EU SLOWDOWN Brings Opportunity for India

Many investors are in dilemma to understand that the current slowdown of the EU and US economies is completely different and will have a marginal impact on emerging economies like India. Further Rupee deprecation is being taken in a setback manner keeping history in mind but this time the rupee depreciation will play a big advantage for the Indian economy.

The investors are not able to get clear that this slowdown of developed economies is very much different when compared to the historic slowdown impacting emerging economies. We don’t rule out that emerging economies like India will not have any impact from this slowdown but the depth of the impact will much mild as compared to history.  Currently developed economies are working out on governmental subsidies, the ordinary people's daily lives don't see a major change, but in the long term, the high debts and the weakening national strength will eventually impact the people's livelihoods in the continent. This is going to be a broader problem going ahead.

In another way, it is found that emerging economies like India will benefit from the slowdown. In the coming months, India’s exports will grow and currency depreciation will big boon for Indian corporate. The current slowdown of the EU and US economy is a different picture altogether where manufacturing is getting halted due to high energy costs not due to financial crisis. But as the demand remains in place the cost of manufacturing becomes less feasible and hence import becomes a wise decision. This is the grey place where Indian manufacturing and its exports will grow.  For example, as manufacturers in Germany face energy bills of up to 10 times more than what they paid two years ago, one in five engineering firms saw the risk of relocating at least some of their business overseas, a survey by the German union IG Metall showed last month.

If we look at the  EU car sales figures. Eight months into 2022, overall volumes contracted by almost 12% to reach some 6 million new cars sold. These numbers will fall down more as production is getting halted and demand is getting disappeared from the EU market.  The input cost index from the JPMorgan Global Manufacturing PMI survey, compiled by S&P Global, edged higher in September, indicating a slightly faster rate of the price increase. We will witness major shocks from developed economies' macro numbers in coming quarters. the number of companies reporting average input costs to have been driven up by energy prices rose in September, jumping to 4.7 times the long-run average – the highest seen since data were first available in 2005.

Coming back to the global market opportunities for India well, more importantly, this problem of the energy crisis is not short-lived and will continue for a longer time frame for the developing nations. The energy crisis will not disappear so easily and moreover, this winter is not going to be the last winter for the energy crisis.  Further many manufacturing bases will shift out from the EU and will move to India in the coming days. In major EU economies, purchasing energy from the US with extremely high prices is a situation forced by the geopolitical crisis but this does not solve the manufacturing industries' high cost of operations reducing margins and further corporate profits. High labor and other costs in Germany have been driving many companies to relocate parts or all of their business to cheaper locations in emerging economies.

Most importantly in the coming Q4 and Q1 results of developing nations will be very poor due to these high energy cost-driven manufacturing halts which will bring down their markets in the coming Quarters. This will further divert a significant amount of inflows into emerging markets where returns are much better when compared to EU markets.

The sharp depreciation of the Indian rupee followed by developed nations' slowdown and huge market potential for Indian markets leads to a shift of manufacturing base to India. Cost competitiveness plays the dice and clear winner in India only.  The depreciating rupee not only helps export but also will transform the manufacturing of India since the opportunity for buyers is here not in the EU or in the US. This is a  major area that has been left unidentified.

At the same time, many investors are thinking that the international crude prices are rising above $100 levels and may breach $110 before October ends might be a major problem for Indian inflation. Well, India is buying crude from Russia at much-discounted prices hence the impact of higher international crude prices is negligible for the Indian market.

Indian economy and its exports will find significant growth due to the ongoing high energy cost-driven slowdown in coming quarters till the energy crisis is resolved in developing nations. 

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WEALTH MANAGERS TO FAMILY OFFICE...DISTRIBUTION INDUSTRY 4.0

 

If you are looking ahead to setting up your own Family Office or becoming an IFA from being a wealth manager then this is the best phase of your time. The rules of the game have changed and the speed of change is much faster than ever it has been for the distribution Industry in the last 30 years.  The financial planning, advisory, and client management ecosystem will take a quantum jump in the coming 2 to 3 years when the well-experienced wealth managers from distribution outfits come up to start their own businesses.

 3 years before in 2019, we came up that Distribution Industry 3.0 depicted the transformation of the industry where distributors need to become Manufacturers. We find NJ coming up into AMC and Groww taking over Indiabulls AMC. In the next 2 years down the line, we will find a significant changeover in the wealth vertical where Ex bankers and wealth managers in distribution houses will be coming up aggressively to start their own businesses.  This is nothing new but we will find a quantum jump in terms of these family offices starting up and growing a significant AUM base.

In every wealth, vertical PMS and AIF have started playing a very pivotal role in the survival of the employees. This is well reflected in terms of the AIF industry where the AUM jumped from Rs. 3lakhs cr  in 2019 to Rs.7 lakh cr as of today. This is no doubt an upfront revenue business model which makes quantum earning and survival way for the cutthroat competition prevailing in the distribution Industry.  PMS and AIF are going to be in high demand as the Indian economy and markets are going to reach new highs.  Further new structured products will be coming up in the next few years which will also drive significant revenue and growth for the distribution Industry. Hence it is wise to start your own rather than working for someone to fight for justification of 5 times revenues.  For example, the unlisted share is a significant area where distribution wealth managers turned into family offices and IFA are earning huge compared to what they used to get as salary.

 In the last few years, we have seen that physical assets are declining and financial assets are increasing and this trend will continue for the next 10 years as of now. Hence there is a wide opportunity for newcomers.

On the other hand, clients are also looking ahead for niche products away from traditional products like Mutual Fund and direct equities. The structured products segment has taken a quantum jump due to changes in taste and preferences among the clients. PMS has taken a sharp jump since investors don’t have much time compared to covid times and their portfolios have increased by many folds making PMS one of the best products.

