In Review – Week 29, 2021

Global Covid cases rose further (3.5mn) again last week, led by Europe and Asia. Yet global Covid vaccination drive also continues to ramp up (Japan being key highlight this week). Key market trends for last week. (1) Govt interest rates were mixed. (2) Corporate/ Credit spreads have increased moderately in July21, basis our analysis. (3) US/ EU interest rates declined again last week. (4) Gold, the risk off commodity, was largely range bound last week. (5) India/ US equity market volatility remained below-normal/ normal. (6) The Indian equity/ share market was largely range bound last week. Foreign investor flows remained -ve despite the blockbuster Zomato IPO (strong FII interest). (7) But the US/ EU markets reported strong gains during the week. (8) Energy markets were mixed – Crude Oil seems stable during the week but had a topsy-turvy trend – sharp decline on Monday followed by strong recovery over the next 4 days. But the star was Natural Gas – US$4 level hit even before Winter season kicks in. (9) Currency markets were largely steady during the week.

References (writeups during past few weeks) :

India Bank Credit trends July21 update

Stuck at 5-6pc

India Bank Credit growth remains stuck in the 5-6% range, no surprise given the second Covid wave impacted business momentum. Yet the counter is (a) bank credit is a function of nominal economic growth and inflation has been rising and (b) we have not seen any material change in bank credit trajectory in June21 (despite receding Covid). CRISIL yet expects India Bank Credit growth to end up at 9-10% by Mar22. Key trends in data (May21). (1) Agri Credit growing at a robust 10+% pace on none to shabby base (no surprises). (2) Industry Credit growth remains subdued at 0-1% despite strong goods/ manufacturing momentum. Metals segment deleveraging is not the issue given excessive leverage (historically) and strong rebound in Commodity prices in 2021. But barring Food Processing, none of the other large Industry segments are showing any Credit momentum. (3) Services Credit growth has also crashed down to 1-2% levels. RBI data has undergone some dramatic adjustments so segment-wise growth is largely incomprehensible. Yet where trends are consistent – Trade segment Credit growth robust (Inflation, Working Capital) and Comm Real Estate segment Credit momentum has completely crashed (this is hardly over, IMHO). (4) That leaves Retail Credit growth as the only bright spot in the entire mix. Housing and Auto Credit growth has slowly but steadily scaled up the 10+% trajectory. Yet it is the Unsecured Loan book (Credit Cards, Personal Loans) that is leading the charge. In our book, strong growth in Unsecured Retail book alongside rising NPAs should add to concerns, not strength.

References (writeups in the series) :

SIP returns tracker July21 update

SIP returns remain on track

The higher they climb,
the harder they may fall.

In this series, we cover the SIP performance of major schemes of DSP and UTI mutual funds, our partners in crime. The focus is on Equity and Equity-oriented hybrid funds (5-10+ years long-term investments). The Market Cycle remains constructive and SIP returns are back on track (10+%) – in fact, medium-term (5 year) SIP performance has gone beyond 15% (for the most part and is starting to knock on the 20% door. Yet this is the time the above-highlighted market wisdom must be kept in mind. Key lessons from 2020-21 (1) Equity/ Share funds/ SIPs are the ideal investment vehicles for the long run (10+ years) – discipline combined with compounding and solid returns. (2) The Market Cycle matters – SIPs done within a few months of each other can have very very different returns. Set the right benchmark (10+%) and treat everything else as a bonus. (3) Pure Equity/ Share funds/ SIPs are not good for the medium term (5 years) as returns are not guaranteed and even negative returns are possible (Mar20). (4) Hybrid funds (mix of equity and debt) manage the Market Cycle/ volatility better and are more suited for medium term investments (4-7 years). The key tests are -ve returns (Never in 5 years) and high probability (85-100%) of 7+% returns, as we have presented.

