Dear Reader,
The Indian economy is seeing a sharp recovery. GDP numbers for the July-September 2021 quarter were released this week and while it’s a relief that the economy was back to pre-COVID-19 levels, consumption growth during the quarter was still 3.5 percent lower than in the corresponding quarter of 2019.
But the Composite Purchasing Managers Index, a yardstick of private sector activity in both manufacturing and services, was at a high 59.2 in November, up from 58.7 in the preceding month. Any reading above 50 signifies expansion from the previous month. The November Composite PMI reading was the highest since January 2012. What’s more, India’s Manufacturing PMI saw the highest reading in Asia. Our recovery tracker continued to show momentum.
Non-oil import growth has remained strong even after the festive season, another indication of the recovery in domestic demand. Indeed, even the real estate sector is coming out of its coma, as our interview of Macrotech Developers CEO & MD Abhishek Lodha shows. Moreover, the central government has enough fiscal ammunition to spend freely in the rest of FY22.
To be sure, there are some worries. For starters, the PMI survey showed weak business confidence, chiefly on fears that rising inflation would dampen the recovery. We took a look at whether price hikes by FMCG firms will affect demand and affect their stock valuations.
Furthermore, note that in spite of all the talk of a V-shaped recovery, the fact remains that the October data show the core sector has grown just 1 percent over the last three years. The auto sales numbers for November were also far from reassuring, especially in the mass market segments, and auto component stocks are reeling from the fear of more supply chain disruption. Nielsen data show a slowdown in rural demand while the macro numbers indicate that the terms of trade have turned against agriculture. The fertiliser shortfall, for instance, may continue despite a record subsidy payout.
Government data for January-March 2021 show that jobs have come back in urban India, but many of these jobs involve working as casual labourers or as household help. At the other extreme, tech jobs are in such demand that firms are paying through their nose for skilled people, as our Start-up Street section noted.
In short, the evidence is piling up of a K-shaped recovery. The strong performance of the upper arm of the K should lead to a demand for wealth management products and we wondered whether investors could play this theme by subscribing to the Anand Rathi IPO, or by picking other firms in the business, such as IIFL Wealth.
All this pales into insignificance, however, with the spectre of Omicron looming over the markets. We still do not know how lethal the variant is, although there is increasing evidence of its rapid spread. We said that while government policy should take preventive steps and step up vaccination, care should also be taken that the economic recovery is not put in jeopardy. Our Herd Immunity Tracker worried about vaccine hesitancy.
Talking about vaccines, while this FT story (free to read for MC Pro subscribers) described the inside story of the Pfizer vaccine (described as ‘a once in an epoch windfall’), another one reported the Moderna chief predicting that existing vaccines will struggle with Omicron, which led to a sell-off in the markets. We chimed in with our views, saying that Omicron is a timely reminder of the risks in the market, that the rough patch should end soon and with an FT story about how the markets are more fragile than investors think, borne out by the rise in volatility.
The sharp fall in the market has led to a search for stocks which have become attractive buys. We looked closely whether stocks such as Tata Motors, Ashok Leyland, Karur Vysya Bank and Control Print fit the bill. We considered whether stocks such as Apex Frozen Foods, Suprajit Engineering, HCL Tech, and Go Fashion India after its splendid listing, have become big bargains. With the wedding season in full swing, we debated the merits of Matrimony.com vis-à-vis Jeevansathi. And we had contrasting views on two IPOs — Star Health and Tega Industries. Also, we picked these innerwear stocks, on the plausible premise we will still need them even in the case of a deadly Omicron wave.
In Crypto Conversations, we looked at how blockchain could help nab cybercriminals, while we cast a sceptical eye on whether the smart contract promise of blockchain is smart enough for India. In our Crypto Learn series, we explained about Altcoins.
In fintech, we examined the pros and cons of digital only banks and explained what the fight between RuPay and Visa is all about. We also looked at the RBI guidelines on bank ownership.
Our Eastern Window this week focused on the war clouds emerging over Taiwan. The Chinese economy is losing steam and Wang Zhe, Senior Economist at Caixin Insight Group, commenting on the November PMI, said, “From late October to mid-November, sporadic COVID outbreaks in several Chinese regions had a negative impact on the economy, in particular suppressing the demand side.” Reports have come in of fresh outbreaks in Beijing and Shanghai. With metals heavily dependent on Chinese growth, we recommended caution in the metals space while we analysed the implications for IFGL Refractories.
RBI’s Monetary Policy Committee is scheduled to meet next week. Ahead of the meet, Fed chairman Jerome Powell said his insistence that inflation was ‘transitory’ is history and that he planned to speed up the taper. That’s in spite of the emergence of Omicron.
In India, the November PMI survey said: “The combined rate of input cost inflation matched that seen in October, and was therefore the joint-highest in close to nine and-a-half years. Manufacturing firms recorded a stronger increase than their services counterparts. With rates of charge inflation easing at service providers and manufacturers, the aggregate rate of increase in output prices softened from October’s 51-month high.” Given these inflationary pressures and the rebound in growth, RBI should dial back monetary accommodation and lift the reverse repo rate next week. Policies formulated during the depths of the COVID-19 pandemic are no longer appropriate. A hint of that was seen this week, with two non-bank lenders hiking their public deposit rates.
Cheers,
Manas Chakravarty