A wealth manager who deals directly with clients is in the best sweet spot today. After working for 10 years and accumulating a good set of clients building up an AUM of Rs 10 cr or more in the next 2 years is now quite easier compared to slogging one's ass in the distribution platform. You might be called it entrepreneurship or family office or IFA but in the end, it's freedom from this immense pressure of distribution.  The stockbroking business has lost its glory due to discount broking. Now it is just baiting to catch new clients. Today the client does not only do diversification in investment asset class but also in terms of the distributors and avenues through which they do investment. We have found that in many cases wealth managers are scared that if partial or full profit booking is done by the client the client will open up new doors for doing fresh investments rather than getting back to the ones with whom he started.

The Distribution industry will witness new breeds of quality wealth managers starting as IFA and later coming up with their own PMS and AIF products backed by PE and VC. The dynamics of the game have changed today.  Platform service providers are struggling today since so many 1000 platform service providers have come up reducing the margins and glory enjoyed 5 years before.  This has led to a significant reduction in the setup cost of the family office or becoming an IFA.

Most of the wealthy outfits are now struggling with manpower and with the Indian economy and markets being in a strong position over the next 10 years it has become a very wise decision to start and build their own AUM and own distribution setup.  If anyone is looking ahead to expanding at the National level PE and VC make it much easier. We all know that bank wealth managers are under the highest grade of pressure and this is the place where most of the next generation IFAs are coming up.

The power of pricing and control has moved away from the Asset Management to the Distributors in the last 10 years now the same is moving output from the hand of Distribution to the wealth managers who are coming up and building 10 cr or 100 cr AUM over the next 3 years. The speed of building AUM has become much faster driven by social media and knows tricks and strategies by the wealth managers.

The reason behind such aggressive family offices opening up is intense pressure in the distribution Industry 5 times justification asked by the company.  In many cases, a misselling attitude takes birth and in many cases, wrong products are sold where margins are high in order to save from losing the justification game. The maturity of the market has changed dramatically; now NRI client segment is aggressively looking ahead to doing investments in India and hence starting its own business is now the best option.  Building a client base over the 10 years  and then starting your win is the best match-winning formula. Further, it is not compulsory that you need to work for 10 years to start your own even joining hands with others will expedite your opportunities. The earnings are also quite high since having a book size of 10cr or 100cr leads to significantly higher income compared to the salary you earned every month.  

The power of the distribution Industry is shifting and in the coming years, we will find significant M&A which is nothing but consolidation in times of revenue war. 

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NEW HIGHS - BANK INDEX GROWTH ...LINKED WITH INDIAN GDP GROWTH

Do you know that FIIs were tired of pulling out Rs.2.6 lakhs cr from the Indian market?  What makes Indian markets to be completely segregated from the U.S and EU market is the real rationale behind the markets climbing new highs in the coming days.  Do You Know why FII's are coming back again and what makes Indian markets to be so good?  The dollar Index is currently 20 years high for India stating at 109 against the 2001 level of 120 which is negative since the higher dollar index is bad for equities. U.S 10 years yield is now 3.3% followed by higher gas prices for U.S and EU. Whereas for India the energy prices are down by 30%  followed by 10-year yields that rose  7.2% from June 2022.

 Well, the Nifty is up by 14% compared to S&P and DowJones. On the other hand, the BFSI industry will be playing a big role in the coming quarters behind the market. Banks have also accelerated tech investments for F22-23. We think F24-25 could surprise the upside on cost-to-income ratios. We need to understand the rationales and factors driving the market away from the U.S and EU market and their economic impacts.

The corporate profit to GDP of India is climbing up and has a long way to go. After rising significantly from FY20 onwards, the aggregate profit of listed India companies stood at Rs11.2trn, or 4.5% of GDP on a TTM basis (TTM: trailing 12 months). The ROE of the Indian equities is yet to touch the all-time high of 2007-08 of  25-30% which is currently hovering around 15%. The prime reason behind the same is that capacity utilization is still at 69% far from the pre-covid phase levels. On the other hand, the credit growth of the Indian corporates is yet to come up which is currently just around 10% YoY till July 2022.

 To date, we had a healthy monsoon followed by a festive season falling early which significantly pushes up the consumption climate. The August to October GST numbers will speak very loudly on the same.  The revival of the rural demand and falling industrial inflation adds significant margins to the corporate profits in the coming quarter result. The pent-up demand for festival celebrations is adding more value to the consumption which will get reflected in the quarter results.

If we look at the government CAPEX we find significant growth and a path for significant growth too. Government CAPEX continues to be robust (Q1FY23 saw a 57% YoY rise in Central government Capex at Rs1.75trn resulting in a TTM Capex of Rs6.5trn). This is getting reflected in the GVA in FY-22 to the level of 18% which is heading towards a new all-time high. The banking credit is also supportive of the same GAV contribution. Credit growth improved further although core sector growth moderated. Fortnightly non-food credit growth in Aug’22 exceeded the 15% YoY mark. Core sector growth in Jul’22 however moderated to 4.5%. If we look at the number of Capex to GDP we find that during 2012-13 it was around 35% to 40%  which is currently around 28%, hence their significant way to crossover the historical highs.

 This is further supported by the manufacturing and service Index numbers where   PMI-manufacturing and PMI-services are at 56.2 and 57.2 respectively.  Exports on the other side have been very strong for India with a depreciating rupee and a robust pipeline of exporting orders. With higher crude prices many countries are cutting down on the production of Goods and this opens up the demand for Indian companies to produce and export. This further supports and backups any domestic slowdown as well as supports the growth of Indian macro numbers.

 The banking sector is just on the verge of significant upheaval in terms of ratings as well as growth.  The asset quality improvisation has already happened in the last 2 years and now the robust demand climate will come up which improves the growth of the Industry. The loan growth acceleration sets an earnings upgrade cycle for the industry in coming quarters.  New Capex cycles, an increase in Industrial utilization of capacities, corporate sector profitability, and deleveraged banking sector balance sheets will help the Banking index to climb new highs.  PLI is also playing its cards behind the Indian GVA and GDP growth.

