Sunday, July 30, 2023

Welcome to The Weekly, where our team shares a few thoughts to take you into the week. This week’s thoughts have been brought to you by Sagar Lele, Founder of Rupeeting. He also manages the All-Weather portfolios.

Looks like It’s Going to Be Soft

No, that’s not what she said. It’s what the street is saying in the US right now.

The Fed raised rates last week by 25 bps, after a temporary pause before that. This brought interest rates to 5.25-5.50%, which is the highest they’ve been in almost 25 years. And yet, it doesn’t look like the Fed is done. The Fed Chair, Powell, said another rate hike could still be on the cards for this year.

But something interesting has been happening. Unlike earlier when the markets dreaded each rate hike, and feared commentary on what would happen next, the atmosphere has become rather relaxed now.

Picture this, last October, a Bloomberg survey of economists indicated a 100% chance of a recession in the US. What’s going on now? The US markets are on a two-week winning streak, and are just about 5% away from their all-time high.

What’s keeping the US markets pumping?

  1. Inflation is under control - Last month, CPI fell to 3%, which has been a big relief. Yes, it is still above Fed’s target of 2%, which is why the Fed is still raising rates. But, it is much lower than the 9% it was in June last year
  2. The economy is blazing - The US economy expanded at an annualised rate of 2.4% last quarter, as consumer spending remained buoyant. A super-low unemployment rate, and wages exceeding inflation have kept growth high despite expectations of a recession

What does this mean?

The resilience of the US economy, and cooling inflation are signs that things are on the right track. Given that the rate hike cycle was the fastest and steepest, most were expecting a ‘hard’ landing, aka a recession. However, a combination of cooling inflation, and strong economy are now tilting market expectations towards a ‘soft’ landing, which has also been responsible for the 44% YTD rise in Nasdaq.

Any impact on India?

India has been in a better place throughout the mess US went through. India’s superior position was led by more structural growth factors, high-impact reforms, favourable demographics, controlled inflation, and consequently increasing investor preference. Two dimensions of spill-over impact for India that we see are:

  1. Foreign money moving out of India as the US, or other economies offer better risk-reward in the short-term. If global investors get an improving economic situation for lower valuations and higher upside elsewhere, they would trigger an allocation change, especially with India’s valuation premium being at its highest ever.
  2. With the economy doing well, and the outlook getting better, corporate America might just start spending more money, and the hurt Indian IT sector might finally gain some visibility on turning the corner. Anyway, the stocks have been beaten down massively, and any visibility improvement here could make them good bets, with the rest of the market being expensive.

Idea - Praj Industries ⛽