References (writeups in the series) :

Global Human Mobility trends

Still not normal (will they ever be)

Human mobility propels economic growth, reduces inequalities and connects society(-ies)

As we add another tracker to our Macro Asset Allocation portfolio, we wondered how to impress upon the importance of human mobility. Let’s just say the history of humanity and its development has been written on the pages of mobility. Of course, times are a changing, with digitization (and skills) becoming more important. This has also created two opposite groups in terms expectation of human mobility in the post-Covid world. (a) One believes the human mobility trends never recover to pre-Covid levels and the quickly we adjust to the new reality, the better. (b) The other that digital is still not all pervasive, actually promotes inequality till it is and recovery to pre-Covid levels critical to economic recovery. The truth, we believe, is somewhere in the middle. Although the global economy is headed towards increasing digitization (and lower human mobility per unit of GDP), yet mobility remains a critical piece in the jigsaw of human development and economic growth. And although we present the trends in the context of broader economic reopening/ recovery, mobility has structural direct correlation with specific industries (real estate – residential up, commercial down). Key conclusions. (1) US almost back to normal, surprisingly also EU (already). But Japan, India and UK are much further away – implies the global economic recovery is still not done. (2) Residential has gained structurally (WFH). Parks (and public spaces) too. Essentials (grocery and pharmacy) back to normal in most markets; Discretionary still far away. But workplaces are the furthest away from pre-Covid levels – not sure if they will ever come back fully.

References (writeups in the series) :

  • US mobility trends. These mobility trends are sourced by Google from its Android-OS-powered smartphones. The trends are broken down across 6 elements – (1) Obviously, Residential has remained above pre-Covid levels throughout the Covid crisis. Since people already spend a lot of time at home, changes in Residential are likely to be smaller. (2) Essentials (Grocery & Pharmacy) recovered back to normal in early-2021. (3) Parks (and public places) have seen a large jump (open air and spaces), although the huge spike they have seen may also be due to seasonality (summer season is big for outdoors in generally Cold countries like US). (4) Discretionary (Retail and Recreation) still to come back to normal but not lagging by much now. (5) Travel Stations still much below normal. (6) Although this may be largely due to continued Work from Home, as quite a few Workspaces continue to remain closed or operate at sub-optimal capacity. Also note that US economy has by far the largest share of Institutional Services (BFSI, Software) in the economy.
  • China. Data is not available.
  • EU – Germany. Since consolidated data for EU is not available, we look at the top-2 representative economies – Germany and France. Surprisingly, Germany is ahead of US on most mobility parameters. Notably Workplaces, although it must be noted that Germany is the heart of Manufacturing in Europe with relatively lessor share of Services. Along with similar trends in France (larger share of Consumer Services), this implies EU economic recovery may be far ahead of expectations (3Q21 vs 4Q21). Also take note that EU has almost covered up the gap vs US on the Covid vaccination program.
  • EU – France. Very similar trends to US and Germany except… (1) Discretionary (Retail and Recreation) have already recovered back to pre-Covid levels – the French do love their cafes and summer travel. (2) Workplaces lag and have declined recently. Hence France is slightly more of a mixed bag compared to US and Germany.
  • Japan – where the problems lie. No surprises here. Japan continues to lag the global reopening by a mile. Surprisingly, Essentials (Grocery and Pharmacy) are not the issue and neither is Workplaces (Manufacturing dominant) but everything else. Even Parks (and public spaces) continue to lag. Given Japan’s aged and further aging population, whether these trends are more structural remains an open question. Nonetheless, countries like Japan, India and UK also provide the potential for upside surprises to global economic recovery.
  • India – left to rue what could have been. Obviously of keen interest to us not just from an economic but an investment standpoint also. First, look at the Jan-Feb21 period and mobility in India was almost back to normal (except Retail and Recreation) – Essentials (Grocery and Pharmacy) were actually ahead of pre-Covid levels. Instead, we are left to rue the sharp second wave that completely destroyed that momentum and we are yet to come back to even the Jan-Feb21 levels in July21. Discretionary spending (Retail and Recreation) continues to lag significantly and the one to watch going forward.
  • UK – down in the dumps. After taking the lead on vaccinations in early-2021 and beating both US/ EU, UK had the bright idea of allowing the Queen’s Platinum Jubilee Celebrations and Euro 2020 (2021?) with fans/ crowds. The rest, as they say dryly, is history! With the Delta variant raging, dont expect much till late-2021, despite the high vaccination rate.

