CIO’s Desk
- Person of the Year
- Market Views
- Market Outlook
Like every year, there were several contenders.
The planet recorded its highest ever temperature and the highest decibels on climate change. Greta Thunberg, the young Rebellion against mankind’s Extinction was a strong candidate. How Dare We let the Amazon burn, Venetian alleys flood, Australian bushfires rage and Delhi choke? Odds of a catastrophe may not be Evened by retiring cars, moving the COP 25 from Chile to Madrid or by changing capitals (Jakarta to Kalimantan).
There are a few good signs – EU’s push for a circular economy, democratic candidates’ green new deal, the rise of green parties and innovations funded by the likes of Bill Gates. Christine Lagarde gets full marks for joining Mark Carney in making green finance a central agenda for central banks. For lasting change, we must stop flying private jets to inconclusive Climate conferences. As Yoda says, Do or Do not, there is no try. ‘Chernobyl’ was the highest rated TV show, hope the climate story doesn’t end like that.
Carrie Lam must be lamenting the cost of extradition bill. Hong Kongers are honking loudly, tear gas can’t tear apart their Victorian determination. Dealing with these bulls in China shop may put Jinping in a soup. Events in Hongkong will have repercussion on Taiwan, Tibet and the mainland. China is dealing with a slowing economy, ageing population, leveraged system, tariff troubles and deteriorating international relations. But, make no mistake, China is an 800-pound gritty Gorilla as nimble as a Gazelle with ambitions taller than its Great wall.
Ukraine chose a young comedian as President. Nancy Pelosi pelted Trump for biding with him to stall Joe Biden’s bid. President got a Hunter of impeachment. Trump’s tweets kept markets on tenterhooks. Mocking the Canadian president or UK Ambassador, leaving Syrian Kurds or the Paris agreement, picking a fight with Jerome Powell or Jeff Bezos, dealing with Government shutdown or China, he may look like playing Birdbox challenge, but Don has his dongles dialed to the 2020 elections. Democratic Avengers are searching for their Captain America.
Tiger Woods’ resurrection was as ‘breathtaking’ as Keanu Reeve’s Renaissance. Rafael and Djokovic aced the court. Messi dribbled with Balls of fame. I loved Megan Rapinoe’s roaring calls for equality and Ashleigh Barty’s play on Parisian clay.
Paris saw fumes from Notre-Dame on one side and yellow vests (Gilets Jaunes) coming out on streets. Despite his falling popularity, my macro bet is still on Macron. His manual seems right for Europe. US Scientists revived brain cells of a dead Pig, he can do that with NATO. Multilateralism has been on the wane, we need leaders who are sane.
Boris bore the brunt of judges for bypassing Westminster and boxing his way into a no-bargain Brexit. Now, he is back with a bang in Downing Street, Labor is broken under Corbyn’s feet. UK has entrusted this hairy Tory but negotiation with EU and SNP may not be so hunky dory. Baby Archie brought Pounds of luck, Britain won cricket world cup.
Robert Mugabe, liberator turned dictator, has left an interesting tale. Abiy Ahmed deserves it for infusing a new hope in Ethiopia. Africa needs leaders like him. Jokowi is back in Jakarta while Rajapaskas Dynasty will run the Ceylon tea party.
Despite hazy clouds, equity markets kept dancing like BTS and indices rose like their followers. Commodities are entering the party. Greece and Italy issued bills at negative yields. Forget bulls and bears, even PIIGS made money. Lenders paying bond issuer, what a bonding orchestrated by central banks. Inverted yield curve subverted Fed’s agenda. Japanification of developed world can create risks for pension funds. Hangover of excessive debt is being treated by more monetary alcohol. In a savings glut world, fiscal policy (promoting capex) must take the reins. Building a sustainable economy with new Infrastructure can cure several social and economic ills. I wish Keynes was around.
I thought of John Bogle, the Ironman of capital markets, for being at the Vanguard of democratizing equity ownership. Paul Volcker, the crusader at US Fed and the paragon of public service will always “rule” American hearts.
Ranting investors demitted founder Neumann from Wework’s office. Softbanks had a hard time while Uber and Lyft had a tough ride on bourses. Bolsonara’s bytes bite hard, but his reforms have brought a bull market in Brazil’s Bovespa.
Satya Nadella reached Cloud nine with Microsoft making a trillion-dollar Power-point while Tim has Cooked an equally large Apple pie. Google founders had their best moonshot in Sundar Pichai. Can he Doodle the next trillion dollar Alphabet. You bet. Libra didn’t find currency with regulators. Mark my words, public wrath on data privacy issues will continue. Coordination among scientists brought first images of black holes. Tides of de-globalization and cyber risks are dark matters. Ask Jack Dorsey.
Boeing facing turbulent weather deplaned its CEO. United Technologies is uniting with Raytheon. BMS-Celgene and Abbvie-Allergen will create new bio-concoctions. Philip Morris’s proposed marriage with Altria went in smoke while LVMH ringed Tiffany. What a Juul!.
