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Dear Reader,
An unprecedented supply crunch threatens to stymie growth and raise inflation. It started off with semiconductors and shipping containers and has now spread to coal, gas and crude oil. Why, even truck drivers are in short supply in the UK, leading to a massive fuel shortage there.
On the Manufacturing Purchasing Managers Index (PMI) for the Eurozone, Chris Williamson, chief business economist at IHS Markit, said, “Supply issues continue to wreak havoc across large swathes of European manufacturing, with delays and shortages being reported at rates not witnessed in almost a quarter of a century and showing no signs of any imminent improvement.” In China and much of Asia, supply chain disruption crimped manufacturing growth.
A confluence of many factors — years of underinvestment in capacity building, a surge in demand as the world recovers from the pandemic, the drive to shut down polluting plants in the drive towards green energy — was responsible for the crunch. How can investors turn it to their advantage? We found a way for Indian investors to play the power crunch in China here. And we argued that given the current constraints in renewable energy, policymakers should keep coal as a backup. Markets seem to concur, sending the Coal India stock up 33 per cent in the previous month.
Indian manufacturing, particularly the auto industry, has also been hit by the chip shortage. But the India manufacturing PMI for September shows that not only is the recovery intact, but also it gathered some steam during the month. Our recovery tracker too showed improvement in several high frequency economic indicators. Add to that the excellent state of the central government’s finances, which will allow it to step up the pace of spending. Our Herd Immunity Tracker shows that at least half the population has acquired immunity. The monsoons have been good and the current account balance is robust. Growth is coming back on track.
The upbeat outlook, rising bond yields overseas on the Fed’s tapering announcement and nervousness about the Evergrande crisis led to higher bond yields in India, despite the government announcing that it will stick to its borrowing plan for the second half of the financial year.
India is not alone, and global bond markets too have had a very bad month. So far, it has all been rather orderly, with US 10-year treasury yields still lower than in April-June this year. Nevertheless, as this FT piece argues, “The more rate volatility increases, the greater the risk of yields suddenly “gapping” upwards, given that we are starting with a combination of very low yields and extremely one-sided market positioning.” That could be the reason for the jitters in the stock markets this week.
In India, we argued that retail investors have successfully absorbed selling by foreign investors so far and debated whether they should buy the dips or sell the rallies.
What about the China scare? Top investors are split on which way the Chinese markets will go and by the end of the week, the Shanghai Composite index seems to have found a floor. But the Evergrande crisis is far from over, although much depends on whether Xi Jinping is willing to forsake short-term growth for long-term stability, as we argued in our Eastern Window.
Where does all this leave investors? As we pointed out in a discussion of Sumitomo Chemicals’ prospects, market participants are turning cautious in view of all the macro risk factors and “it’s time to separate the wheat from the chaff, in terms of differentiated business models, product range and management quality”. Following that model, we found MTAR Tech, Matrimony.com and the Aditya Birla AMC IPO to be decent bets. And while Persistent Systems and Indiamart Intermesh are not cheap, we still found them worth the risk.
Among FMCG companies, we considered the road ahead for Godrej Consumer’s Indonesian operations while pondering what Marico’s clash with Dabur means for investors.
Tata companies were in the news this week, with Tata Motors’ India business finally on the mend, while Tata Power is betting on business transformation for future growth. And amid reports of Tata Sons acquiring Air India, we wondered about the fatal allure of the aviation business in India.
In our Green Pivot series, we looked at whether central banks should embrace green finance, while also considering whether this company making green chemicals is worth investing in.
In the final analysis, it is the strength of domestic demand that will decide the pace of the recovery. In China, Caixing Insight Group’s senior economist Wang Zhe said of the September manufacturing PMI: “Domestic demand varied based on different types of goods. The demand for intermediate goods and investment goods was relatively high, while the demand for consumer goods was weak, reflecting consumers’ lack of purchasing power.” In India, the forthcoming festive season, therefore, is critical.
For the longer run, it is employment that will be the deciding factor. Jobs in India had seen a net gain in 2018-19 for the first time in seven years, but those gains have been dissipated by the pandemic. The new quarterly employment survey from the government shows that all the jobs in the formal sector lost during the lockdown have been restored.
We will soon know in the festive season whether that is enough to boost consumption demand.
Cheers,
Manas Chakravarty
