Dear Reader,
The Fed ‘put’ may be history, but the markets consoled themselves on Friday with the People’s Bank of China (PBOC) ‘put’. The PBOC cut its five-year loan prime rate, the reference rate for mortgages, by 15 basis points in an attempt to prop up its beleaguered real estate sector. It was a welcome change from the gloomy news about higher inflation and policy tightening, and stocks gave a rousing cheer.
In recent weeks, estimates of Chinese growth this year have been cut, thanks to its COVID curbs. Goldman Sachs cut its forecast to 4 percent while Bloomberg Economics put it as low as 2 percent. Nobody believes the official Chinese government forecast of 5.5 percent. In April, retail sales had contracted 11.1 percent from a year ago.
The International Monetary Fund (IMF) had predicted Chinese real GDP growth of 4.4 percent. Going by the IMF projections, China is forecast to contribute 32.4 percent of global growth this year, while the US contributes 31 percent. Chinese growth is therefore of immense significance for global growth. In The Eastern Window, old China hand Saibal Dasgupta wrote about the impact of the China slowdown on global supply chains.
Real estate is a very important driver of Chinese growth, estimated to contribute 17-29 percent to Chinese GDP, depending on how it’s measured. A report that average new home prices in 70 major cities fell in April must have rung the alarm bells for the Chinese leadership. Premier Li Keqiang has been rooting for a monetary and fiscal stimulus to support the economy at every meeting. Xi Jinping, whose coronation as supreme leader for life is scheduled to take place this autumn, must also be worried.
But how can China afford to cut interest rates at a time when the rest of the world is tightening? Well, producer price inflation, at 8 percent in April 2022, is at its lowest level in a year, while retail inflation moved up to a still low 2.1 percent because of supply disruptions caused by the COVID curbs. Producer prices lost momentum as demand fell on the one hand, while the government took measures to increase production. For instance, my colleague Ravi Ananthanarayanan pointed out that aluminium smelters were running at full capacity by end-April and output is expected to be even higher in May.
It’s another matter, of course, whether the rate cut will bail out the Chinese real estate sector. There is after all a glut of housing and it wasn’t so long ago that Xi went to town with the slogan that houses are for living in and not for speculation. For the moment, though, the markets seem to have immense faith in the ability of the Chinese Communist Party to deliver results.
The bounce may also be due to pessimism in the market having reached extremes, as the survey of fund managers by Bank of America showed, setting the stage for a bear market rally.
But there’s no escaping the fact that the withdrawal of monetary stimulus by the major central banks will have a big impact on the markets, as V Anantha Nageswaran, the Indian government’s chief economic adviser, told us in an exclusive interview.
Anantha Nageswaran also said India is better placed among the emerging market economies both for portfolio and direct investments. The strength of the US dollar, though, is a problem, as this FT story, free to read for MC Pro subscribers, says. There is nowhere to hide. If China eases policy while the US tightens, the pressure on the yuan could weigh on the rupee, although it’s also true that letting the rupee depreciate may not be a bad idea.
The Indian economy is in a reasonably good shape, as our Economic Recovery Tracker shows. Indian banks have had bumper profits. Among companies, with business conditions getting back to normal, Avenue Supermarts saw a good recovery in sales in March. Price hikes and exports have helped Eicher Motors. Loan growth at the bottom of the pyramid has gained momentum, as seen from Bandhan Bank’s results. With a normal monsoon expected, tractor demand is expected to be strong. With the resumption of travel, the road ahead is smooth for luggage companies. ITC’s FMCG segment has done well and the full resumption of mobility is a tailwind for its cigarettes business. Barbeque-Nation Hospitality is accelerating new restaurant openings. The situation in Russia presents a long-term opportunity for Dr Reddy’s. Tariff hikes have led to a profit surge at Bharti Airtel.
But inflation remains a problem, as seen from margin pressures at several firms, including Pidilite and tyre companies. Lupin’s Q4 performance was marred by pricing erosion in the US. Godrej Consumer Products’ international business dampened the show. And, as the minutes of the Monetary Policy Committee show, more rate hikes are in the offing. How the government and RBI manage inflation, says Shyam Sekhar, is “central to the stability of the stock market. If we do far better than 2012-13, then we should be able to overcome this problem”.
How should investors approach the markets then? In this tumultuous environment, investors need to take stock of the drivers of volatility. This FT piece argued it’s time to hold gold and commodities. Our analyses of SBI and Tech Mahindra stressed their attractive valuations after the market correction. My colleague Madhuchanda Dey looked at bond yields versus earnings yields as a way to figure out whether it’s time to bottom-fish. This piece said that after the investing excesses of the pandemic, it’s time to go back to basics. Staying in cash is not an option, because inflation will erode the value of your savings—taking no risk is therefore the biggest risk. My colleague Sachin Pal wondered whether we are in for a repeat of the 2008 meltdown in the markets. Start-up Street considered what start-ups should do as venture capital funding ebbs.
In our constant endeavour to add value and help investors navigate asset markets, we have brought you GuruSpeak—where we can learn from successful traders; Crypto Conversations—we had a story on how to buy property in the Metaverse; FX Learn, on currency trading. This week, we introduce a new series, Strategy Lab, which will provide a forum to traders to back-test their trading strategies. Do make full use of it.
Cheers,
Manas Chakravarty