In Review – Week 28, 2021

Global Covid cases rose sharply (3+mn) last week led by UK (Delta variant, Euro 2020) and Asia. Yet the global vaccination drive also continues to rock. Key financial market trends for last week. (1) Govt interest rates declined moderately. Yet it is just a small break in the longer term trend (rising). (2) Corporate/ Credit interest rates were largely flattish in June21, basis CRISIL data. Corporate/ Credit spreads have increased but interest rates declined moderately in July21, basis our analysis. (3) US/ EU interest rates declined again last week. (4) Gold, the risk off commodity, was largely flattish last week. (5) India/ US equity market volatility remained below-normal/ normal. (6) The Indian equity/ share market reported robust gains last week, notwithstanding continued weak foreign flows. (7) But the US/ EU equity markets reported moderate declines last week. (8) Energy markets, notably Crude Oil , corrected sharply given continued OPEC+ uncertainty. But the uncertainty has been resolved with the OPEC+ agreement over the weekend. (9) Strong US Dollar but EM currencies (Yen, Rupee) held off strongly against the USD. Rupee strong vs Euro weak.

References (writeups during past few weeks) :

The Black Gold July21 update

The OPEC binary re-emerges

The cure for high prices, are also high prices.

What difference do 6 months make. At the start of 2021, Crude Oil was still languishing at around US$50 and although Covid vaccines had emerged, vaccination spread was still limited. Today, in July21, not only has the WTI benchmark hit US$70+ levels, Covid vaccine doses hit 3.5bn globally, but US Crude Oil demand just hit back its pre-Covid levels. Although India played spoilsport in 2Q21 thanks to the second Covid wave, global Crude Oil demand continues to improve steadily. With OPEC+ (40+% of global supply) holding the supply horses, the demand-supply balance remained favorable. US/ DM Crude Oil inventory levels continue to decline with China also opening up its inventory taps recently. Yet pricing has gone way above our anticipated range (US$50-65) and into new territory (US$65-80). That in itself would be reason for pause, there is another – OPEC+ recent meeting (July21) was called to just extend its continued supply normalization (0.4-0.5mbd per month). Instead, an emerging oil production rivalry between Saudi-UAE, old time friends, was witnessed. Saudi has sought slow normalization of the 6mbd supply held off by OPEC+ (Dec22), but UAE wants faster normalization (Apr22, as originally planned). This is the re-emergence of the OPEC+ binary (we have talked about it previously), resulting in cheating/ showmanship and ultimately the potential end of the OPEC agreements. For now, Saudi and UAE seem to have reconciled their differences, but we believe the endgame is high probability in 2022.

References (writeups in the series) :

  • Demand-supply balance and inventory. Figure 1 is not just the first but the most important figure in today’s writeup. Great news – within 6 months of launching the nation-wide vaccination drive, US hit its pre-Covid level of Crude Oil consumption as the Summer driving/ construction season started in the right earnest. There is more than just hope for its market. To be sure, 2Q21 had its share of demand disappointments as well – India witnessed its second Covid wave coupled with sharp Crude Oil demand declines – UK also reported the ‘Delta’ wave as it allowed unfettered access to Euro 2020 matches. And thus, the reopening still remains a careful game, not in the hands of crazy politics. Nonetheless, the good news is global Crude Oil demand remains on a steady normalization path (likely 4Q21E or 1Q22E) – Figure 2. Even better news is the large demand-supply mismatch of 1H20 has been largely corrected in the last 12 months. Some excess inventories remain (largely in China) but likely to be corrected further in the next 6-9 months, assuming OPEC+ supply agreement remains on track (initial scare, but agreement is on track now basis news reports). In fact, DM inventories (Figure 3 presents US data) are now below 5-year averages (normal). No surprises then that Crude Oil prices have overshot our expectations range (US$50-65).
U.S. crude oil stocks graph
  • But the OPEC+ binary (0, 1) re-emerges – not to our liking. We have discussed the OPEC+ binary previously in our writeups (see here). The fundamental logic behind any cartel is to control supply of goods, and prices, because a competitive market will result in pricing significantly below cartel-controlled pricing. Yet cartels are fundamentally volatile (and OPEC+ is particularly explosive) and there is always potential benefits in cheating by a few players, especially when prices reach extremely profitable levels. This is what we are seeing right now – Crude Oil prices have reached very attractive levels and although we are not seeing cheating currently, few countries such as UAE (and Iraq) that have invested heavily in production capacity, are raring to open the taps. On the other hand is Saudi Arabia, the de-facto OPEC+ leader, preaching restraint as global Crude Oil demand is not back to normal. But if UAE and Iraq do not pay heed to Saudi, what can the it do? Saudi’s only possible retaliation (short of war) is to open the taps itself. That creates the OPEC+ binary (0, 1) – (a) the parties can come to a resolution and Crude Oil prices can continue to rise or (b) they cant, the OPEC+ supply agreement is dissolved, and prices crash. The re-emergence of the OPEC+ binary is usually an indication that prices are nearing their intermediate peak. News reports already indicate that Saudi-UAE talks are headed towards a resolution, so expect the party to continue in 2H21E – most experts expect a move to US$80+ but a few adventurous ones are calling for US$100! Yet we believe the higher demand and prices go, the higher the incentive to cheat and the endgame for 2022E is clear (to us) – its time to move to the sidelines.
  • Natural Gas continues to rock – more upside in Winter season (Oct21 onwards). Yet not all is lost in the Energy complex – as Natural Gas continues to rock. Unlike Crude Oil, demand destruction in 2020 was much more limited, and demand momentum has come back equally strongly in 2021 (also helped by exports out of US). On the other hand, US production/ supply continues to remain below peak levels (late-2019). Summer season (Apr-Sep) prices currently (US$3.6-3.7) have been much ahead of benchmark (US$2-2.5) and even ahead of the Winter season (Oct-Mar) benchmarks (US$3-3.5). Therefore, even if prices do not move structurally higher, they can still go cyclically/ seasonally higher to US$4-4.5 levels. US inventory levels are just middle-of-the-road but there is no scope to absorb any shocks – especially in the face of resilient global demand – either on demand or supply side.
dry shale production

