Talking Points This Week: One Step Forward, One Step Back
In ‘Talking Points This Week’, Niraj Shah studies how top business leaders and market makers are navigating the pandemic-altered financial landscape.
The opening week of 2022 lived up to its billing. The western world saw record covid cases and India is starting to follow, Chinese tech stocks fell again and so did the others after the U.S. Federal Reserve minutes revealed the possibility of faster rate hikes, OPEC+ bowed down to American pressure and upped crude output (believe me, Indians ain’t complaining), foreign institutional investors returned to the party in India, and the Indian batsmen failed yet again in overseas conditions in the second cricket test against South Africa. And yes China once again held people captive for testing, this time not in an amusement park, but aboard a cruise ship. Amidst all of this, we saw a sharp pullback in the equity markets in India in the first half of the week followed by a corrective move. The party was led by tech and spoilt by tech. As the famous Saudagar dialogue goes... Banaye bhi Chuniya, bigade bhi Chuniya.
Omicron And Other Headaches For Equities
“A series of fundamental negatives—Fed Turbo Taper/Hikes, Omicron-driven interruptions, Build Back Better impasse—are driving markets away from our current Base Case Targets towards our Bear Case. This is not a time to be a contrarian Bull, although that moment may come at some point in 1H[CY22].”
This is the view of Jonathan Garner and his colleagues at Morgan Stanley in their Asia Equity strategy note. A few others have sounded those words of caution as well. Hartmut Issel of UBS asserts that after a stellar two years for the Nifty where it even left the S&P 500 behind at times (even in dollar terms), the valuation of the Indian markets does not fully reflect upcoming headwinds like rising interest rates both globally and in India, and importantly, the return of India’s historic soft spot – current account deficits. UBS believes a multi-month pause is in order, the recent correction notwithstanding. In a world worried about flows, rates, and continued variants of the Covid-19 virus, this is a relatively easy and realistic assumption to make, especially in light of the fact that the first quarter in India is full of events like the union budget and elections in Uttar Pradesh, which may lead to high volatility at the very least.
Tech Tumble After Apple Landmark
Apple became the first company to hit the $3 trillion market capitalisation mark. In the process, fanboys and critics alike agreed in various polls that it will likely be the first company to go and hit the $4 trillion mark too. Save for this landmark, tech stocks tumbled. China’s tech stocks fell as firms backed by Tencent Holdings came under pressure after it pared investment in the sector for the second time in two weeks. As a result, the Hang Seng Tech index started off 2022 on a backfoot. What is not helping are worries about the rise in treasury yields which is putting pressure on stocks with extended valuations. Traders began the new year by jettisoning software and chipmakers. As a Bloomberg report finds, during the four sessions through Tuesday, tech sales reached the highest level in dollar terms in more than 10 years, data compiled by Goldman Sachs’ prime broker show. However, Indian IT came out of the week smelling like roses. While global tech continues cracking, most experts believe that there is merit in staying long Indian IT, especially ahead of the results season. The consensus belief is that in a seasonally-weak quarter marred by annual furloughs, the sector will deliver revenue growth over 4% in constant currency terms on a sequential basis due to strong demand and deal ramp-ups. Next week, same time, we would have known what transpired.
New Capex-Led Economic Cycle Ahead?
Manish Gunwani of Nippon AMC as well as Mahesh Patil of Aditya Birla Sunlife AMC believe that there is room for the industrials and capex-related themes to do well. Housing may lead the cycle, as the spending has already started and is seen on-ground. The broad-based capex cycle will likely unfold, as in the past, with a lag of 6-8 quarters. Four quarters of the housing cycle have gone by, and we are likely to see evidence of the broader capex cycle kicking off. My colleague Nickey Mirchandani put out this must-read deep dive on the pulls and pressures in this space and what may drive the capex cycle. Past experiences show that when the capex cycle turns, it is accompanied by growth in margins, core return on equity and earnings, while lowering working capital days. Together, these support valuations and there is evidence to show that India Inc. senses that will happen again. Larsen & Toubro Group Chairman AM Naik, a veteran of many past cycles, concurs in this exclusive BloombergQuint column and prescribes the measures needed for the capex to be healthy, invigorating, and sustainable.
Is it time to rechristen the sugar sector as the ‘ethanol/energy’ sector? Some of the players do think and want so, as the seasonality in the business goes away. If the last few quarters are any indication, valuations are moving up. The reason why this small sector finds a mention this week is because of the sharp gains in the space seen amidst the volatility elsewhere in the market. Every time Road Transport Minister Nitin Gadkari talks about ethanol, these stocks come into the limelight. One key reason why these stocks are moving higher could also be that despite the runup seen, there are a bunch of sugar stocks available in single-digit price-to-earnings multiples on forward estimates, and almost all of them are available at sub-20x on trailing earnings. I doubt there are many other high-growth sectors that would be trading at such multiples.
Sporting Stars Brought Back To Earth
Two of 2021’s top sporting newsmakers found themselves being humbled this week, after a year of runaway success. The Australian Open presented Novak Djokovic an opportunity to go one past Roger Federer and Rafel Nadal’s tally of 20 grand slam title wins that all three men’s tennis greats are currently tied at. Instead, the unvaccinated Djokovic was barred from entering and, as Bloomberg columnists Tim Culpan and David Fickling write, “the world’s No. 1 men’s tennis player now has the dubious honor of joining actor Johnny Depp in receiving a harsh lesson on Australian quarantine and border policy.”
Meanwhile, after landmark test cricket victories through 2021 in Australia, England, and South Africa, the Indian men’s team stumbled in Johannesburg. Unthinkable in the early 2000s, the batsmen let the team down again, and bowlers have been the drivers of victory. From the semi-final loss in the one-day world cup in 2019, the World Test Championship final loss against New Zealand, or the latest loss against South Africa, there have been multiple instances of single-digit scores by the team’s storied middle-order batsmen. Hopefully, new coach Rahul Dravid will do what he did throughout his playing career.... salvage the situation.
Niraj Shah is Markets Editor at BloombergQuint.