India’s GDP growth increased to 6.1% year on year in January-March, from an upwardly revised 4.5% in the final quarter of last year. The reading exceeded even our forecast of 5.7% — the highest in a Bloomberg News survey — and was 1.1 percentage points higher than the consensus estimate.

For fiscal 2022, which ended March 31, that translates into GDP growth of 7.2%, higher than the government’s second advance estimate of 7%. This was in line with our forecast, but 0.2 ppt higher than the consensus estimate.

Key drivers behind the positive data surprise included government subsidies that are energizing the electronics sector, multinationals shifting back-office business to India to reduce costs, and stronger real credit growth.

The Reserve Bank of India’s cumulative 250 basis points of repo rate increases in this cycle didn’t appear to have any meaningful impact. The construction sector, which is most sensitive to interest rates, also recorded higher growth in 1Q.

India’s Manufacturing PMI is in expansion territory and continues to trend higher. That is in sharp contrast to the negative readings in both China and the USA. Manufacturing capacity has been migrating for much of the last decade as China’s wage bill trended higher. The low end garment industry is now well established in places like Bangladesh, Pakistan, and Ethiopia for example. 

Relations between South Africa and the US — its second-biggest trading partner after China — have soured over Pretoria’s insistence that it is taking a non-aligned stance toward Russia’s war in Ukraine. Even so, South Africa participated in naval exercises with Russia recently, while officials of the ruling African National Congress have expressed support for Russia’s invasion of Ukraine.

State Department spokesman Vedant Patel wouldn’t be drawn on whether the US would consider sanctions against South Africa should the arms claim prove true, but added during a regular State Department briefing Thursday that the US had “serious concerns” about a sanctioned Russian vessel docking in a South African port.

“The political stakes are high, with trade deals and market access all now in question,” economists at Rand Merchant Bank wrote in a client note. “This will add an additional layer of risk until the debate around this has cleared, and the rand should reflect that risk premium.”

Eskom’s challenge in keeping the lights on pales into insignificance relative to the threat of forcing countries to pick sides in the new geopolitical landscape. Selling arms to Russia is not exactly remaining unaligned. Of course South Africa could argue they are equally willing to sell arms to Ukraine. Nevertheless, from NATO’s perspective, depriving Russia of resources is essential to the path to ending the conflict so South Africa’s nonconformity is likely to be viewed very negatively. 

Investment is set to power a pickup in India's growth in the year ahead. An increase in public capital expenditure and incentives aimed at expanding manufacturing capacity are set to spark a private-investment cycle. The Reserve Bank's hold in April after a series of rate hikes to fight inflation also signals a shift to supporting growth.

Investment is set to power a pickup in India’s growth in the year ahead. An increase in public capital expenditure and incentives aimed at expanding manufacturing capacity are set to spark a private-investment cycle. The Reserve Bank’s hold in April after a series of rate hikes to fight inflation also signals a shift to supporting growth.

We forecast the expansion in GDP to accelerate to 5.9% year on year in the first quarter of 2024 from an estimated 5.0% in 1Q23.

On a full-year basis, growth will be distorted by pandemic effects — a low base contributed to a surge to 7.1% in fiscal 2023. Coming off the high comparison, growth is poised to slow to 6% in fiscal 2024.

Inflation is likely to slide to 5.3% on average in fiscal 2024 from 6.7% in fiscal 2023, due to lower commodity prices, lagged impacts of the RBI’s rate hikes, and base effects.

We see the RBI keeping its repo rate on hold at 6.5% through the end of 2023, avoiding over-tightening that could damage the economy. As consumer prices cool, we expect it to ease in 1Q24 to add support for the recovery.

India’s politicians have to create friendly conditions for employment growth over the next decades if some semblance of civility is to be sustained. Modi’s administration has played up nationalistic fervour by feeding into sectarianism. That’s not great for standards of governance which means there will need to be more focus on how well develop goals are executed. 

It shouldn’t have taken more deaths for Prime Minister Narendra Modi’s administration to act. The red flags have been there for years. What’s lacking is political will, and transparency. The FDA publishes different reviews of new drug applications on its website, along with detailed notes. The European Medical Agency gives similarly expansive information. There is no such openness in India.

