Talking Points This Week: Taiwan Strait Simmers, Oil Goes Off Boil, Earnings Fire Up

Every week, Niraj Shah studies how top business leaders and market makers are navigating the fast-changing financial landscape.

This week was as much about earnings as it was about geopolitics and commodities. While the earnings season clocks on the world over, it was a busy week in India for the consumption space, and boy did the companies deliver! Meanwhile, OPEC did not deliver the production bump that some quarters expected. Throughout the week, the earlier underplayed Asia visit by U.S. House Speaker Nancy Pelosi brought about a fair degree of news flow. Do note that the markets did not react dramatically to rising U.S.-China tensions, this resilience may not be a bad thing. Foreign investors continued to buy India after an about-turn in July, and the Reserve Bank returned borrowing costs to pre-pandemic levels and pledged to do “whatever it takes” to bring inflation back to target, reiterating a hawkish stance that sent bond yields and the rupee higher.

July Was Not June. Can August Be July?

If June was a steady grind-down, July was the complete opposite, with markets going up with reasonably low volatility. FIIs turned net buyers in July as they bought over Rs 5,000 crore worth of equities, after pulling out more than Rs 50,000 crore last month. There were some other telltale signs. The average daily traded value in the last week of July was Rs 57,000 crore, up 8% from the previous week. The weekly delivery volume was 43%, much higher than recent averages and the proportion of non-institutional delivery volume increased to 19%, which was 14% at the start of the month.

August picked up steam as well, with markets rewarding anything that resembled a good quarter, a sign of positive sentiment. Stocks from gaming to paints to consumption to ITC Ltd. and Zomato Ltd. all got positively impacted after the numbers. Is this a definitive turn, since India is faring much better than a bunch of other large Asian or emerging market economies? Sure could be. A sceptic would argue that the play in crude oil is not done and remains a wildcard. And that the number of downgrades has been far higher than the number of upgrades. But so far, the winning camp is the bullish one.

Oil Is Not On The Boil

Saudi Arabia, OPEC’s de facto leader, had so far refused to pump additional oil as requested by the White House. But following President Joe Biden’s trip to the kingdom in July, and the famous fist-bump between the leaders of the two countries, it was considered possible that Saudi Arabia would push other members for a further supply boost. The belief was that should OPEC+ have announced a new deal that involved substantially higher output rather than merely a symbolic increase, oil prices would have likely come under pressure, as a big move was not being widely anticipated. This was a minor output change, but what is puncturing the oil fizz are the fears around demand drawdowns due to slowing growth. As a result, the price of oil is on the move, with the commodity correcting over 24% since the start of June. Meanwhile, in India, Russia has undercut the price of oil from its OPEC+ ally Saudi Arabia as competition to supply to India heats up. I am sure the Indian finance minister is not complaining. The impact is showing up in the prices of other commodities as well, with even Elon Musk saying that inflation is past the peak as component costs trend lower.

Out Is In

Indians are going out, eating out and staying out. This is evident from not one, but a bunch of results in the first quarter. Picture the following: in its third consecutive quarter of profitable growth, Westlife, which declared results last week saw revenues grow by 107.6% year-on-year with same-store sales growth of 97%. Yes, you read that right! Devyani International was not too far behind, with a 63.6% SSG for Q1FY23. Players like Varun Beverages which has the PepsiCo franchise in India participated in the performance leaderboard, with an over 100% rise in revenue and profit. EIH’s performance in Q1FY23 was strong as occupancy increased to 72% from 56% in Q4FY22, driven by a pick-up in corporate travel and strong demand from leisure travel. Lemon Tree reflected the same in its numbers, and ITCs hotel business saw average room rates 10% above pre-pandemic levels with 70% occupancy. This is not all. Multiplex leaders like PVR and Inox have shown that people are flocking to the theatres in a big way. Despite average ticket prices being at an all-time high of Rs 229, footfalls were 6% higher than the pre-pandemic base. Out in most certain In.

Pelosi Stares Down Xi

Nancy Pelosi's visit to Taiwan was an important milestone in her political career. One, she put her reputation on the line for not backing down as a decades-long strong critic of China's human rights record. With the U.S. midterm elections nearing and the Democratic party sliding in polls, she is at a high risk of losing the speaker's gavel. Someone watching Chinese President Xi Jinping’s increasingly authoritarian tilt, for Pelosi this might be now or never — no matter the fallout. There seemed to be some fallout, with China ratcheting up the tensions with missiles fired over Taiwan, and some bilateral meetings cancelled over statements made. This has the potential to become an adverse event and be a sore point in the days to come but as the week ended, risk assets did not show much impact.

More ‘Windfall’ Action?

The sword of some big government decision continues to hang on the corporate world. If steel companies have seen taxes on exports and oil companies in India and the United Kingdom have seen windfall taxes, there may be more to come elsewhere in the world. United Nations Secretary-General Antonio Guterres was critical of Big Oil, saying it’s “immoral for oil and gas companies to be making record profits from this energy crisis” spawned by Vladimir Putin’s war. He called for nations to impose excess profit taxes. 2022 continues to remain an eventful year.

Niraj Shah is Markets Editor at BQ Prime.