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Japan's Growth in the 1970's
In the 1970s, Oil prices rose 10-fold - compounding 25% (Currently, we have doubled so far), so CPI inflation was double-digit in most of the developed world. The first Oil Shock came in 1973 because of the Arab/Israel War against Egypt. The next one was in 1979, when the Shah of Iran was toppled.
Between 1971 and 1981, the US Bond Yield went up continuously. In that decade, the US went in and out of recession. The US stock market gave zero returns between 1967 to 1983
In the same decade, Japan, the 3rd largest economy at that time (after USSR) and an oil-importing country, transformed their country. They, too, went into a mild recession with the 1st Oil Shock, but from 1973 onwards, Japan was cutting interest rates. As a result, their stock market gave a 12% compounding return and, in dollar terms (as the Yen strengthened), compounded at 22%.
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How did Japan achieve this growth?
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They changed their energy consumption from Oil. For example, 62% of their electricity generation was from oil, which went down to 26% by the end of the decade.
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They shifted their economy from Heavy Industry to Light Industry and Electronics.
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(a)
They were the large Steel and Ship Building manufacturers. This was handed over to Korea.
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(b)
They developed their car manufacturing industry - Small, compact, energy-efficient cars. They started exports, and Toyota, for example, went from 2% global market share in the early 1970s to 13% at the end of the decade and is still around 19% share.
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(c)
Even though the economy grew at 5% through the decade, oil consumption remained flat.
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(d)
They pioneered knowledge-intensive industries and developed innovative processes and efficiencies.
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(e)
Funding came from local savings - they had a high saving rate of 21%. Japanese banks were
flush with funds and lent to the industry. The Central Bank gave commercial banks an
underwriting guarantee.
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Hence high inflation, rising interest rates, and rising oil prices do not necessarily spell doom and gloom for all countries.
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INDIA'S MOMENT
Based on Economist Issue of 13th May 2022
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The Economist, in its 13th May 2022 issue, announced that India is already the fastest growing economy, and they believe that India will hold onto that title for several years. India is on the Cusp of doing a Japan of the 1970s.
India is the World's 5th largest economy. Its Macros are in better condition than in the US. US real interest rate returns are negative about 7%, whereas we are about half that. Half the CPI inflation is due to food. We are self-sufficient in basic food production, except for edible oil. Wheat and Sugar export is banned, and Rice is likely to be next. Steel export is curtailed, and we have reduced excise on Petroleum products. We are purchasing more oil at cheaper rates directly from Russia. Getting CPI under control would be easier for India.
On the following fronts, India has transformed itself :
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Transportation and Communication networks are radically better. For example, broadband connections have grown 40X, airline travel 5X, and highway networks have doubled.
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India's alternative energy thrust is very powerful. It is moving towards Green Hydrogen fuel - which is more expensive but eco-friendly. Many companies have announced plans to set up units - Reliance, L&T, JSW Steel, Jindal Steel, NTPC, etc. The world's largest solar park is being set up in Bhadla, Rajasthan. Muppandal Wind Farm and Jaisalmer Wind Park are in the top 10 largest wind farms in the world.
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The US does not have Grey/UPI - they are still using Credit cards. Everyone from
the Rickshaw driver to the Vegetable Vendor has a Gpay account. India has the
largest FinTech adoption rate globally of 87%, which is considerably higher than
the global average of 64%. Indian financial technology (fintech) comprises 40
per cent of the world's digital transactions.
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GST has resulted in jobs moving from the informal sector to the formal sector at an
astounding rate (between half a million to a million every month) This is not going
to stop, and we still have a shortage of manpower in transportation /IT etc. So
unskilled labour does have a problem. However, with Jan Dhan - Aadhar Card -
Mobiles (JAM), the Government could transfer Rs 270 bn to the poorest in the last
3 years without leakages.
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India has a US $ 3 tn economy, of which about 50% is in services - US $ 250 bn is
exported. Western world services are around Rs 15 tn. Even if 10% come to India,
that would be a massive growth spurt. Only in India do we churn out 5 million
programmers every year. As parts of the world move into recession - IT Growth
spending may reduce, but as there is revenue pressure, routine activities can be
handed over to India. A few months ago, except for Pilots, Air Hostesses and the
boarding staff of Virgin Atlantic - all other functions were handed over to TCS.
India is negotiating many Free Trade Agreements.
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In the Pharmaceutical industry, India has the technological know-how to become
the manufacturer for the world. Our API (Active Pharmaceutical Ingredient)
industry is currently US $ 10 bn - China is US $ 100 bn. China shoots itself in the foot
every week with its statements. If just 10% of China moves to India, this will double.
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Financialization of Assets - Covid has increased the trend, which had already
begun. There has been a 3X increase in bank accounts 4X increase in Demat
accounts. US $ 85 bn dollars has been invested in the stock market by Indians. The
mutual fund SIP book adds Rs 12000 crore every month. India's household wealth
is about US $ 10 tn, out of which US $ 9 tn is in physical assets, which will not
increase in value much more than inflation. If an additional 1 tn is added to the
stock market over the next 3/4 - the Indian holding would double.
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Although India could be affected by the global events in the short term, it is hoped that over the longer term, India is better placed to expand the economy, the way Japan did in the 1970s.
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EQUITY MARKET
The equity markets continued to be very volatile as the events unfolded. Equity markets are a function of:
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LIQUIDITY
As long as the FIIs continue to sell, the markets will not make a bottom. However, domestic investors are holding the market up, especially with a strong monthly Systematic Investment into mutual funds.
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SENTIMENT
The Domestic investors have not given up yet and at some stage, the FIIs will re-start investing as India is one of the growth countries. But, at the moment, for them, it is a flight to safety, i.e. the dollar.
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CORPORATE EARNINGS
Corporate earnings continue to be satisfactory. Of course, we will have to watch the quarterly returns, but most Balance Sheets are strong.
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DEBT MARKET
The 4-5 year rolling returns for the 10-year GSec are at an all-time low, and this would be a good time to enter this space safely. Investment can be made either through:
- Roll down strategy with a fixed maturity period - the returns expected here would be known.
- 10-year Constant Maturity GSec where the returns are most likely to be higher, but you can see volatility in between.
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GOLD MARKET
The gold funds have not gone anywhere in the last couple of months - they stayed range-bound. If the US goes into recession, expected in 2023, then gold prices will pick up. On 1st July, the Government increased the import duty on gold which is positive for Gold in India.
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AKURDI |
WAKAD |
WANOWRIE |
MAGARPATTA |
B-20, Jai Ganesh Vision, Akurdi, Pune-411 035. |
No-1, Nisarg Deep Apartment, Kaspate Vasti Wakad, Pune-411 057. |
No. 26, Shraddha Regency, ’A’ Opp Kedari Garden, WANOWRIE, Pune-411 040. |
No. 14, 4th Floor, Destination Centre, Magarpatta City, Hadapsar, Pune-411 013. |
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