As Thakur explained to me, the pharmaceutical industry is India’s manufacturing success story, providing a major source of foreign exchange and soft power. Any criticism is seen through the lens of nationalism, he said, and framed as defaming the industry. So why does contamination with such deadly substances occur so regularly? “The simple answer is that Indian pharmaceutical companies quite often fail to test either the raw materials or the final formulation before shipping it to market,” Thakur said.

India relies on the weak oversight of developing countries that make up the bulk of its exports — that’s how it can continue to push substandard and often deadly medicines there. As a paper on the Gambia poisonings published in March by the CDC noted, “inadequate regulatory structures make the sale of medications from international markets an especially high-risk activity in low-resource settings.” But what about countries with supposedly strong regulatory systems, like the US? This latest scare should prompt further reform of the FDA’s overseas inspections regime.

In the absence of a global framework for pharmaceutical safety, what can be done to make the generic drugs that consumers around the world have come to rely on safer and effective? For a start, the WHO’s prequalification program, which facilitates the purchase of billions of dollars’ worth of medicines through international agencies such as Unicef, must be overhauled. Then there’s the question of holding these companies to account for the harm they cause inside and outside India via legal avenues and victim’s compensation.

Any headline where children are dying is a headwind to public confidence in any company’s products. There is absolutely no doubt tighter safety controls are highly desirable and movement on that front would greatly improve outcomes. However, it is also true that having a friendly domestic regulator, in what is a low margin, high volume business, is also highly desirable from a business perspective. There is also a significant difference between the largest, most successful companies, and smaller less well capitalized businesses. 

The White House was the first to announce the deal with Boeing, releasing a statement from president Joe Biden describing the deal as evidence of a strong economic partnership between the US and India. According to the statement, all the Boeing planes will be made in America and will create over one million jobs across 44 states.

The purchase was also welcomed by Indian prime minister Narendra Modi, who said it was evidence of “the successes and aspirations of the civil aviation sector in India.”

Air India was privatized in 2022 after a long run as India’s national airline. Currently, it only has a fleet of around 100 jets, most of them leased. The first batch of planes from Airbus is expected to arrive later this year. Boeing has yet to release a timeline for production.

Freedom to travel quickly, both within and outside one’s country, is a major part of entering the middle classes for many families. The investment in widebody jets may be focused on the diaspora but rising living standards within India also promise to create a large population of tourists. India is investing $11 billion through 2025 to build 21 new airports. 8 have already been completed. Here is a section from a related article. 

Development plans are also underway for small, underserved and remote airports as the subsidized Regional Connectivity Scheme expands. With 400 regional routes, another 600 are planned to connect to 156 airports. 

The crisis of confidence plaguing Gautam Adani has taken a sudden turn for the worse, with a record 28% plunge in his flagship company’s stock raising questions over the extra collateral he needs to cover loans.

Adani Enterprises Ltd. plummeted in afternoon trading in Mumbai after Bloomberg reported Credit Suisse Group AG has stopped accepting bonds of Adani Group’s firms as collateral for margin loans to its private banking clients. Banks including Barclays Plc had earlier asked for more shares to cover a $1 billion loan.

With the rout in the group’s stocks triggered by short seller Hindenburg Research’s fraud allegations reaching $92 billion on Wednesday, the risk is that more financial institutions start to scrutinize their exposure to the indebted conglomerate. Without a dramatic upturn, investors who bought into a recently completed $2.5 billion stock sale by Adani Enterprises may be staring at deep losses.

“The problem now is that the dynamics are becoming a self-reinforcing negative feedback loop and investors are now just dumping the shares and asking questions later,” said Peter Garnry, head of equity strategy at Saxo Bank A/S.

Adani Enterprises is a trading house with interests in coal, shipping and ports. The size of leveraged positions is a product of risk appetite and the willingness of credit providers to provide margin trading. When margin calls come in, positions have to be reduced or the trader must successfully scramble for fresh funds. Adani Enterprises is currently receiving margin calls faster than it can source new funds. That is contributing to volatility. 

