Talking Points This Week: Micro Over Macro?

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

Have the historical returns realised over the last many years caused many to look past the current burdens on the equity market?

Strong inflationary pressures, record fuel prices, 20-year highs in S&P 500 valuations, and the conflict between Russia and Ukraine are all weighing down investor sentiment. But flows can do strange things, and if negatives are priced in, then a month-end up-move may happen. That is what JPMorgan seems to be indicating, and flows from local funds in India might not be poor either, more on that later.

Here is where the market stands: out of the three big events for March, the Uttar Pradesh election event is over, the large Life Insurance Corp. initial public offering is not front and centre over the next fortnight, and the U.S. Federal Reserve outcome was largely on expected lines, with some tweaks. These are the key talking points this week.

No Big Surprises From U.S. Fed, But Long Inflation Fight Looms

The Federal Reserve raised interest rates by a quarter percentage point and signaled hikes at all six remaining meetings this year, launching a campaign to tackle the fastest inflation in four decades. Chairman Jerome Powell asserted that the inflation trajectory through 2024 is “notably higher” than initial December projections, but bucked some calls for a larger half-point increase, which would have been the first since 2000, adding it could still happen in the future. Fed officials also pledged to start shrinking their $8.9 trillion balance sheet, with Powell indicating that it could start in the month of May.

Disruptive? Not quite, as was evident in the way the markets reacted. The longer-term impact on stocks is difficult to gauge. Especially because this is the first time that stocks approached the Fed meeting dates in a downturn, which is a very rare event, as evident by this chart.

The higher inflation trajectory may debunk RBI’s transient hypothesis too. CPI inflation in India for February at 6.1% and upwardly revised print for January at 6% appear to be etching a trajectory higher than RBI’s guidance of peak inflation at 5.7% for Q4 FY22. Core inflation remains elevated at 6% and is now averaging above 6% for over a year. The latest data shows a rise in food inflation resulting in both headline (6.1%) and non-core inflation (6.3%) rising higher than core inflation (6%). Assuming only partial adjustments of global commodity prices, rupee depreciation, and rising WPI trend, the headline CPI inflation looks set to rise further by mid-2022.

Do these trends mean that RBI may be letting the inflationary momentum build if it continues an accommodative monetary policy? Shashanka Bhide, an external member of the six-member Monetary Policy Committee, did say that the RBI’s February predictions would need to be revised given the war-induced surge in energy and food prices and the threat to global economic growth. From an equity watcher’s perspective, don’t be overweight on anything that gets impacted by a rising rate trajectory.

Falling crude prices are a small positive, which were spiralling out of control before cracking over 20% from the recent highs. At the last count, after a sharp up-move of nearly 100% in 3 months, the commodity has cooled off from highs of nearly $140/barrel to double digits once again. From an Indian macro perspective, one hopes it stays this way.

Gauging The Fund Flow Winds

A JPMorgan report last week advised global investors to add to risk assets, as the analysts felt that a lot of negativity was already in the price. The note said, “Looking ahead, we think it is important to remember what path we were on before the crisis started: namely, the global economy was on track to accelerate sharply on re-opening from the Omicron wave, with factory output surging, inventories lean, and mobility and the service sector rebounding. Despite the current tumultuous conditions, we believe a lot of risk is already priced in, sentiment is depressed and investor positioning is low, so we would add to risk with a medium-term horizon.”

The advice seemed prescient, and the markets did consolidate since then. But the trillion-dollar question is what next? While JPMorgan believes that the past month’s correction has induced too much negativity in markets, on the fear that growth will be severely affected by the war—not counting the Chinese lockdowns as yet—the Bank of America Global Fund Manager survey points out that cash levels with fund managers are the highest since April 2020 and the optimism around global growth is the lowest since the Lehman Crisis period of 2008. One statement sums up what BofA’s stance seems to be, after this survey: “BofA Bull & Bear Indicator at 2.8, i.e. not yet ‘extreme’ bearish; Positioning + Policy = too early for contrarian buy call = we remain tactically & cyclically bearish.”

Localising the analysis of the flows entirely, March may be a strong month for domestic flows, with possibilities that the domestic flows may be very strong due to tax-saving fund inflows, as well as multi-cap inflows. Varinder Bansal of Omkara Capital wrote in his Wednesday morning note to clients that local fund managers tell him about possibilities of inflows touching Rs 25,000-30,000 crore in March. That would be a sight to see.

Lots Of Buzz In Mumbai Real Estate

A Morgan Stanley note stated that pre-sales and new launches of property for the last quarter of 2021 were the highest in the last five to six years, exceeding pre-Covid levels for the first time. Add to that, a UBS note asserts that there is a huge construction boom coming up in the city of Mumbai. The UBS note details that select regulatory initiatives recently led to 150 million square feet of development rights being approved in 2021. Along with new residential supply of 33 million square feet in 2021, this implies a supply surge in Mumbai over the medium term, with pricing and margin implications. If indeed some strong companies are able to capitalise on this and if the output gets gobbled up, then it could mean substantial growth in revenues for companies in this space.

Multiple companies stand to benefit if they can see their projects getting approved. Prestige Estates has three-four project launches in Mumbai soon, and companies like Godrej Properties and Oberoi Realty already have a large presence. Oberoi has added a couple of large land parcels recently and is working on fairly large projects in the Mulund and Borivali localities of suburban Mumbai. There is talk in the market that DLF will make a re-entry in Mumbai, though there is no official word from the company yet.

The caveat to the real estate play is the macro. While commodity costs have cooled off from the peak, steel prices have moved up and a potential cement price hike by companies to combat the higher input costs would all lead to cost inflation in construction for realty companies. Add to that, the sector which is probably the most inversely correlated to rising interest rates is realty, and it seems to be a given that the RBI may have to reverse its benign stance, as indicated earlier. In light of all this, the question remains whether real estate companies can indeed give strong returns after what has been a fairly decent last 18 months of stock price returns.

Evergreen Or Everground?

This is a footnote in the overall piece for the week. Exactly a year after a giant container ship got stuck in the Suez Canal for almost a week and disrupted global trade for months, another Evergreen vessel has run aground, this time on the U.S. east coast. The Hong Kong-flagged Ever Forward got stranded after departing the port of Baltimore on Sunday night, according to mapping data compiled by Bloomberg, and was en route to Norfolk, Virginia, when it ran aground in the Chesapeake Bay. Talk of reminders, this was a bad one.

Niraj Shah is Markets Editor at BloombergQuint.