 The recent Apple  decision for the Apple 14 manufacturing plant in India is a big eye-opener of future growth outlooks.  Digital banking has improvised the credit market followed by significant job creation and healthy pay packages in one segment of the economy plays a key role behind consumer loan market growth. The SME segment doesn’t think of any slowdown but is planning for expansion and growth which is more supported by the PLI segment.  For the quarter ending June 2022, the applicants under this PLI scheme had undertaken sales of Rs 1,67,770 crore, including export of Rs 65,240 crore, a NITI Aayog release said on Friday (9 September).

This PLI is becoming bigger since the govt will get more manufacturing hubs in India replacing china and this would improve the performance of quarterly results. If we look at the bank index we find that the Bankex has risen 73% over the past two years, compared to 53% for the Sensex. Capital ratios of the banks have improved significantly which creates significant growth opportunities for the banking industry to contribute to the market.

 The Indian macro is completely riding on a different track which is not linked with EU or U.S slowdown factors.  Short-term hiccups are not be termed as a slowdown for the Indian economy.

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EU WILL GET $105/BARREL

There is nothing much to be happy about for crude coming down to $85/barrel since very soon it will be around the range of $100 to $105/ barrel and much before that India will face some international political pressure for not buying crude from Russia.  But if the world faces any Covid-type situation crude might plunge below $50 so as the global economic growth and stock markets across the globe.

 Currently, most of that oil in that build came from the Strategic Petroleum Reserve but as soon as these reserves get depleted and refiling activity begins the demand for crude will increase and vice versa the price. The prices came down due to China's lockdown and slowdown fears, but these are short-lived rumors since demand can change at any point.  Once October kicks in we will find the heat of the OPEC decision and winter speculation rising up. The threat price will be more form geo-political pressure created by U.S and the EU is haste to punish Russia before December 5th which will play its cards.

The complete gas stoppage of Russia for the EU will bring significant demand for crude oil in the coming months.   LNG price will be decided more by China in terms of demand coming from them in winter further how strong the EU winter will be is also going to decide the crude price. This demand play will decide the fate of crude oil.  Till now all the decisions and rationales of calculations are based on the that it will be moderate winter for the EU but if we have a winter like 2012 where 20 billion cubic meters of gas was consumed then we will find crude to have a very high price as the consumption will increase being an alternative to crude.

 The EU problem will not get over even in the 6 months since they will have a summer next year and the current storage will not last till that time. Further moving from gas to alternative energy is a long cakewalk. Hence crude is the only immediate support for the EU in the coming days. As per the Dutch TTF gas contracts 272 Euro per megawatt. This has gone up by 400% in just one year and will go up to 500% by this winter, pinching the EU citizens. The biggest wrong decision being adopted by the EU is cutting down industrial use of gas which means no manufacturing and more job loss and a stronger recession. Now this decision would be short-lived since the EU cannot manage the industrial gas cut-down strategy for long hence dependency on crude increases.

It is not the EU alone if we look at the data we find that volumes withdrawn from the Strategic Petroleum Reserve were 7.5 million barrels, which dropped the total inventory to 442 million barrels, the lowest level since 1984. The U.S. oil and gas rig count fell by one last week to 762, the third-straight weekly decline.

Deutch Bank is saving electricity to the tune of 49000 light bulbs for an hour whereas supermarkets have started using dim lights in their hops for energy saving or rather unable to pay huge bills. Many companies have adopted various strategies to save money from high energy costs like cutting down on times of opening and closing up shops and businesses. This is the very place where demand for crude will grow significantly. In order to save the EU economy from recession, they have to increase their dependency on crude and this is the place where demand and prices will increase.

The most shocking thing is that the global oil demand from gas to oil switch will cost more than 80% in the next 6 months. Gas is currently 5 to 6 times more costly than crude now and this spook the demand climate going ahead.  It has been found that the EU's total gas and power costs may rise to $1.4 trillion from $200 billion before the war. Out of this 70% belongs to Electricity and 30% is gas which is equal to 8% of the region’s economic output.

If anyone thinks that packages like the UK will help out its citizens during winter and over the few years well the 150-billion-pound box is twice the covid pandemic package. This means balance sheets will swell with debt and currencies will remain volatile giving less sleep to the EU and the world over the few years.

But the whole demand increase of crude will not come from the EU alone but from Asian countries too where it is expected that gas to oil demand will reach 47% in Q3 2022. Further Demand for switching gas to oil is 43%  of the total.

Energy transition will reshape the control of the economies in this decade. We will witness expensive volatility before this transition and might face higher prices of the extensive supply as a token of punishment to become energy independent.EU & UK have more recoverable shale gas reserves than Australia or Russia but this exploration will cost climate and also will take significant time to reduce the energy dependency. Now the fight will be over climate and the search for alternative energy source investments 

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$2 TRILLION MARGIN CALL FOR EU IS ON ITS WAY

Forget about the winter energy crisis of Europe, we find massive more pain before the same where companies are heading for defaults in their commitment. The global market is going to feel the heat erupting from the European energy company’s crisis. In the last couple of hours, it is being found that there have been significant Key Developments:

• Equinor says $1.5 trillion of margin calls risk energy trading
• Fortum gets 2.3-billion-euro financing, Centrica seeks liquidity
• UniCredit, Intesa earmark billions
• Uniper may need even more funds from Germany
• Hundreds of local utilities in Germany are under strain
• Truss drafts £130 billion plan for households, £40 billion for businesses; it risks running out of control

 The bond market is going to get rattled and margin calls on derivatives will bring nightmares for companies across the globe. Short positions will be built over and a massive sell-off might happen also separate funds will come up to manage the calls.  Till now it’s been found that European energy companies are facing margin calls of a total of $1.5 trillion in the derivatives market. Well, the number does not stop here and it goes a long way. 