There has been no suggestion that the Adani entities would struggle to make these payments, and Adani has flagged interest coverage ratios that show it has the wherewithal to meet such obligations.

But Hindenburg’s report last week alleging “accounting fraud” along with its short position in Adani’s US-traded bonds and non-Indian-traded derivatives has put the debt in the spotlight. Some of the notes have fallen to distressed levels below 70 cents on the dollar that generally show mounting concern about creditworthiness. The securities extended declines Monday after a rebuttal by the Indian conglomerate and as Hindenburg followed with its own response.

Tightening global liquidity causes liquidity issues. We’ve seen several examples of that in the last 12 months. The UK pension crisis, South Korean perpetuals, frontier country sovereign defaults, REIT withdrawal issues are all symptoms of that theme. The issues currently being explored with Adani are part of the same trend. The longer rates stay high and as liquidity tightens the more these issues will appear. Eventually we will see solvency issues arise.

First, no country can avoid engaging with both the US and China. Dealing with both simultaneously is a necessary condition for dealing effectively with either. Without the US there can be no balance to China anywhere; without engagement with China, the US may well take us for granted. The latter possibility may be less in the case of a big country like India, but it is not non-existent.

Second, I know of no country that is without concerns about some aspect or another of both American and Chinese behaviour. The concerns are not the same, nor are they held with equal intensity, and they are not always articulated – indeed, they are often publicly denied -- but they exist even in the closest of American allies and in states deeply dependent on China.

This perspective gels very well with the reality on the ground I observed in Saudi Arabia on my last two visits. The simple reality is China is the country’s biggest customer and the USA the country’s greatest geopolitical ally. There is no way to play favourites the greatest risk for any country is to be taken for granted because that greatly enhances the scope for one’s interests to be trampled. 

Inward remittances, accounting for around 3% of India’s GDP, surged 12% from 2021.

Besides a large working population of Indians living abroad, there were other reasons, too, for this increase. For instance, students are the other big constituents of the Indian diaspora. They eventually form high-income groups, with direct implications for remittances.

The depreciation of the Indian rupee has also helped. Since January, the currency has fallen 10% against the dollar. This has made sending money from South Africa to India cheaper by 26%, from Thailand by about 17%, and from Japan by 14% in the past year or so, the World Bank has said.

The dilemma for countries with high rates of emigration is they end up sending the most ambitious, adventurous, and well-educated abroad. The so-called “brain drain” is mourned by society and people lament that if these productive people could stay at home, they would better society. However, the reality is those people probably have better personal opportunities overseas and would not reach their full potential at home. The benefit is they send cash home which is a significant source of inward foreign currency.

Since returning from the Chart seminar in London I have spoken to several people who work in the Israeli high-tech industry, They all tell me that about 10% of their colleagues have lost their jobs recently. Today you referred to your MIIN index. How can we invest in these countries?

Thank you for this additional insight. The market for big ideas ballooned with the delivery of free money. Suddenly, no idea was too grand, or time to delivery/commercialization too long. That trend was looking tired in 2019, as the Federal Reserve’s quantitative tightening was siphoning liquidity from the global economy.

Another product has migrated to the financial center: a popular derivative based on a benchmark gauge of Indian stocks that was traded on the Singapore Stock Exchange. In 2022 the National Stock Exchange of India opened a cross-­border trading link with Singapore—similar to the Hong Kong-Shanghai connect—to allow global investors to trade stock derivatives listed on the Indian market without needing to set up shop in India.

Trading volumes have increased since a single regulator, the IFSC Authority, was created by the Indian government in 2020 to streamline approvals and oversight in the special economic zone. In October, average daily turnover on the two stock exchanges in the financial center climbed to $14.6 billion, from $3.4 billion two years before, cumulative derivative transactions by banks jumped to $466 billion, from $22 billion, and cumulative banking transactions rose to $303 billion, from $45 billion.

“Beyond the shores of India, in some of those centers where India-centric business developed, they are able to notice that something is happening, and things may not be the same in the future,” says Injeti Srinivas, the IFSC Authority’s chairman. “Business is gravitating toward IFSC.”