The Psychology of Money P8

Time is Money

Behavior is hard to teach,
even to really smart people.
Especially to really smart people.

References :

Credits :
The Psychology of Money, by Morgan Housel (if you like what you see in these pages, do consider buying the book – you will not be disappointed)

The highest form of wealth is the ability to wake up every morning and say, “I can do what I want today.” People want to become wealth to make them happier. Happiness is a complicated subject because everyone’s different. But if there is one common denominator – its that people want control over their lives.

Angus Campbell was a psychologist at the University of Michigan. Born in 1910, his research took place during an age when psychology was focused on disorders that brought people down – things like depression, anxiety etc.

But Campbell wanted to know what made people happy. His 1981 book, “The Sense of Well Being in America” starts by pointing out that people are generally happier than many psychologists had assumed.

But some were clearly doing better than others. And you couldnt necessarily group them by income, or geography, or education, because so many in each of those categories end up chronically unhappy.

Campbell summed up the most powerful common denominator of happiness – having a strong sense of control over one’s life is a more predictable predictor of Well Being than any of the objective conditions of life we have considered.

More than your salary. More than the size of your house. More than the prestige of your job. Control over doing what you want, when you want to, with whom you want to, is the broadest variable that makes people happy.

And Money’s greatest value – is its ability to give you control over your Time.

A small amount of wealth means the ability to take a few days off work when you are sick (or when someone you care about is) without breaking the bank. Gaining that ability is huge if you dont have it already. Or being able to deal with a medical emergency without the added burden of worrying about how you’ll pay for it.

A bit more means waiting for a good job to come around after you get laid off, rather than having to take the first one you find. That can be life changing. Six months’ emergency expenses means not being terrified if you have to take some time off to find the right job.

Using your Money to buy Time and options has a lifestyle benefit few luxury goods or services can compete with (if any).

That, is the Psychology of Money.

In Review – Week 27, 2021

Global new Covid cases remained sub-3mn but continued to increase moderately led by UK (Delta variant, Euro 2020). The rate of global vaccinations continues to improve, with India/ Japan/ Indonesia sincerely joining the effort. Key financial market trends for last week. (1) Govt interest rates remained mixed on a weekly basis. Yet the longer term trend (ytd/ yoy) is quite clear – rising rates long term. (2) Corporate/ Credit spreads have increased moderately in July21, basis our analysis. Yet AAA/ AA debt effective interest rates remain much below historical levels. (3) US/ EU interest rates declined against this last week. (4) Gold, the risk off commodity continued rebuilding post sharp sell-off few weeks back. (5) India/ US equity market volatility remains below-normal/ normal. (6) The Indian equity/ share markets reported relatively flattish trends last week. Mid-/ Small- cap/ companies out-performance yoy has been a beauty to behold – but is the cycle close to its peak now. (7) The US/ EU equity/ share markets were also largely flattish during the week. (8) Energy markets corrected a tad across, given the OPEC+ uncertainty, but after a long upwards run. (9) The currency markets were largely steady with no pronounced move in USDollar/ Rupee.

