Talking Points This Week: From TINA To TARA
This week had as much lull as can be expected from the first trading week of a new year. Trader desks are getting warmed up, people are setting up budgets for the new year and large action is missing.
However, an indicator that stood out was BofA's so-called sell-side indicator—which aggregates Wall Street strategists’ asset allocation views—fell 33 basis points in December and is now 1.5 percentage points away from the level that’s historically tied to a good buying opportunity. Midweek, the indicator was the closest it's been to signaling a ‘buy’ since 2017. Does that mean equities are the place to be? Or do the alternatives look stronger? That, plus the Fed minutes' minutae and some terrific conversations with market experts form a part of this edition of Talking Points This Week.
Fed officials noted that “an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the committee’s reaction function, would complicate the committee’s effort to restore price stability. The minutes brought out a seemingly frustrated Fed, but also drove home the point that even if rate hikes are smaller, hiked they will be.
There is a school of thought though, which believes that with the kind of layoffs in the tech sector in the U.S. (Amazon Inc. just announced 18,000 job cuts), the stubbornly high wage inflation might come down, and the Fed may pivot. The Fed may not believe it will, but certain sections certainly continue to do so.
Howard Marks of Oaktree wrote about a sea-change in the investing landscape, specifically pointing out how the low interest rate regime was a thing of the past and investors should note that.
He spoke to BQ Prime and makes this point of how the availability of higher returns in relatively more certain assets like fixed income in the U.S. would mean that a lot of portfolios, which were getting diverted to riskier assets like EM equity, would now find a haven in U.S. Credit, and thus it would be wrong to assume that too much money can come around to EM shores, at least in the near term. Even on U.S. equities, Howard speaks of some more downside before they become attractive again. He does believe that there is a serious alternative now available for investors, which will be made use of.
From TINA To TARA
For the last few years, due to the lower rates and stagnation in real estate prices, there has virtually been no alternative to equities. That has changed.
Fixed deposit rates have inched up to over 7%, and in some cases 8% as well. Credit can give you even better returns, and in the words of Maneesh Dangi, is juicy. And as he laid out for us beautifully in this episode of Talking Point, U.S. tech is an alternative for Indian investors as well.
Usually, he points out, whenever U.S. tech has corrected, it has been accompanied by a correction in Indian markets, too. As a result, it has never been relatively cheap. This is a rare instance when U.S. tech is cheap, but Indian markets are not. So, for an Indian investor, there are alternatives. Place your bets properly.
As Vetri Subramaniam of UTI AMC says, from TINA (There Is No Alternative), it's time to move to TARA (There Are Reasonable Alternatives).
Commercial Vehicles Look Strong
Jefferies on Tractors & Trucks estimated that truck wholesales were up 35% YoY in December and 84% higher than the December 2019 level. They say that Tata's press release mentions that truck demand was boosted by improving fleet utilisation, pick-up in road construction projects, and increase in cement consumption, and that truck registrations also grew 18% YoY in the month.
Incidentally, e-way bills—a measure of truck movement—also rose a sharp 32% YoY in November, and tractors witnessed another month of double-digit growth with wholesales up an estimated 28% YoY.
Companies that BQ Prime spoke with were optimistic as well. MM Forgings, a supplier to CV companies, spoke of optimism on the domestic side as well as a replacement demand led bullishness on the global side.
There is also a belief that China and the global steel market may remain in oversupply in 2023, which becomes a crucial factor behind any 'OW Autos and UW Metals' call.
For all we know, the margin expansion theme for autos may not have played out as yet. And CV companies may be in a sweet spot, both on the demand side as well as on the margin expansion front. Space to watch.
All in all, while specific pockets may always do well, the market at large seems to be on a sticky wicket, more so with the kind of returns that fixed income is giving. Could it turn out to be the Achilles heel? 2023 would have the answer to that.
Niraj Shah is Executive Editor at BQ Prime.