A new international bullion exchange will let qualified jewelers directly import gold to India through GIFT City, a change from current rules permitting only some banks and nominated agencies approved by the central bank to do so. That loosening of restrictions is set to widen the importer base in India, the world’s second-biggest consumer. An aircraft leasing and financing business is operating in GIFT City to tap into the demand of one of the world’s hottest aviation markets for new-plane orders. Ship leasing will start soon.

Bull markets thrive on liquidity and so do economies. India has a burgeoning young population. The biggest challenge the government has is growing the economy quickly enough to absorb the productive capacity of that many people. Setting up special economic and financial zones is a vital step in attracting sufficient inward investment to make a difference.

In the post-Covid environment, global CEOs appear more comfortable with both work from home and work from India. The emergence of distributed delivery models, along with tighter labor markets globally, has accelerated outsourcing to India. The number of global in-house captive centers that opened in India over the last two years was almost double that of the prior four years. During the two pandemic years, the number of people employed in this industry in India rose from 4.3 million to 5.1mn,and the country's share of global services trade rose 60bps to 4.3%. In the coming decade, the number of people employed in India for jobs outside the country is likely to at least double to over 11mn,and we estimate global spending on outsourcing could rise from US$180bn per year to around US$500bn by 2030. This will have significant effects on both commercial and residential real estate demand.

If India is already the 'office to the world', it is increasingly becoming its factory as well. We anticipate a wave of manufacturing capex owing to government policies aimed at lifting corporate profits' share of GDP via tax cuts and hard dollars for investing in specific sectors, and we note that performance-linked incentive (PLI) schemes now total US$33bn across 14 sectors. Multinationals are more optimistic than ever about investing in India, as the all-time high on our MNC Sentiment Index shows (Exhibit 39),and the government is encouraging investment by both building infrastructure and supplying land for factories. The trends outlined in Morgan Stanley’s multipolar world thesis and cheap labor add to the mix. We estimate that manufacturing's share of GDP will rise from 15.6% currently to 21% by 2031, which implies nominal output jumping from US$447bn to about US$1.49trn.

 

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Apple got a bad shock this week when its most significant iPhone production facility was shut down as part of a COVID lockdown in China. For a company that prides itself on forcing suppliers to compete with one another, that was a significant hiccup. Apple has already been building more products in India and that trend is likely to accelerate over the next decade.

In some ways this represents an important generational change in the way China will interact with the rest of the world. As far as we know, the term “international circulation” originated in 1988 when a government researcher, Wang Jian, made the case that China should adopt an export-led growth strategy, making use of its huge surplus labor to plug the economy into the international manufacturing process. In that sense, the de-emphasis of international circulation is an important historical shift. In a People’s Daily article in November 2020, Vice Premier Liu He set out a number of objectives relating to the DCS including: (1) the priority of upgrading of China’s technological capacity, including an enhancement of China’s supply chain resilience (though referred to in this article as “optimizing the structure of supply”); (2) the need for finance to serve the needs of the real economy; and (3) the promotion of further urbanization. Any mention of external demand comes last

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China’s stock markets are accelerating lower so that is a trend ending signal. The big question for all investors is at what point will the risk premium be fully priced in? The USA’s more aggressive attitude towards China is about the only bipartisan topic in the current administration. In fact the two parties seem to be competing for the mantle of biggest China hawk. China’s response to more activist counterparty risk is to look inwards and many people fear a repeat of the Cultural Revolution is already in play.

“We have started to see green-shoots of this with India’s exports in FY22 reaching around $420 billion, far higher than earlier years,” Jain said. “This was driven by a combination of external as well as internal factors.”

India also managed to surpass El Salvador to become one of the top 5 suppliers of cotton t-shirts to the US this year.

The apparels sector, where India competes with nations like Bangladesh, saw an up-tick owing to multiple factors including a ban of all cotton products from China’s Xinjiang region over alleged ill-treatment of its ethnic Uighur Muslim minority, said Gautam Nair, managing director at Matrix Clothing Pvt., a medium-sized garment export firm. “The surge also further accentuated due to huge boom in buyers’ purchase and supply chain diversification.” 