References (writeups during past few weeks) :

RBI July21 Financial Stability Report

Sustained Optimism, despite second Covid wave

Risks beget Challenges,
Risks also beget Opportunities

RBI Financial Stability report discusses the state of the global and Indian economy and Banking and Financial Services industry. Financial Stability feeds into the growth and inflation mandates of the RBI. BFSI is one of the lifelines of the economy, providing credit to industry and returns to savers. The report generally makes for dour reading (focuses more on risks), but hardly surprising (Figures 1-2). Key elements discussed. (1) Global economic growth prospects have improved considerably – led by robust vaccination drives in major economies. (2) India economic risks, however, have not thanks to the second Covid wave. (3) Thankfully, a strong forex reserve base implies limited external reserves. (4) Commodity/ Inflation risk has played out strongly since the last writeup in Jan21 – we believe there is more to come. (5) The Fiscal deficit risk remains elevated – second Covid wave impact vs Inflation (supports tax buoyancy). (6) Corporate/ asset quality risk was improving, but the second Covid wave has complicated this again. Banks have capital, so in a good position to weather this risk, but this is not a great situation. (7) Real estate risks are concentrated in Commercial segment. (8) Interest rate/ Regulatory risk has moderated since RBI had to react to second Covid wave, but will rear its head again in late-2021 given potential for rising Inflation. (9) Equity market risk has risen since Jan21, a combination of weak fundamentals and high valuations.

References (writeups in the series) :

