Talking Points This Week: Balancing On Tricky Cycles

In ‘Talking Points This Week’, Niraj Shah studies how top business leaders and market makers are navigating the fast-changing financial landscape.

As the risk-off mood across asset classes continued this week, it firmly enveloped equities and crypto assets in its fold. The week led the premier crypto Bitcoin to lose over 50% from its peak and also showed the bubble portfolio (consisting of Chinese internet and real estate names to U.S. technology stocks like Netflix and Tesla, and cryptocurrencies) slide down to over 30% losses. The week also saw Zimbabwe suspending bank credit to deal with inflation and the currency slide as well as had the President of the United States sounding hawkish on the inflation fight. Not to forget that the humanitarian issues continued to plague Ukraine and Sri Lanka. Lots of developments, and shortlisting the key talking points was difficult, but here are the main ones.

Riding Out Inflation

Not only Jeffries' Chris Wood, but also analysts at Deutsche Bank and Credit Suisse are pointing out that the equity markets are too complacent about inflation. Google trends mentions with ‘stagflation’ surpassed its 2008 peak. A range of conversations, with market experts and corporate leaders, indicate that inflation is the primary focus for now.

That said, despite surging costs, corporate profitability appears okay. This implies that cost increases are being accepted and/or that strong brands have pricing power. But both are inflationary in nature. Amidst all the issues of supply-chain disconnects, likely slowing consumer confidence and rising rates, the managing director of India’s premier paints company highlighted how inflation is the biggest elephant in the room and if corporate India, as well as the economy, deals with that one aspect then the rest should not be as big a problem.

Reading Cycles And Indicators

How can our business cycle end when our banks’ balance sheets are strong and corporate balance sheets are in ship shape? This is arguably one of the most repeated questions one hears in the Indian context. In a recent newsletter, Maneesh Dangi of Macro Mosaic Investing and Research wrote of how some previous slowdowns could serve as templates—2008 for example. Classic business cycles aren’t only about bank non-performing assets and how well they are controlled. A lot of times, they are about a fall in consumer confidence impacting consumption, and a fall in corporate confidence which impacts investments. Dangi believes that if the reason is the former, drawdowns in economic growth tend to be deep. Some of such hypotheses are long drawn in nature and play out slowly, but when they do, they do so strongly.

Looking At Past Market Cycles

People tend to compare the current dip to the recent ones which got bought into. A more salient comparison for the current setup is the near-bear experience at the end of 2018 when a 19.8% peak-to-trough drop for the S&P 500 (closing prices) was arrested as the U.S. Federal Reserve signaled it would halt interest-rate hikes, and then moved toward cuts. The S&P 500 is now down about 16.8% from its Jan. 3, 2022, peak, and the Fed is committed to keeping hiking rapidly now. This means that we are now in waters where we haven’t waded in the last few years, and therefore the outcomes can be materially different than the ones which we have seen in the recent past.

Can we, for example, see a scenario where, unlike the recent examples of markets moving ahead of the economy, the economic growth precedes the equity market and the equity market stays sluggish, simply because the markets have other technical factors like lower liquidity, higher discounting rate for multiples and no central bank ‘put’ to contend with? Can financial conditions stay at or worsen from current levels, which are already tighter than in 2018? If you know the answer, you know the way stocks will move over time.

Waning Covid > Interest Rates Or Geopolitics

Talking Point interviews and earnings interviews this week had one focus—which was to try and gauge what the leaders of India Inc. fear the most in the times to come. BQ Prime spoke in detail with multiple companies, each of which expressed confidence in FY23. The key driver—a post-pandemic world. Asian Paints’ Amit Syngle says that aside from inflation, FY23 holds no big challenges. He asserts that the Indian consumer, after two years of lockdowns and constraints, is not bothered about the war and is instead catering to her pent-up demand, and that will drive growth for FY23. Last week, Anil Rai Gupta of Havells made a telling statement saying that FY23 would be better off than FY22 despite all the challenges that it brings. Achal Bakeri of Symphony, the largest brand in air coolers in the world, is confident too that a post-Covid, opened-up India will make their India business shine in FY23 after a muted fourth quarter.

By The Way

Indian companies are benefiting from the ‘China-plus-one’ shift. A Bloomberg story found that the global energy crunch spurred by Russia’s invasion of Ukraine is giving the world’s biggest refining complex a much-needed boost as well. Reliance Industries’ Jamnagar facility is said to be lifting crude processing and deferring planned maintenance to take advantage of surging demand for diesel, according to people with direct knowledge of the matter. RIL is already sending shipments of the fuel to Europe, and this will reportedly increase in the coming months.

Somebody’s pain is somebody’s gain. In this case, that of the oil-to-telecom behemoth from India.

Niraj Shah is Markets Editor at BQ Prime.