Medium- and large-export firms saw a jump of 30%-40% in their order books last fiscal year and the upswing would be more visible in the current financial year ending March 2023, Nair said. Matrix Clothing, which exports apparels to global brands including Superdry, Ralph Lauren, Timberland, and Napapijri, has seen orders climb by 45% last fiscal year compared to the pre-covid year.

Still, there are hurdles to the growth of low-value added manufacturing in the form of non-labor costs, warn analysts.

“The bigger problems are the legacy issues of contract enforcements, tax transparency etc.,” said Priyanka Kishore, an economist at Oxford Economics. “These do pose a challenge to India’s manufacturing ambitions and need to be addressed for the country to fully tap its potential as a manufacturing hub.”

India doesn’t do lockdowns. It can’t afford to and doesn’t have to because the population is so young. With several hundred million people under the age of 25, job creation is a more urgent concern. Ensuring manufacturing is allowed to prosper and grow without being stifled by overbearing bureaucracy will need to become the national priority. 

“The golden period of 30 years between 2020-50 where our working age population will bulge can be an important horizontal enabler to bolster growth, even as the developed world including China ages,” the report notes.

The report adds that over the years, India has experienced rising literacy rates, but level of vocational training/skilling is low, which gets reflected in the high unemployment rate among the educated. “Closing the skill gaps of its qualified workforce will be critical, as India depends more on human capital than its peer countries that have a similar level of economic development,” it said, adding that skilling and reskilling require a coordinated response from the government, industry, academia even as COVID continues to cause structural changes to the workplace.

“The reversal in India’s structural transformation back toward agriculture is a sign of fall back to subsistence employment. Enhanced safety nets through PM-KISAN and the MGNREGA will be critical investments needed to ensure that incomes of small and marginal farmers are protected and their basic needs are met… But manufacturing and services will still have to be the two key growth engines going forward,” it said.

Given the trajectory of emerging market development over the decades, it is stating the obvious that India needs to do whatever is necessary to improve employment opportunities for its millions of young people. The fact the conversation is taking place is at least a good starting point.

India’s foreign exchange reserves dropped to their lowest in 15 months as the central bank probably stepped up its intervention to support the rupee that is testing new lows amid foreign capital outflows.

The reserves fell by $8.06 billion to $580.3 billion as of July 8, data released by the central bank showed Friday. This is the second straight week of decline and comes as the rupee nears the psychologically-important level of 80 per dollar.

While most emerging markets are seeing a sell-off on the US Federal Reserve’s rate-hike outlook, the Indian currency has lost about 7% this year, staying in the middle of the regional pack where the South Korean won has weakened by over 10% and the Philippine peso has shed over 9.5%.

A bigger import bill due to high commodity prices is also boosting demand for dollars, putting pressure on the local currency.

Monetary authorities in Singapore and Philippines on Thursday responded to the situation by going for emergency tightening. Some economists in India are factoring in the possibility of an unscheduled announcement by the Reserve Bank of India too. The central bank, which is due to announce its rate decision Aug. 4, had surprised with an off-cycle move in May.

At the current level, the reserves will cover less than 10 months of imports. Investors are worried that the drop in reserves leaves the rupee vulnerable to speculators, but even now these are much larger than they were during the taper tantrum of 2013, Bloomberg’s economist Abhishek Gupta wrote on Friday ahead of the data release. 

India is in a better position to defend against surprises than at any time in its history. In 2008, reserves of $300 billion were considered healthy. Today they hold $580 billion which is down from a peak of $640 billion in August 2021. That has not done much to arrest the decline of the currency but it does provide the RBI some options.

India’s faster-than-expected inflation print for April has pushed the pace of consumer-price rises above the benchmark bond yield by the most since 2020. The return of the negative real yield suggests the Indian debt may suffer a deeper selloff.