MBS & Co saw Yemenis drones hitting their wells and ESG-infected investors not taking Aramco well. Oil apart, Middle east remains one of the boiling flashpoints. Will Smith sings rightly in Aladdin - Arabian nights like Arabian days are hotter than hot.
Texas – a promising oil-field was chosen by Howdy Modi to drill a well of partnership. Rafale jets backfired on Rahul in election WAR as BHARAT voted with Josh - Phir Ek Baar, Chowkidaar. India lost stalwarts like Jaitley and Sushma. Netflix bid adieu to Game of thrones. The ultimate Power (Pawar) game was played in Maharashtra. Legislators shuttled like PV Sindhu. Let’s do 370 prayers and work with an Inner-net to build a peaceful, pragmatic and prosperous India.
The economy needs the boldness and precision of a surgical strike. Rate cuts, liquidity and now operation Twist, RBI is showing its fist to take the economy out of mist. My wish for financial system - May the Shakti be with you. A lot that others need to do what Das Kan’t do. Corporate tax cut makes the cut. RCEP or no-RCEP, Indian businesses should build biceps of innovation and efficiency to be future-ready. With the might of millions of Gully boys, $ 5 trillion could be in sight. I am sure, Apna time ayega.
Nifty axed 12000 walls of worries. Those holding mid and small caps lost their caps. Its’ time for bottom fishing. Telecom’s trunk call got attended. Time will reveal whether Essar deal was a steal for Arcelor. A big leap for bankruptcy process for sure. Yes, stressed financial entities need faster resolution. Naresh Goyal lost a Jet privilege. I sympathize with lenders, crew and flyers. Corporate Dewans need to perk up their CG power (Corporate Governance). Azim Premji’s bequest touched $ 21 billion, I salute his Aseem Prem for society.
I wish the barbarous mindset that wounded us in Pulwama, Khartoum, New Zealand’s Christ Church, Colombo and Congo learns the message of universal brotherhood from sages like Guru Nanak and Gandhi. In a polarized world, bereft of many true leaders, Gandhi remains the glowing lighthouse. His advice on seven sins are as relevant for business leaders, especially against “commerce without morality”. He remains relevant in his 150th anniversary, hence a strong contender.
It has been 30 winters since Capitalism celebrated the fall of the Berlin Wall. Many invisible walls continue to grow taller. Listen to the loud chorus in protests in Hong Kong, Gilets Jaunes, Chile or Extinction Rebellion. Before we criticize our premiers, what about the wall between those corporate moguls who can prevent climate change and the other earthlings who bear the consequences. Would it be long before the protests are at their gates? Millennials and Gen-Z are wired differently. While buying, they care as much about the planet and the people as about the price and product. Marketers, rework your 4 Ps. Thankfully, in 2019, the influential US CEO roundtable turned the tables. Their new bottom line is - it’s not the bottom line alone that matters. Be as particular about the Planet and People as about Profits. Abhijit and Esther’s “Poor Economics” may help companies do as much for sustainable value creation as review of “Project Economics”. Investors are future proofing their portfolios with ESG (Environmental, Social & Governance) screeners. Sustainable investing crossed $30 trillion and counting. Gen-Z will hasten this transition. What their money does is as important to them as what it earns. Investing bulls of tomorrow will charge at Green-Bonding, Community-Binding and Values-Abiding businesses.
The glowing story of human prosperity has been written with the invigorating ink of capitalism; communism and socialism were too dull for that. Challenges like rising inequality and pompous populism are testing the tenacity of capitalism. Businesses need societal permit to operate, hence, sense of Purpose will be pivotal to earn profits in perpetuity.
Business as usual will no longer be usual. ‘Capitalism with Conscience’ is my Person of the Year. Standing ovation!
Navneet Munot
CIO – SBI Funds Management Private Limited
Navneet.munot@sbimf.com
The “Everything Rally” in risk assets got into a bit of turbulence over the last month as Sovereign Bond yields started to move higher. The swift move up in bond yields have come amidst the larger fiscal stimulus of USD 1.9 trillion passed by the new US administration & the progress in vaccination globally, thereby enabling recovery in economic activities. While the US FED has moved to an average inflation targeting approach and is likely to look through any near-term overshoot of inflation, the market action points to potential repricing of risk-free rates as the immediate impact of pandemic wears off and economic activity starts to normalize. At another level, this could also reflect the changing nature of policy support globally. Monetary policy and unconventional central bank actions have been the first line & probably the predominant support measure for years since the Global Financial Crisis, while Fiscal policy has largely played second fiddle. However, with the cumulative impact of various stimulus measures announced since the Covid crisis totaling about USD 6 trillion in the US alone, the role of fiscal policy may be more prominent going forward. Central banks actions to ensure that the process is non disruptive would be keenly watched. This would inevitably lead to market repricing of both inflation expectations as well as real yields. A step up in asset market volatility, given the prominent role of easy money in asset price inflation is hence inevitable.