Margin calls on the energy derivatives market will spill over to other nations too where the pain in energy companies becomes unbearable.  Rising prices have led to fear of defaults and hence the energy crisis deepens creating massive problems for the EU. This $1.5 trillion will soar to $2 trillion in the next week despite capping since price caps will not help to cut down on demand.

The state government will get funds and would help grant loans to manage these margin calls. The taxpayer’s money will again be deployed to save not only the margins but also jobs in these energy companies.  GDP numbers of the EU will fall like a pack of cards and simultaneously credit rating agencies will be pulling down the ratings which will get reflected in the bonds and equities of these companies. 

The government will bring down energy demand by cutting down on every aspect of the economy creating massive unemployment and job loss. The taxpayer's bill will increase and also government debt will swell to new highs.

Very soon IMF will have to come up to rescue many EU states, particularly the UK. The rise in prices has seen 13% of manufacturers already reduce their hours of operation, and 12% have been forced to make job cuts as a direct result of increased energy bills.  

Furthermore, 42% of manufacturers have seen their electricity bills rise by 100% in the past 12 months, and 32% have also seen their gas bills double. As many as six in 10 British manufacturing businesses are at risk of closure, according to a recent survey. It’s a massive slowdown for them going ahead and will find many business and manufacturing shift to other economies even for short term and might turn out to be long term. Import of items for the EU will increase and hence demand products in other countries will increase which will get inflation control into a messy issue.

On the other hand, the UK is coming up with an $8 billion lithium battery Giga battery factory. Yes, in the world of batteries UK might become the king in the coming days. Well, we all know that every adversary comes up with an opportunity.  

Overseas investment from Taiwan has currently started flowing into the UK and we will find many more nations to come up taking this as an opportunity.  This will create jobs and this shift from the traditional models of energy sources will be a boon but prior to that, we have significant pains to face.

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EU NATIONS PROBLEM AND ITS IMPACT ON MARKET

Forget about what IMF or the world bank is projecting for the EU the ground reality is far more painful than these documented texts and media prints. You will find social unrest and income inequality in the coming months due to the energy price crisis. Before the war, about 55% of their gas imports used to come directly from Russia which came down to about 30% over the summer. But about half of all German homes rely on gas for their heating.  The savings ratio of the EU states is coming down due to the energy crisis. In Germany, the savings ratio has collapsed to 10.8% b/c German citizens can put aside less and less due to inflation. Will fall even further when the energy crisis hits full force.

Well, you will be shocked that Deutsche Bank said that all their offices across Germany will no longer get hot water in the washrooms. In n Berlin, where about 200 public monuments are now not lit up at night. There are endless such acts across the EU.  Many EU states are having blackouts, two hours off for every six hours. Natural gas prices topped $3100 per 1000 cubic meters in mid-August, a 610% increase over the same time last year as measured by the Dutch TTF market. Britain’s National Energy Action charity projects an increase from 4.5 million U.K. households to a full 8.5 million will face energy poverty this winter.

This Winter inflation in the Eurozone will be expensive which is known by everyone but what is not being taken into consideration is that there will be Greece-like conditions in the coming days. Yes, we might get defaults in a few countries due to the rising cost of Inflation. Further the way energy cost has gone up for the EU as a whole we will find a significant slowdown in GDP rising from the stoppage of production. In fact, the EU slowdown will be more prolonged due to the mess created over the last decade with energy source management.  The annual inflation hit a record 9.1% in August within the eurozone, the highest since records began. But inflation varied widely among EU countries, up 25.2% in Estonia, 11.3% in Greece, and 8.8% in Germany.

 The slowdown of the EU will be on the consumption side as well as more due to cutting down on manufacturing which will have a ripple effect on the economy. For example, those Stainless steel mills are closing across Europe due to the ongoing energy crisis. As per the calculation, around three million tons of Europe’s stainless-steel capacity is at risk. Rising prices lead to defaults in demand and hence cutting down on production is the way out. 

German energy giant Uniper seeks an additional €4bn from a state-owned lender to support its business. Surging costs force utilities to extend more collateral. The German energy giant is losing €100mln a day as the shortfall in Russia deliveries now amounts to 80%.

On the other side energy cost in damaging even battery production in the EU.  In the coming months and quarters, we will find macro numbers plummeting for the EU creating more pressure on the Debt market in parallel to the Equity market.  Well by debt I wanted to draw attention to Italy’s total government debt is now up to $2.52 trillion, 150% of the country’s gross domestic product. It’s larger than the combined government debts of Greece, Portugal, Ireland, and Spain, all of which were given loans by the European Central Bank following the 2008 financial crash.

 Hence the interest rate hike decision will create a major setback for the global economy and more importantly, we will find interest coming down and energy-related subsidies being given to tide over the winter crisis. On the other hand, we will find stimulus packages in the form of Direct Transfers to the EU countries this winter to battle out the rising energy cost. There is no other alternative rather than increasing the debt limits of the EU to enable the citizens to fight the rising energy cost.

 Falling GDP increases the Debt to GDP ratio for any country and for the EU it is very easy to calculate the growth. European Union Government debt accounted for 87.8 % of the country's Nominal GDP in Mar 2022. This will soar to the level of 90% to 92% in the coming winter. You will find more imports by the EU compared to the historical levels since production in the EU is coming to a halt. This will also increase the CAD for the EU. The below chart speaks about the default risk but what is now depicted is the interlinked banking and financial services and the debt papers involved between the EU 27 countries.