India’s real policy rate -- the spread between the central bank’s main rate and inflation -- has been negative for several months, like almost all emerging markets (China, Brazil and Indonesia are exceptions). But the latest inflation data has turned the market-determined real bond yield negative too.

India might just be paying the price for its hesitation to raise interest rates. The Reserve Bank surprised markets last week with a 40-bp hike, after previously saying it would stick with a dovish policy as consumption remained below pre-pandemic levels. It had hoped oil prices might come down, but crude prices remain above $100 a barrel and the nation’s consumer-price inflation is more broad-based, including items like clothing and footwear.

The upward pressure on inflation from the rising cost of commodity imports suggests the RBI will have no choice than to accelerate interest rate hikes. The Rupee has held a succession of lower rally highs since early 2021 and broke to a new all-time low today. Considering the strength of the US dollar, this has been a better performance than other regional currencies but that does not detract from the fact a weaker currency boosts inflation.

The Reserve Bank of India stunned markets Wednesday with a 40-basis point rate increase and a move to suck out billions from the banking system. That was a remarkable U-turn from February, when it announced an ultra-dovish policy, highlighting a relaxed stance toward inflationary pressures at home and U.S. tightening abroad.

“We believe the rate hike is a belated acknowledgment of the inflation risks and that policy has been behind the curve,” Nomura analysts Sonal Varma, Aurodeep Nandi and Nathan Sribalasundaram wrote in a note.

Yields on the benchmark 10-year bond jumped as much as 30 basis points on Wednesday to 7.42%, the highest since 2019, while the shorter 4-year yield saw a nearly 50 basis point jump. Yields extended gains on Thursday. 

Emerging market central banks have much more direct experience of the damage high inflation can do. They are usually alert to inflationary pressures and tend to implement remedial action quickly. Brazil hiking from 2% to 12.75% in little more than a year is a good example of that. That also helps to highlight just how out of step the RBI has been. The Repo rate was stock at 4% for nearly two years before this week’s hike.

As shown, the working age population in the U.S. is expected to be relatively flat whereas both Europe and China will likely experience a significant decline. The key point is that economic growth is equal to the sum of growth in the working age population and productivity growth. Therefore, unless China can stimulate significant productivity growth, it can expect a significant slowdown in economic growth. While not top of mind for most Americans, this likely slowdown has important implications for the U.S. First, slower economic growth may cause socio-political issues for the Chinese government which may further complicate already tense international relations. Second, a shrinking workforce in China will likely result in higher wages which may import inflation to the U.S. given our dependency on China for the manufacturing and assembly of so many types of goods. Third, recent supply constraints in the U.S. will likely continue on a sporadic basis. Finally, a maturing population in China will consume internally more of what it produces. This example is so fascinating because the unintended consequences of a forty year old policy decision are currently impacting the entire globe.

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This chart included with this report highlighting the reversal of working age population growth in China, Europe and the USA is particularly relevant. It suggests a migration of manufacturing and labour-intensive activity to lower median age countries is inevitable over the coming decade.

In 2020 I began a series of reviews of longer-term themes which will be updated going forward on the first Friday or Monday of every month. These reviews can be found via the search bar using the term “Secular Themes Review”.

“Play along to get along” has been the default strategy for global peace over the past thirty years. The default proposition was that if we concentrate on commerce, and all grow wealthy together, there was no real need to focus on our political differences. Under that system globalization flourished.

A just in time global supply chain allowed components to be made in a host of different countries, assembled in China and exported to the world. The demise of subsidy regimes allowed commodities, particularly agriculture products, to be produced in the lowest cost regions and exported to the globe. The internet has allowed the dissemination of know-how and services like never before.

In attacking Ukraine, Russia expressed a willingness to risk being cut off from much of the global economy. Regardless, of any other motive, Russia’s invasion of Ukraine is a gamechanger for the global order. With evidence of war crimes emerging, the chances of Russia being welcomed back into the global trading community are growing progressively more distant. We are back in an “Us versus them” global environment.

In 2020 I began a series of reviews of longer-term themes which will be updated going forward on the first Friday of every month. These reviews can be found via the search bar using the term “Secular Themes Review”.

