Adani Group.
Fed Begins Front-Loading Rate Hikes, As Does RBI
The U.S. Federal Reserve indulged in double-barrel action of a 50 basis points hike this week and a planned balance sheet squeeze starting from May 1, 2022. This 50 bps hike takes the target Fed rate to 75 bps and will be followed by a similar magnitude of rate hikes in the coming meetings. While the Fed has committed to increasing the pace of normalisation, the restraint from taking an aggressive move of a 75 bps hike reflects a calibrated normalisation path to deliver a soft landing for the economy. The surprise, though, was from RBI Governor Shaktikanta Das who, in a shock move, announced that the Monetary Policy Committee raised rates by 40 bps in an off-cycle meeting, a day before the Fed action. Was it proactive, even if late in the books of some? Yes. Was it necessary? To most, the answer is yes. Will it impact the currency, amongst other things? Well, the rate hike ahead of the Fed’s announcement appeared to be aimed at preventing a steep depreciation in the rupee vs the dollar in the wake of continued strength in the U.S. Dollar Index. And as of Thursday, it seems to have worked. Let’s see how the cookie crumbles. From an equities perspective, while it should largely be a negative, and negative for home loan borrowers and all other forms of borrowers, it may work well for select banks. Analysts at Morgan Stanley point out that the surprise rate hike is a net positive for the large private banks as they are CASA/retail funded, and have a high share of loans linked to the repo rate. So, while there could be some moderation in system loan growth, given up-fronted rate hikes, large private banks are well placed to gain share.
How Hot Is Inflation?
Red. Scaled to the power of a quintillion. And, the fear is that the April India CPI print is likely to be much higher, maybe in excess of 8%. Hence, the repo rate hike announcement also comes with a CRR hike of 50 bps to 4.5%. On the scale of relativity, India may be a bit better off compared to, say, Turkey, where the factory-gate inflation accelerated to an annual 122% in April, likely due to the global uptick in commodities. But, it does seem that the inflation print is going to be stiff. With food inflation at 39% of the CPI basket, arguably the highest in Asia, with fuel costs set to stay high if Russian oil is banned, and with vital food commodities and palm oil export ban stoking price pressure, it is good that the RBI is worried. Household conversations would tell you that families are too.
Equities Hit By Potent Cocktail Of Stress, But Is All Priced In?
Red hot inflation and front-loaded rate hikes are not the only reasons that should keep investors awake. The disruption of the supply chains, caused in equal measure by the conflict in Europe as well as the Chinese lockdowns and the Covid-19 situation isn’t helping. The MSCI Asia ex-Japan Index is back below pre-Covid-19 levels thanks largely to the China carnage.
The situation is summed up perfectly by Chris Wood in his latest Greed and Fear note, where he states: “From a financial market standpoint, the situation remains the inverse of Goldilocks. A hawkish Fed trying to regain credibility remains plain bearish for growth stocks which is why, as also discussed here last week, there is a growing risk of mass redemptions from ETFs with the sell-off exacerbated by the reality that everybody owns the same stocks because of the socialist monstrosity known as passive investment or ‘indexation’. This is why GREED & Fear continues to favour cyclical stocks over growth stocks even though they have already outperformed by 18.3% year to date.”
Do note that growth stocks are getting walloped. On Thursday, when the U.S. markets had their biggest fall since 2020, e-commerce stocks fell like nine pins. Wayfair was down 26%, Etsy down 17%, Shopify down 15%, E-Bay was down 11.7%, and most of them are near 52-week lows. It tells you a story about what has happened to growth stocks around the world. Is all the damage in the price already? Difficult to say.
Oil Meter Still On High
The European Union hasn’t yet agreed on “a complete import ban” on Russian oil, which would be phased in over the next six months for crude and apply to refined fuels by the end of the year. But, the plan has impacted oil prices, which rallied from lows of $103/barrel on Monday to over $110/barrel on Thursday. If the measures are implemented, the region could stop purchasing about 1.5 million barrels a day of Russian oil, according to estimates of Kpler, a commodity data and analytics solutions company, which may impact prices further. Also, oil is not the only commodity that is surging. Natural gas is zooming. A long era of cheap shale gas in the U.S. is showing signs of fading, with prices hitting the highest in more than a decade. Does this impact upstream companies positively? The earnings of ONGC Ltd. and Oil India Ltd., yet to be released, will show the gains due to higher average prices for both the oil and gas segments. The Singapore GRM, a gauge of regional gross refining margins, rose to multi-year highs of $18/barrel in April and inched up to $25/barrel this week, owing to the supply disruption in Russia and lower exports from China. This has led to a substantial rally in refining stocks in India and has also aided the performance of the bellwether Reliance Industries. Can the space do more? Keep an eye on oil and gas and GRMs.
As We Go, The LIC IPO
A friend got this message from his broker:
“Have a fam jam with the LIC IPO.
Get your friends and family to open an account.”
Maybe friends and families did open that account because the much-hyped IPO was subscribed on the second day itself. That’s Rs 21,000 crore in the exchequer’s kitty, and an insurance behemoth listed. The quality of the book of anchor investors on the foreign side was not necessarily strong, but that is hardly news. May it succeed, because a large portion of Indian retail investors have subscribed to the issue and it would not be a nice picture to see so many people losing a portion of their investments in an entity that most Indians have been a customer of.
Niraj Shah is Markets Editor at BQ Prime.