 You will find significant social crime growth in the EU due to rising energy costs and living life. Income inequality and poverty levels will rise significantly in the EU in the coming quarters creating longer problems for the economy. At the same time, the stimulus money will be coming up for the society at large to save the people from the energy-driven crisis. The French government has offered lower-income households a €100 inflation bonus, the UK a £650 cost of living allowance, and pensioners will receive an additional one-time payment of £300 Italy is giving low and middle-income families for their bills with a €200 bonus payment., Belgium offered a payment of €225 and Germany paid each taxpayer a one-time sum of €300.  Well, these payouts will increase by around 25% to 40% in the coming winter to face the energy crisis. 

We will witness significant development in bitterly and alternative energy sources coming up from the EU in the coming next 2 years.  Every project on alternative energy is being expedited for significant results in a shorter time frame compared to the previous time frames.

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WHAT MAKES INVESTORS SCARED OF INVESTING IN THE CURRENT MARKET..WHAT THEY ARE UNABLE TO UNDERSTAND IN THE MARKET?

This research insight is divided into 4 parts where we have accentuated the comparison between the macro factors over the last 9 years, followed by the new DII, the impact of the U.S slowdown, and finally the interest rate increase impact on the equity market. These 4 parts will help to get clarity on our market expectations and outlook. There is too much lack of clarity and constant comparison of the market with the last 10 years in order to get clarity on the direction of the market. It's nothing but confusion and lack of clarity that is guiding the investors and not the market.

You are still expecting Nifty to be around 15000 levels but I am sorry to disappoint you that NIFTY will surprise you with new highs over the next 6 months. The prime problem of not being able to believe this is that we are comparing Indian markets with the past 10 years' market pattern and not data. If we look at the data we will find significant enough rationales to find and understand the new Indian economy and market.  If we look at the macro factors comparison between 2013 and current we find huge differences in the strength and maturing of the current Indian economy.

 
Well, the increase in the number of tax filing and growth in govt revenue plays a critical role for the Indian equity market to grow more aggressively in coming years. It also proves the strength of the market too.

 We have witnessed FII’s redemption to the tune of Rs.2.6 lakhs cr resulting market to fall 16% from 18500 levels to 15200 levels and that’s too for continuous 8 to 9 months. If we look at the historical redemption pattern of FII’s outflow and market fall we will find that NIFTY should have been at 10000 levels and we should have entered the bear market phase. But we stopped at 15200 and we rebounded from that levels back to 18000 levels within the last couple of months. The reason being the DII’s market has transformed significantly in the last decade.  The DII’s market is so strongly matured that we are no longer much dependent on FII’s money. Many of the readers will disagree but I accept the same with an open mind.

 

The above data clearly throws light on the transformation and strength of the DIIs and the maturity of the inflows. This is the major part we missed while doing the market outlook and mistake in calculating that the market will fall to 13000 to 14000 levels.  Another segment we missed out on while calculating the market direction is that currently we have a significant number of new Demat account holders who are first-time investors and they risk takers and investing with a long-term vision in the market.

Indian market is moving significantly from the traditional mode of investments in physical assets to financial assets. Total Household Assets as of date is Rs.802 lakh cr and Equity in total Household assets is Rs 39lakhs cr which is just 4.8%.  We dig deep we find that 4.8% comes to 2.52 lakhs cr in the Equity market and out of that current annual SIP book size of India is Rs.1.44 lakhs cr. Hence a long scope of investment in the equity market is yet to be explored which supports the DII’s market compared to FII’s market. This scope also reduces our dependency on FIIs and more on DIIs.

Coming to the macro front we find that India has only a crude problem and that too has been resolved through a strategic tie-up with Russia and other countries for crude supply. Further, as the International crude prices fall we will be getting more lower prices from Russia and other countries which helps India in every term. 

This will be a hidden significant boost for the Indian markets.  Monsoon, Festive season, Rural demand, and all triggers are present every time, every year in the market, what we need to know is how the next 5 years the market will change over in its earnings, demand, and opportunity for the market. The corporate profit-to-GDP ratio attains an 11-year high of 4.3% in FY22 and this is going to increase in the coming years as the Indian business ecosystem takes a significant turnaround. The recent example of the 5G and EV market is just a small step towards a revolution across ancillary sectors.

Coming to U.S Recession well every slowdown shifts inflows to emerging economies once the optimum level of the slowdown is faced. Further interest rate falls down begins once the optimum level is reached. Hence in both ways, the Indian market will get inflows.  If we look at the interest rate cycles and their impact analysis on the market well I am sorry to disappoint you that in every case investing in equities was the best option and decision taken by investors historically.

 
Hence from the above charts, it is well clear that even if interest rates go hike Indian equity market will not be giving negative returns. More importantly within these 18 years' time frame, you have witnessed many wars and many global events not favoring the market, etc but still, the market gave a return to the investors.  This proves that the concept of market timing is a big myth & the notional loss of not investing is huge. 

The current macro speaks strongly that the Indian market is far different from the global market and this is the place where we are having problems in building trust in Indian equities to reach new highs when the developed economy is struggling. The change in supply chain and change in demand has transformed the market for India.   Hence stop daydreaming for Nifty to 13000 levels and invest in equities with a long-term vision.

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75BPS Hike might be contemplated by FED...Liquidation panic Takes Over

In the coming few years all central banks' key heads will be politicians and they will stand from their respective countries and political parties as candidates for a vote to run the government.  Forget the 50bps hike now it’s being planned for 75bps hikes by U.S Fed or maybe more.

 The fear of aggressive interest rate hike by the U.S and its impact on the global economy turning it into recession is the fear which makes markets tumble.  Well, when fear takes over every inch of the logic then markets are bound to go for extreme wild toss. Don’t be surprised if Nifty Breaks below 15000 since that is very much within range now and Nifty coming down to rest and consolidate at 14500 levels are now very clear. The market fall will be aggravated more as those investors who have joined the market in the last 2 years particular the ones who joined the market by moving away from Debt products in search of returns in equities will start liquidating equities now.  

