1. Long Grind in the US
Recessions have become shorter and shorter because
of the role of Government intervention and easy
money. They could do this because inflation was
falling. Due to the easy money, many zombie
companies were kept alive, which should have wound
up in typical situations. This lowered productivity
Inflation is now going to become stickier, and it will
not be so easy for the Government to pump in money
and cut interest rates at the first sign of trouble.
Hence the 2% inflation target in the developed world
is likely to be more like 4% for a long time, and interest
rates will remain higher for longer. Hence the long
grind instead of a V-shaped recovery. India will not
escape a slowdown too.
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2. Dollar has Peaked
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For the last 11 years, the dollar has been
strengthening. The dollar is likely to spend the next
couple of years declining for the following reasons:
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(a)
Owes a lot of debt around the world.
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(b)
Weaponized the dollar, so countries are looking
to move away from dependence on the dollar
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Hence the rupee's decline against the dollar going
forward will be much slower.
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3. When America goes down, the Rest of the World will go up.
America has 4% of the world’s population, and the US
stock market is disproportionately high, with 60% of
the world market cap (25% of the world GDP). In the
past, America had an up decade and then followed by
a down decade compared to the rest of the world. The
US markets are too expensive, and their size is
disproportionate compared to the rest of the world
and will return to mean and hence catch up with the
rest of the world if there is not a sharp crash in the US.
This will be a long-term process over decades.
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4. Tech stocks are going to shrink
The top 10 stocks keep on changing. The Chinese
tech stocks have already fallen off. When you
become so big, competition comes in, regulations
increase, and this sows the seeds for
underperformance. The last bust was the dot-com
bust when old economy stocks outperformed. New
Economy stocks have cooled off in India too. In 2021
35% of IPOs were tech, which went down to 2% in
2022. Technology is here to stay but will slow down.
Old economy stocks will rise again.
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5. Money spent on TV has resulted in worse programming
Massive amounts have been spent on content, yet
ratings are regularly falling. This was the Golden Age
of streaming – hence, as money was spent massively -
quality went down. Now, as money becomes tighter,
the focus on quality will go up.
Netflix and other streaming platforms of the world will
cut costs - only a few movies will go direct to
digitisation. Films have made losses - although
disproportionate amounts are paid to stars. Hence
entertainment spending will become more rational,
and the content will improve.
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6. Japan is back
Now developed markets’ debt is more than Japan’s.
In the 1980s, Japan had a golden era - 16% of the GDP
and 45% of the market value. Japan has still not
reached the all-time high of the 80s, even after 40
years. However, quietly Japan has been making
course corrections and has learned how to face the
problem for decades - now the rest of the world has
the same problem as Japan - ageing demographics,
resultant falling productivity and mounting debt.
Corporate profitability in Japan is at a historical peak
and has gone up hugely. Female participation in the
labour force in Japan is 85%, one of the highest in the
world.
A rising Japan can lift India. Japan’s foreign direct
investment has increased from 3% to 7% in the last
ten years.
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7. A move to outsourcing outside of China
It could be an opportunity for Asia. US outsourcing to
China has gone down 4% - Asia went up 4%, but India
went up only 0.2%. China was the factory to the world
- looking at Vietnam, Cambodia, Bangladesh, and a
small part of India. India has the scale to get a more
significant share but has to improve the ecosystem.
India is one of the few countries whose working
population is still increasing, and over the long term,
that, too, should help.
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8. Return to Orthodoxy
The period of easy money is over and hence the time
for Governments to experiment, and move away from
financial orthodoxy, is over. The twin deficits of trade
and fiscal will have to be reduced. The UK, with Liz
Truss, tried to do something different by cutting tax
rates without cutting spending but was punished
sharply.
India did quite well during the Covid era as it did not
overstimulate too much. India's budget was in the
black last year, whereas the rest of the emerging
markets are deeply in the red. We hope that as the
election year comes up, India will not be tempted to
largesse in this coming budget, which is the last full
budget.
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9. Relief from Elections
2023 will be a light year for elections around the world.
No country among the G7 nations has elections this
year which has not happened in the last 100 years.
Amongst the G20, only two countries have elections,
which is the lowest in 35 years. There is a possible
regime change in Turkey and Nigeria.
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10. Look out for BlueBirds (as opposed to Black Swans)
There were 3 Black Swan events in the last few years
- Brexit, the Pandemic and War in Ukraine.
Recession is expected in the US, UK and Europe -
hence that is known. In times of gloom, we need to
look for possible BlueBirds - Ukraine at peace,
US/China settlement or even Inflation falling.
Ruchir Sharma listed out trends in 2022 and got 9
out of the listed 10 correct:
- Decline in Birth rate with acceleration in the fall - it flattened out instead
- China's economy has peaked - YES and is likely to be around 2.5%, except for the reopening bounce.
- Global debt trap will deepen – YES, but India has deleveraged its private sector. Interest costs have gone up.
- Global Inflation will rise but not touch double digits - YES seems to have peaked but will remain sticky.
- Greenflation/commodity price will remain high - YES because new capacity has not been created.
- Productivity paradox persists YES - because Zombi companies artificially propped up. Tech is used for gaming, and entertainment and not for increasing productivity. Working from home is not productive.
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- Increasing Data localisation – YES, Russia, China, Saudi
Arabia, and Indonesia all put data curbs. Even India has
done this.
- Bubblets will deflate - YES, Crypto, Tech with no
earnings, and Green energy have all corrected sharply
this year.
- Small investor mania will cool down - YES partly due to
increasing interest rates, and there is an alternative.
- Physical world will gain Importance - YES - Basic
infrastructure increased. Manufacturing has revived.
Travel, etc, gaining in importance.
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The Indian Economy has been a bright star in the
global gloom. Economic activity is near all-time highs.
The rural economy, too is recovering. GST collections
at Rs. 1.4 tn is the new normal and other tax collections
are robust. Credit growth is recovering to doubling
digits. Banks' gross NPA is at a 7-year low.
Manufacturing PMI is at a 2-year high. Registrations of
New Manufacturing companies have moved up.
Private Sector new project announcements are at a
decadal high. In a nutshell, India is expected to be one
of the fastest-growing economies over the next 2/3
years.
India's valuation premium over other Emerging
Markets is high. Also, against the different economies,
it is very high. Due to the retail investors, the FIIs find
it easy to leave but challenging to re-enter. But retail
investors, too, seem to be slowing down. That is on a comparative basis - in isolation India's valuations are
slightly higher than fair value.
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Market capitalisation to
GDP has fallen.
As we can see in January, the markets will continue to be
volatile. Hence it would be safer to invest through a SIP or
STP for at least 6 months. Lumpsum investment can be
made in asset allocation funds.
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Debt Markets
Debt continues to be an attractive option giving 7%+
tax-efficient returns. FMPs and Target Maturity plans
would provide an opportunity to lock into the returns.
However, it would be better to see the budget before
taking longer duration funds - which over 3 years could
give additional returns.
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Central Banks have been accumulating gold at a
record pace not seen since 1967. Debt is at all-time
highs on most countries' Balance Sheets. Gold is the
only international currency not issued by a Central
Bank and cannot be printed. Regarding revaluing
gold, Europe is most likely to take the initiative, as
opposed to the US, because it will damage the dollar's
status as a reserve currency.
With so much debt, inflation and uncertainty,
precious metal will continue to do well.
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