Equity: Equity markets continue to trend higher even as there has been a step up in volatility, in line with increased volatility across assets. So far, two key factors have worked to help equities. One, the massive fiscal stimulus in the western economies has led to an unprecedented surge in broad money supply growth. This in turn is expected act to reflate economies as their reopening accelerates on the other side of vaccines. For India, a global reflation may be coming just at the opportune time with both economic growth and corporate profits as a proportion of GDP starting at multi-year lows. In addition, the domestic environment is conducive as the last few years have seen significant positives such as a clean-up in Indian banks’ balance sheets, healthier corporate balance sheets, leaner cost structures and plethora of reforms around corporate taxes, PLIs, labor, farming, GST, real estate, etc. The recent budget has also raised hopes that the government is willing to do the heavy lifting initially to kickstart the growth engine, which should eventually crowd in the private sector. There is therefore room for significant improvement in corporate earnings.
The second factor that has helped equities is that bond yields have stayed low globally even in the wake of rising reflation expectations. This has partly been driven by expectations that the record high Government Debts to GDP across the world will necessitate keeping yields lower to help liquidation of this debt over time. Both these factors, economic reflation, and low risk-free rates have meant that earnings outlook improves while discount rate stays low leading to a win-win for equities. However, this may now be changing with a relatively quick increase in global bond yields over the past few weeks. This is already leading to some market turbulence of late. Low discount rates have allowed markets to front load earnings improvement into valuations. This should change as rising rates lead to headwinds for valuations which in turn may cause volatility in markets.
Overall, while valuations may face headwinds as support from low yield wanes, we believe that in the early stages of the cycle, earnings improvement should keep equities supported broadly, even as the pace becomes more calibrated. Moreover, as money becomes dearer, expect volatility to pick up. Beneath the surface, as the deflationary forces of the past decade wane, accompanying market polarizations should continue to reverse. This should mean continued broad basing of market performance. This in turn would mean more opportunity for alpha through bottom-up stock picking versus market aggregates.
In the short term, a key monitorable is the trajectory of Covid cases in the country, the decline in which appears to have reversed now leading to renewed local lockdowns in some parts. While this does not appear to be a worry yet, especially as involvement of private sector is expected to increase the pace of vaccination, one needs to be watchful in the wake of rising mutant strains .
Fixed Income: The directional trend of hardening bond yields that began with the Union Budget got accentuated as the RBI Monetary Policy review failed to provide any explicit guidance with respect to market intervention measures. While the RBI has continued to provide verbal guidance on the bond yield trajectory, the market has remained unenthused given the lack of specific and predictable actions on the same. The global bond sell off added further pressure on domestic markets as auction devolvement became a routine affair. Over the month, the benchmark 10y Government bond yield moved up more than 30 bps to 6.23% and the 5y Sovereign rates moved up by around 45-50 bps. Similar action was witnessed in the corporate bond space with 3 y Benchmark AAA bonds having moved up around 80 bps from the January 21 lows.
The narrative surrounding higher bond yields and failed auctions in the face of RBI efforts to keep yields low has been portrayed as a tug of war between the RBI and the markets. This simple narrative fails to appreciate the fact that net market borrowings have been revised higher 3 times in the current Financial year and RE for net borrowings in FY 21 has come in at 2.5 x of the BE numbers. Alongside this massive supply, in the context of above target headline CPI & nascent signs of input cost pressures, the market’s ability to absorb duration supply has remained constrained in the absence of more specific and predictable Central Bank intervention. This uncertainty has been reflected in market actions and auction biddings. At the same time, the RBI intervention & its ability to pre announce an OMO schedule is squarely constrained by the lack of liquidity absorption tools. The existing large base of liquidity, which clearly needs to be incrementally absorbed and the large portfolio capital flows, clearly required market-based intervention tools such as Market Stabilization Scheme. MSS issuances would also have better addressed the asymmetric liquidity distribution in the market and better aligned the overnight rates to the relevant policy rate and provided a direct tool to sterilize liquidity generated by Forex interventions. A combination of MSS issuances, long term Reverse repo and unwinding of CRR cut would have enabled normalization of excess liquidity as well as created sufficient headroom to provide guidance on bond market interventions. In the absence of these tools, both RBI and market action are clearly reflective of “rational actions” undertaken in the face of various uncertainties by both sides.
The challenges arising from having an Open Capital Account, Independent Monetary policy & a managed Exchange rate have been clearly evident & would continue to remain so. In the absence of sterilization tools, the other objective of keeping sovereign borrowing costs lower in the face of a supply- demand mismatch becomes a more challenging proposition.
While this dynamic plays out, the prospects for debt markets would in the near term be guided by specific market support measures that the RBI may announce. However, the broader directional trend would be shaped by how the Growth- Inflation dynamic shapes up. In the context of expected recovery in economic growth, the base case assumption remains that a normalization of the monetary support measures must be factored in. In the absence of any additional economic shocks, the pace of normalization may well be decided by the trajectory of CPI inflation. Investors in debt products would need to potentially moderate return expectations given the existing lower absolute yields and the likely normalization in monetary conditions over time.
Data Source: Bloomberg, SBI MF research
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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