 In the last 2 years every month, we have around 10 lakhs new Demat account holders which comes to around 2.4cr new Demat accounts. These new investors will now stay away from more from the market even after doing some average buyout on their portfolios.   The market is getting hammered by the valuation expectations which has been built by the analyst community.   The quick return-driven investors who joined during the last 2 years now disappearing and this brings down the markets more.   These investors are simply liquidating their portfolios and this is a global phenomenon now. The global market is experiencing a liquidation panic where everything is getting sold irrespective of an asset class.

 These DIY investors are now more scared and a lack of historic experiences and knowledge leads to fear of flight. The senior citizens who came up to invest in equities when interest rates failed to beat inflation will now liquidate their investment and will get back to FD products where interest rates are increasing. The market always gets flooded with analysts and their expectations. The market is and will be getting hammered more as the high level of expectation of earnings and valuations takes a hit and comes down.  For example, the rupee getting 78.11 led many analysts to think aggressive interest rate hikes so global recession and hence impact IT earnings as projects get reprised.  Well, we have seen the rupee climbing from 45 to 65 from 2012 to 2015 and the journey of the Indian economy and its sectors.  We did not have so much fear as we have now.

 The biggest point to reflect is that this inflation management has been passed to the Central Banks from the government end. It’s well clear that the U.S needs war to make its economy survive. It may not be in a direct war but supplying weapons to Ukraine is an indirect gain for the U.S economy.  Biden who is a strong friend of China is keen to uplift china’s tariffs imposed by Trump and hence we need to face a very high inflation rate so that Biden gets support from the public to open the doors for china.  For china, this going to be a golden opportunity to makeover the lost relationship and wealth during the covid times. But unfortunately, China is now struggling with covid lockdowns and hence the plan of becoming a hero and catching the hand of its best friend Mr Biden has become a roadblock and so as for Mr Biden. The plans were perfect but the dice did not roll down as per expectation.

 This inflation issue cannot be resolved by the central banks and this is a grey area which is being failed to be understood by the central banks. The government policies need to come ahead to fill up the gaps, and the reasons behind the inflation and take steps accordingly for the same.

 This summer is already tuning up to be an expensive summer for the U.S with energy costs soaring to an all-time high. We have seen in 2015 how crude prices came down and dethroned the Middle East with supplies from Russia and the U.S. Today it’s very clear that the current inflation is only of energy cost and less of covid-related supply chain disruption.   How this could be fixed by the central banks by hiking interest rates. Even if the inflation is created by supply chain disruption interest rate hikes will fix this long-term problem.

 Post covid we are witnessing De –globalization, the extensive focus of countries on local supply chain and not towards being dependent on other countries for supplies. We have become focused on local sources, local manufacturing, and cheap at-home production and this is the beginning of inflation.  The current crisis has also led to the creation of more aggressive inflation in the coming days which the central banks cannot control merely just by increasing interest rates.  Household budgets of emerging economies and those just above the middle class segment are getting hammered.   It’s high time that government interventions need to come into place replacing the central bank's tools. You cannot pass every economic decision into the hands of the central banks and the political system is just a puppet. In that case next time political candidates will erupt from Central Banks and not from the old political era.

 The S&P 500’s top companies by market valuation shed more than $1 trillion in market cap in the past four days. S&P 500 sheds $9.3 trillion but this is less than the $9.8 trillion it shed in the aftermath of widespread COVID-19 lockdowns in 2020, but already was $1.2 trillion more than was lost during the Global Financial Crisis from 2007 to early 2009.

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FROM 3RD MARCH GATES OPEN FOR INDIAN INVESTORS FOR DIRECT INVESTING IN US STOCKS....

The LRS (Liberalised Remittance Scheme) route will bring more transformation for the Indian financial market and for its investors.  Investors will enjoy investing from the 3rd of March once the gates are opened for investors to invest and get exposure in the US market.  This is another low-cost model of transactions being felicitated by the NSE.

Trading in US stocks to start in GIFT City from 3rd March. The NSE-owned exchange in GIFT City (NSE IFSC) in Gujarat will start trading in 8 US stocks and add more subsequently.

Domestic retail investors will be able to transact on the platform under the liberalised remittance scheme (LRS) limits prescribed by the Reserve Bank of India (RBI), which allow a resident individual to remit up to $250,000 (Rs 1.86 crore) per financial year.

The move will allow domestic investors to gain direct exposure to the world’s biggest companies, such as    Alphabet Inc, Amazon Inc, Tesla Inc, Meta Platforms, Microsoft Corporation, Netflix, Apple, and Walmart which are all listed in the US.  The list of other companies will be added later on.  

 This is going to be a big moment for diversification in US markets.  It will be quite interesting to witness how the MF industry finds competition and it innovation to get clients glued to their investments vehicle. Most of the investors as of today prefer to use their own choices over stock picks rather than getting guided by some other company.  This is the place where Mutual Funds in the Passive segment will face the heat of competition.   Investors will be able to hold depository receipts in their own Demat accounts opened in GIFT City and will be entitled to receive corporate action benefits pertaining to the underlying stock.

This year from January onwards we all know that passive investments in overseas funds have taken setbacks due to the limit issues. Currently a limit of $1 billion per fund house, and $7 billion for the mutual fund industry on investment in overseas assets. There is a separate limit of $1 billion, under which mutual fund schemes can invest in exchange-traded funds or ETFs listed overseas. These limits are not set by SEBI though; they are indirectly set by the Reserve Bank of India. Hence it’s expected that this new mode of investment will lead to a significant appetite from the investor community.

