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The US is in the "late stage" of the economic cycle. This
is where the yield curve is inverted and the economic
activity begins to flatten - prior to a slowdown. The
response to "Covid" in terms of fiscal and monetary
stimulus was very aggressive, which resulted in
growth coming back faster. But this caused an
overheating of the economy and hyperinflation as a
by-product.
Post 2014, India's business cycle never entered the
expansion stage basically because.
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Banks’ and NBFCs’ balance sheets were in a
mess with growing non-performing assets.
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Demonetization disrupted the economy.
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Prior to 2018 monetary conditions remained tight
due to RBI targeting Inflation.
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Post-pandemic the Government started supporting
growth. India is now in the expansion state of the
economic cycle. Earnings are expanding and are at a
higher level than pre-Covid times. GDP growth, too, is
around the highest in the world. The yield curve in this
stage is flattish.
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The March ending GDP growth in the US was 2% and
was around the same at 2.1% in the June quarter
against expectations of 2.4%.
On the other hand, the GDP growth in India was 6.1% in
the March quarter which went up to 7.8% in the June
quarter. However, the maximum increase was in
financials, real estate and government spending. The
dark clouds on India's horizon are rising oil prices, a
weak monsoon to affect rural recovery, and an IT
slowdown if the rest of the world goes into recession.
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All the prolific global spending has caused inflation
around the world and hence Central Banks have been
raising interest rates.
The Federal Reserve had to increase interest rates
from 0.5% to 5.25-5.5% (1000%). This massive increase
has been a huge shock to the financial system.
In India, the interest rates too have risen but from 4%
to 6.5% (62%), rates we are used to here. Hence the gap
between 10-year G Sec yield between the US and India
is at a historic low, reflecting the difference in
aggression between both Central Banks.
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US Government debt to GDP is now at World War II
highs of 125% of GDP.
This has resulted in ballooning interest payments. On
the other hand tax collection is in a deep correction.
The US yield curve is the most inverted since 1929 and
1979. Currently the interest payment per day is $ 1.7 bn
Fitch rating has downgraded the US government debt
rating from AAA to AA+.
India's public debt remains around 84% of GDP, a fairly
high level for an emerging economy. But it's
considered to be largely sustainable, thanks to the
unique structure and market features of our public
debt.
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Most of India's debt is in non-indexed domestic
currency and there's a large investor base from
India. Having said this, the rollover every year is
about 15% of GDP, which has to be financed.
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India is traditionally a growth economy.
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Remittances to India are the highest in the world
and last year grew 26% to US$ 112.5 bn.
With the upgrade in India's debt - JP Morgan has
added India to their global bond index.
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In the US, the percentage of credit card debt more
than 30 days past due is up for 6 straight quarters.
Delinquency rates have nearly doubled since their
recent lows. Credit Card debt (the most expensive
available) crossed US$ 1 tn for the first time in history.
Student loan repayment is going to restart. Further
mortgage loans due for re-setting will happen at a
much higher rate, causing further stress.
In India, credit growth has moved up from an average
of 8-10% to 14-16% which is normal for mid-economic
cycle numbers. Effective loan rates are reasonable
despite rate hikes due to healthy banking balance
sheets and healthy corporate balance sheets. However,
over the last 5 years, the unsecured loans have grown
by 29%. Microfinance has gone up by 19%. Hence the
income level needs to grow or the Non-Performing
Asset cycle could start again.
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The impact of the Federal rate increase was evident in
some areas like Capex. It has fallen sharply.
In India, there is significant capex spending by the
Government that is boosting infrastructure build-up in
the country. Capacity Utilization levels have gone up
for the first time in the last 9 years. This is more evident
in sectors like power, cement, and steel. Although on
the whole Capacity Utilization is at 15 year average
level, Corporate leverage is at a 15-year low.
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Equity Markets
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Historically, the MSCI World Index and Central Banks
Balance Sheets move in tandem. But although Central
Banks have started shrinking their Balance Sheets due
to Monetary Policy tightening, the markets have held
up. The markets still believe the Federal Reserve will
pivot and start cutting interest rates again. In the MSCI
Emerging Markets Index, India is moving towards the
2nd spot with Taiwan (China continues to have the
highest weightage).
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In 2000 the top 5 shares - GE, Exxon Mobil, Pfizer, Cisco
and Citigroup) accounted for 14% of the S&P 500
market cap. The top 5 shares are now Apple, Microsoft,
Amazon, Nvidia, and Alphabet and they account for
22% of the market capitalization.
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US valuations are outpacing India. Nifty 50 which was
trading at a premium to S&P 500 until late last year,
has cooled off and is now trading below its long-term
average. However, India continues to be more
expensive than other emerging markets.
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Be ready for volatility in the equity market. Events
expected are:
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The Federal Reserve interest rate pivot / staying higher
for longer.
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Elections in the US and India in 2024. Further, there
are some key State elections.
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Rising Oil prices - causing inflation to remain
stubbornly high.
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Monsoon - hopefully we do not have 2 years of
lower-than-normal monsoon.
However over the long term India's macros are favourable
and hence use each dip to buy equities for the long term.
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From June 2024, India's government securities are to be
included in JP Morgan's global bond index up to a
maximum of 10% - by increasing by 1% every month.
Hence in 2024, there will be a surge in Passive inflows (up
to $ 30 billion) in a staggered manner. This will likely get
other active bond funds to start looking at Indian GSecs. It
will have a positive impact on the rupee and with
increased demand, bond prices should rise and yields fall.
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Gold is quoted on the international market in dollars. The
dollar index rising is negative for gold. Interest rates rising
in the US is also bad for gold because gold gives no
interest returns and when safe Government securities
yield goes higher, this becomes the preferred safe
investment option. The dollar index rising and interest
rates rising should have collapsed the Gold prices, but it
has shown resilience. “Gold is the only commodity that
had a positive average return during recessions”. A WGC
(World Gold Council) historic study reveals that gold has
been a better asset class in times when the U.S. slips into
a recession.
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