  • Global economic growth. Looking back at the Jan21 FSR update, we got this one wrong. We were still concerned about Covid risk (especially given rising new Covid cases led by holiday/ festival season in the West) even as the vaccination drives had just started. No harm done (to the portfolios) – given risk assessment/ management is a weekly exercise (once in six months). Nonetheless, global economic growth prospects have brightened considerably with 4 out of top-6 economies (US, EU, China, UK) strong ahead of their vaccination targets and two leftovers (India, Japan) strongly catching up now. We can say with a high degree of confidence that 2H21 would be much better than 1H21 has already been. US joined China in largely normalizing its economy and EU will join them in 2H21.
  • India economic growth. The economic engine was just starting to hum in 1Q21 when the second Covid wave hit like lightening in 2Q21. We were not completely unjustified in our Covid fears – but really it is the lax attitude on preventive measures/ vaccinations that hurt the ambitions of the ‘pharmacy of the world’ (do we laugh, or weep?). And although the wave was controlled by June21 and we are back on the growth path, it is quite unclear the extent of the damage and what that growth path will look like. RBI reversed its Mar21 policy normalization and has provided strong monetary stimulus. But the more robust fiscal side has been absent except for some targeted programs for MSMEs. Even the experts are divided (and given we are not even an economist, what can be said).
  • Current/ Capital account and External risk. The External risk of an economy has two elements – current and capital account. Current account remains under control given strong exports (markets like US) and weak imports (second Covid wave). Capital account had weakened initially last year when Covid struck, but more than made from strong inflows for the rest of the year. Although foreign flows into India have dried up again recently thanks to second Covid wave, India has build strong forex reserve position last year (US$600bn from US$400bn) and we do not see much risk on this account. And thank heavens for that, cause high Domestic and External risks would have been catastrophic indeed.
  • Commodity/ Inflation risk. We have probably spend more time on this subject than any other over the last 6 months, so will not say more. Commodity prices were back to normal already in Jan21 (last update) having recovered from Covid lows. They have only hit new highs recently, and yet have also corrected moderately from the peak levels. In our view, the correction is driven by supply-side challenges being mitigated (somewhat). Yet coordinated demand shock/ peak is yet to come through, in our view by Nov21-Feb22 (Christmas-New Year period in US/ EU, followed by Chinese New Year in Feb22). Wait and watch…
  • Fiscal deficit/ Sovereign rating risk. Remains high. This is the reason the Govt of India has been very very circumspect in terms of fiscal stimulus to support growth. On one hand, the second Covid wave certain hits the Govt finances. On the other hand, high inflation (majority of tax collected in India are indirect taxes like GST) supports ta buoyancy. The Infra development risk is tied to this one since Govt of India is the major spender. Yet we do not believe there is much risk of Sovereign rating downgrade given the solid forex reserves.
  • Corporate/ Asset quality and Bank Capital risk. First the good news. It didnt turn out to be as bad as initially feared after the first wave and lockdowns. Strong policy reaction (by the RBI) supported banks in raising Capital and keep a lid on NPAs. The Corporate/ Asset quality risk was improving, but the second wave has complicated this again. So honestly, at this point in time we have more questions than answers – the answers will start coming in July21 itself, when some of the largest banks (HDFC, ICICI, Axis) report their 1QFY22 financials – these would be very important announcements to watch out. Notable to watch out will be Consumer/ Retail Credit trends, which deteriorated in Jan21, given Personal loans are the only growth segment in Indian Banking right now (Industry/ Services credit already weak).
  • Real Estate risk. To be sure the second Covid wave doesnt help, but we do not much incremental risk in the Residential real estate sector. The risk in real estate markets is concentrated in the Commercial segment, in our view.
  • Household savings risk. For sure its exists at individual household level (it always does), but we have not seen any evidence so far that this is a systemic risk.
  • Liquidity risk. This risk was picking up in Jan21 as RBI was headed towards taking back the excess liquidity it only had given to the market. Then the second Covid wave happened, and RBI had to reverse course and again flood the banking system with liquidity. Not a near-term risk but certainly RBI will again attempt by end-2021 (if there is no third wave).
  • Regulatory/ Interest rate risk. Again, not a near-term risk since RBI had to get busy with supporting the economy in the face of the second Covid wave. However, CPI Inflation continues to remain above RBI comfort range (4-6pc) so may actualize some time in late-2021. But RBI will look to remove excess banking system liquidity first, before raising rates. Hence look out for Liquidity risk first and Interest rate risks later. These are risks if the economy is not strong enough (or recovered enough from second Covid wave) to tolerate the tight liquidity/ higher interest rates, or if the pace of normalization is faster than expected by the market.
  • Equity market risk. This risk has certainly increased in the last 6 months, as Equity markets have continued to move higher despite second Covid wave. Yet only rising Equity markets do not define Equity market risk, rising valuations do (see here for a perspective). Further, Equity market risk is also linked to other elements such as Capital account (foreign investors being the largest investors in the Indian market) – this risk is also starting to materialize now given foreign flows into EMs (emerging markets) such as India, are slowing down. Weak fundamentals (economic growth, rising Inflation) feed into this risk.

Sovereign Gold Bonds

A more profitable investment into Gold (long-term)

We have been fans of Gold as an investment asset since last year. Sure, we may have got the timing wrong but one year in a short time period in the investment world, and there is no change to our long-term investment case for Gold. Some time back, the only two options to investment in Gold were – physical (Gold coins) or digital (Gold mutual funds). Lately (2015 to be sure), RBI added to the options with SGB (Sovereign Gold Bonds). And although we discussed the various Gold investment options in one of our previous writeups, it was a long one and the message seems to have gotten lost/ forgotten. SGB is a more profitable investment into Gold (long-term) given the additional 2.5% interest rate offered on top of Gold returns. The investment can be done in units of 1 gram of Gold. The term period of investment is 8 years, but the lock-in is only 5 years, and the investment can always be sold on the stock exchanges (NSE, BSE). Held to maturity (8 years), the investment is exempt from capital gains tax. But if sold before redemption (5-7 years), long-term cap gains tax is applicable after indexation (20% adjusted for inflation). The tax benefit (capital gains tax exemption) make it a fantastic investment (into Gold) over the long term (8 years). Of course, the shortcoming is in terms of redemption flexibility, so please be mindful of the same. Finally, less convenient than mutual funds given the option of SIP is not available (each investment needs to be done manually). RBI comes out with a notification every six months detailing when the option to invest in SGBs will be available (over the next six months) – see below for May-Sep21.

We do not offer SGBs as part of our investment offerings and this writeup is for informational purposes only. Please contact your bank/ relationship manager for more details.

References (writeups in the series) :