At the same time investors need to be careful about the stocks they buy since in India most investors don’t read much balance sheet and neither have they preferred to invest a significant amount of time for knowing details about stocks. Hence these investors need to now understand the underline stocks and their intricate deals and transactions so that if any blue moon surprise pops up the investor should be capable enough to navigate the same

The NSE IFSC will allow investors to buy shares through fractional ownership. This will help investors get exposure to stocks, such as Alphabet and Tesla, which have high absolute costs. For instance, one Class A share of Alphabet, the parent company of Google, currently quotes at $2,738 (over Rs 2 lakh) and that of Tesla quotes at $714 (over Rs 50,000).

Coming to the taxation part it is being found that these investments would be treated on par with any other foreign stocks. This means slab rate for gains made within 2 years of purchase and 20% with indexation for gains made after a 2 year holding period. Initially trading in 8 big tech giants like Alphabet and Amazon will start on 3rd March. Eventually, the 50 largest US companies will be listed. The government provides for several benefits, such as exemption from capital gains, securities transaction tax (STT), and stamp duty on trades coming from GIFT. All these benefits will also be extended to domestic investors transacting in GIFT City. However, investors will have to pay taxes on profits that get repatriated from the GIFT City account to the onshore or regulator bank account.   How can you invest? Resident Indians can remit up to USD 250,000 to GIFT City through the RBI's LRS (Liberalised Remittance Scheme) route. There you can open a brokerage account and invest.

 Coming ahead we will find India INX, a subsidiary of BSE in IFSC, has announced that it would soon facilitate buying and selling in international equities from over 130 stock exchanges across 31 countries including the US, Canada, UK, Europe, Australia, and Japan, at a significant cost advantage to the investor. 

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FROM 28TH FEB GOLD WILL START ITS CLIMB TO 2200/OUNCE

The price of Gold will beyond 2200/ounce There is nothing to get surprised and it might sound unbelievable but once you go through the insight you will fall within the lines. Yes, the recent policy actions related to swift and sudden restrictions and more stringent checks and balances for the Russian economy the price of gold will soar.  RUSSIAN CENTRAL BANK: SAYS TO RESUME PURCHASE OF GOLD AND PRECIOUS METALS FROM THE DOMESTIC MARKET STARTING FEBRUARY 28. The Russian government will now trigger a significant supply crisis by buying gold and creating problems on the currency front for the global economy.

 The matter has now shifted from the cold war to a financial and asset class war with Russia and the rest of the world. Further any Nuclear related act will create more volatility for the global markets where precautionary steps of pulling out funds from invested asset lass for rainy days might be adopted as a strategy. Emerging markets might find significant outflow of capital and winding up from risky assets to safe assets hence GOLD supply will get short since every corner of buyers will buy the yellow metal. All gold-related products will find significant investors demand and hence the buying by other central banks will also begin.

The Nuclear standby claim announced by Russia itself is a significant alert for the global markets. Many countries have started supplying war items to Ukraine and hence it now seems like half of the world is at the back of Ukraine fighting Russia under disguise.

 The risk of the sentimental aspect has gone up significantly. Due to SWIFT, the global liquidity landscape will now change and this will trigger spill over to other asset classes.  The transaction which is currently live will witness a significant change of route due to the current policy actions. Now if the nuclear story comes into play then the more stringent sanctions and more policy actions will come into play which h will create more volatility for the equity markets.  Russia's central bank said on Sunday it was temporarily easing restrictions on banks' open foreign currency positions after the West decided to block certain Russian banks' access to the SWIFT international payment system over the fighting in Ukraine.

Coming to India those who are thinking of investing in Sovereign Gold Fund or Gold ETF well jump in and increase their allocation into the same taking the advantage of the best of the time based on the current situation. But don’t forget to book profits when required.   Globally as the demand for Gold ETF increases the physical demand will also increase which will lead to a significant jump in prices as Gold is a demand and supply game. One can look for investing in the Sovereign Gold Bond (SGB) Scheme in India 2021-22 - Series X will open for subscription on Monday, February 28. We have seen Oil Futures plunging to zero now we will witness Gold scaling new highs and also Bitcoin.

At the same time, this doesn't mean that one will forgo its own asset allocation and risk profile and will jump into buying gold. Maintain your asset allocation but you might increase your allocation to Gold keeping other asset classes intact.  These wars are diplomatically driven and hence one needs to take action carefully. 

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BENEFIT OF MARKET FROM WAR...NIFTY Opportunity

 You create war asset prices fall. You create synthetic inflation and the world becomes expensive. You create asset bubbles and now suddenly everything is on street. The Russian war may end but the crude prices will not cool off so easily. Yes mark my words and make note of the same. The sanctions whatever you impose will create more inflation and there will be a scarcity of products.  Diplomatically the U.S is strong but reflects weakness, china on the other hand is awaiting exporting opportunities and emerging economies are the ones who will be suffering the pain.

 The biggest boon of the war is that all Equity valuations have come down and stocks are becoming under BIG Billion day Sale offer Tag now. Those who said that markets are overvalued, overstretched and always busy in timing well don’t expect them to become investors now since they belong from that domicile only.  This war will now force many economies to increase more on war abilities which will drive manufacturing abilities and will attract inflows into the bonds for these types of manufacturing. Nifty might break more and might come down to 15000 or  14000 levels even depending upon the length of the conflict and on the sanctions based projections and cut down in outlooks.  But there is nothing to panic. It is a buying opportunity for the market.

Foreign broking houses will come up with GDP cut downs and stories of slowdown so that their institutional clients can buy when you sell out of fear. Well, the same group will raise the bar of buying when their clients have already built the exposure. 

In Russia, the costs of the conflict are estimated to be in the tune of 1% of GDP, primarily on account of increased investment risks. GDP growths will fall and hard-earned forex reserves will deplete faster for emerging economies which will create currency and bond volatility. European assets are significantly going to face massive losses which are having exposure in Russia. Restrictions like travel, tourism, freezing of assets and stringent checks on cross country transactions and trade will get into place followed by actions for G7, OECD etc. These might turn out to be an opportunity for emerging countries but crude is the secret weapon to will those opportunities for countries like India.  Faster depletion of Forex reserves needs no clarifications.

