Sunday, May 28, 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.
5 Month High
The Nifty hit a five month high this week. But why? After all, there’s not much good coming out of the world lately.
- The US is struggling to reach a consensus on the debt ceiling. With the government battling it out through negotiations, the country is running short on time. If the debt ceiling is raised, there will be some deal reached in the government that entails spending cuts to ensure more prudence. And, if the deal isn’t reached in time, anyway the government will have to partially shutdown and/or cut spending. In any case, fiscal pressure seems highly probable, which may fast track the US into a recession
- Inflation in the UK is still high at 8.7%. It did drop off a little after being in double-digits for eight months. But, 8.7% is still far higher than BoE’s 2% target. This means the central bank won’t go easy on rates, and just send one more country faster into the trenches of a recession
- Germany flopped into a recession as the economy shrank by 0.5% in the last quarter of 2022, and by another 0.3% in 1Q 2023. By definition, two straight quarters of decline = recession. And with the biggest kid in the eurozone falling, there is a high risk that others could be dragged down as well
- China’s comeback has been meh. Since April there has been a series of disappointments - industrial production and retail sales were both below estimates, youth unemployment surpassed 20% for the first time, and corporate sales are yet to reach pre-pandemic levels
And while global economic stability goes down the drain, the Nifty is up 1% in the last week, 3% in the last month, and 14% in the last year. Why even?
- Relative outperformance - Relative to other countries, India seems to be doing extremely well on the macro front. Inflation seems to be cooling off, the RBI took a pause to assess the impact of hikes on the economy, GDP estimates by everyone peg India as the fastest growing large economy. What more do you need?
- Liquidity - With this foreign investors poured in over US$ 5 billion in equities since April 2023. Increased liquidity has been creating the necessary support ecosystem for the markets to rise
- Earnings - Corporate earnings for 4QFY23 were decent. Large companies announcing a satisfactory set of numbers kept the sentiment buoyant
- Normal monsoon - The IMD suggested India would receive a normal rainfall, at 96% of the long-term average, which essentially means a good crop, easy prices and no major headwinds for inflation
There are enough reasons for the Indian markets to be in a cheerful zone. But, but, but, with so much going wrong globally, there are risks too. And when things go south, it doesn’t take too long for the Indian markets to join global peers in bleeding red. While the recent rally has brought in some green, it’s important to be cognisant of risks, and factor them in as well.
Idea - The Part of IT That Isn’t Falling ⚙️
What do BMW, Honda, Jaguar, Rolls Royce, Boeing, and Airbus have in common? They all outsource part of their work to India. And no, not the boring old-school IT services work of ERP systems, payroll management, and BPO services.
There’s a breed of Indian technology companies that has been doing the sexy stuff for global engineering giants. We’re talking about the development of driving systems in autonomous cars, powertrains for EVs, infotainment software in cars, navigation systems for airplanes, and much more.