Europe is already battling with high inflation and now energy cost and other commodities across the globe will become expensive. The poor will suffer and the consumption will take a hit. The emerging economies' weaknesses will create more problems for offshore investments. Russia accounts for 40% of EU imports of natural gas, and about 30% of its crude imports. Energy prices will drive people crazy. Underinvestment in crude and also in the alternative is the major issue now and now the topping on ice is the war.  Sanctions on Russia will also be strategically designed so that the countries that are imposing the same are benefitted at the cost of high inflation.

The Fed rate hike might take a setback and may get delayed.  One of the probable reasons for FII’s selling is due to the anticipation of high energy cost and also inflation getting shot out of hand which creates massive problems for adjustment. We have seen that Annual yields on rouble-denominated debt skyrocketed above 200% last time and the history might repeat.  

 The journey from cheap to cheapest now depends on how long the battel and sanctions are imposed. The media will flood with growth opportunities identification steps. Investor behavioural change is the most important aspect to be identified at these times. Few investors will be scared to invest, but the truth is that they are basically always scared and make others nervous too.  Few investors are always busy timing the market and in the end, they did not invest at Sensex 45000 levels and not at 60000 levels. Other segments of investors are still busy timing the market and they only give 80% effort in timing and rest in execution.

Many of these investors will pretend to become analysts for a short period of time. Now the strangest part is that all these investors the ones who will do investment will never tell the other investor to invest.    Arbitrage options followed by hedging will play a big role in portfolio management.    Stay invested and avoid rumours.  Focus on your portfolio advantage and don't copy paste someone else risk profile. Invest with vision and please don't try to become a Fund Manager. Remember Cheap might become cheapest.  Follow your rules of asset allocation and don't time the market and most importantly  before giving advice on investments to others get your investments executed. 

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CRUDE POLITICS ..HIDDEN TRUTH

  

 It's better not to be fooled and have an open eye and open insight on the crude and capitalist minds gameplay. The biggest mistake while going ahead with traditional economic theory is that Fed will be going ahead with an interest rate hike which will be going to extreme pressure on the struggling society. Europe has already a done blunder and it seems that they have got into the sudden interest rate hike. The Eurozone wages and salaries index rose by 2.3% YoY in 3Q21, compared with a pre-pandemic high of 2.9% YoY reached in 2Q19. 

Now the pressure of the interest rate hikes will be felt across the society and particularly for those who are just above the poverty line. As for Germany, the index of agreed hourly earnings rose by only 1.1% YoY in January, the lowest growth rate since March 2011.

For example, in Europe, the energy cost has gone up where it is being found that Benchmark European gas prices at the Dutch TTF hub rose by 330% last year, while benchmark German and French power contracts have more than doubled. This energy crisis should also be taken in another way round where the Paris climate proposal is being humiliated creating pressure on the citizens.  Yes, it is an indirect way of squeezing the intellectuals and those who think about climate to place pressure through exorbitant fuel costs which creates massive problems for society.

 Further the capitalist mind of oil rigs and investors who have been challenged that crude demand will be brought down by 2050 or 2060 well for them it’s a quick time to make more returns within those many years left. God Bless Them. We all know that the UAE plans to introduce a 9 per cent tax on corporate profits from June 2023 as part of an ongoing plan to diversify the economy from oil and gas revenues and ease fiscal pressures.

Hence one can get clarity about the other way round of making money for the capitalist mind.  The policy related to transmission to zero is not only inflationary but also going to be a painful act. In short, it’s the cost of an attack on the political favors of fossil fuel.

Europe and the U.S and many other countries across the globe, it is being found that energy suppliers pass on higher wholesale costs to consumers through their retail tariffs. In Britain, for example, on a dual fuel bill (electricity and gas), the wholesale cost can account for 40% of the total.

 So now comes the biggest question when do you expect the crude prices to come down? Well as the capitalist mind story mentioned above is going to play its dice but aggressive interest rate hike might cut down consumption and hence demand might fall which might bring some relief for the crude. But the irony is how low the crude prices can be kept low which gives balance to the society. Well, that is not going to happen so easily.  Crude prices will remain elevated despite Ukraine or Russia war. If the war happens it’s a boon for oil rigs. More storage demands more price increases and more profits for govt at the cost of the society.  The race for storage will drive prices into the crazy zone.

Taxes might come down like VAT so that goods become cheaper and people could buy. Yes, that is another aspect that will happen when aggressive interest rate hike along with exorbitant fuel prices pulls down the household and corporate consumption.  This will further bring down the earning projections of the macro numbers across those countries where the balance of activities will come into play.

As it has been projected by the Bank of England that Britain's inflation will soar to 7.5% in the next 6 months makes only one thing scary about cutting down on consumption and its ripple effect on the economy and society. Well very well planned punishment for the Paris climate supporters.  By 2050, the world population will expand by 40%, and the energy demand will at least double.

But there is a boon among all these fiascos.  The pace of investments in alternative energy will now be the top priority for many economies and they will now deploy trillions faster energy independence from fossil fuels. It’s now a game of speed between old capitalist and the new capitalist minds.

Hydro and Nuclear energy will come into play and these segments need significant capital and also they have economic growth factors and demands creators. For example, China is driving growth in the global nuclear sector. It plans to build 150 new reactors by 2050 — an effort that will cost $440 billion. More than 40 nuclear plants are now under construction there.

 Asian countries are the ones who will find more poverty numbers increasing and more re-adjustment in household expenses due to rising crude prices.   This will get captured in the coming quarters of FMCG and other segments of the industry. The more crude prices increase the more stock market will feel the pinch. Ignorance has also limited days. 

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