When Wall Street indices were breaking out to new highs in 2012/13 the world looked to be on the cusp of a golden era of globalisation, co-operation, and the inevitable rise of the middle class. Higher living standards would breed a more tolerant society with greater respect for the environment and for our fellow global citizens.

In predicting a secular bull market, we were correct about the market call. Wall Street and the FANGMANT stocks have outperformed global indices by a wide margin over the last decade. It was also correct to expect oil to underperform because of the bounty arising from shale oil and gas. Predicting a decade ago that the USA would become energy independent was seen as maverick. Today it’s a fact.

The social upheaval that began with the monetary and regulatory response to the credit crisis represents a significant threat to the utopian ideal of the everyman. Exporting job security in return for cheap products has hollowed out the middle class in most developed countries. The evolution of the subscription business model has also reduced individuals to cash flows; where ownership of hard assets is marketed as an outdated concept. This has contributed to significant social upheaval and the response to the coronavirus pandemic amplified it.  

At the same time, the trend of geopolitical tension continues to rise. The concentration of wealth in the hands of a small number of people, companies and countries is creating greater competition. China is much more active in staking its claim to global trade than in the past and Russia’s current invasion of Ukraine is reflective of a desperate need for both security and relevance in a world that is actively working to use less of its primary export; oil.

The Indian government is exploring ways to reach out to smaller Russian banks that have not been sanctioned, according to an official in the Ministry of Commerce. One of the routes being considered is via smaller Russian banks that are outside the ambit of sanctions, said the official, who isn't authorised to disclose details and spoke on the condition of anonymity.

An alternative method of setting up a rupee mechanism has also been discussed, the official said. In looking for a solution, India may look to a system it had established nearly a decade ago for payments to Iran. Caught in the regulatory crossfire, Indian exporters are also worried that their shipments might be left unattended at Russian ports with no insurance.

"Earlier, we came to know that the Export Credit Guarantee Corp. of India has removed its umbrella insurance cover for Russian exports. Now, we hear there is going to be a case-by-case evaluation," said Rahul Singh, an exporter of engineering goods, including electrical machinery, to Russia.

To complicate matters, large amounts of engineering goods have already been shipped, said Singh. He has now reached out to the government regarding this. "Even if we receive payments, there will be a significant delay.

India is just one example of how trade settlement has been upended by sanctions on Russia. Getting paid for goods already sent is a major headache but who in their right mind would send more without having some security that future payments will be forthcoming. This is going to have a significant knockon effect for both the Russia and wider emerging markets sector.

In 2020 I began a series of reviews of longer-term themes which will be updated going forward on the first Friday of every month. These reviews can be found via the search bar using the term “Secular Themes Review”.

The biggest trend in the world isn’t bitcoin or the FANGMAN stocks. It’s bonds. Yields peaked in 1980 and the cost of borrowing has done nothing but decline since.

That’s enabled the steady rise of leverage, debt accumulation, asset price appreciation, speculation in all manner of public and private assets and every other bull market too.

The exact mix of where the debts have accumulated most is different in each country. For the USA, fiscal excess and unfunded liabilities are the biggest debt issue. The large number of companies surviving with no profits is the second biggest debt issue.

In Australia, Canada and the UK, consumer debt ratios, household debt and property debt are the pain points. The Reserve Bank of Australia’s reluctance to raise rates, despite inflation, is a symptom of the economy’s reliance on property prices.

For China, the accumulation of debt in the property sector has been epic. The sector represents 30% of GDP. At least in Japan, the massive quantity of debt is held domestically but it is a significant hurdle to raising rates.

That plan will require borrowing a record 14.95 trillion rupees ($200 billion) to bridge the shortfall, much higher than the 13 trillion rupee consensus, as revenues from divestments are slow to materialize.

“While the fiscal expansion is expected to be pro-growth, the heavy supply is expected to worry the bond markets,” said Upasna Bhardwaj, an economist with Kotak Mahindra Bank Ltd. 

Indian bonds fell, with the yield on benchmark 10-year notes rising by as much as 21 basis points. Stocks traded 1.5% higher, paring earlier gains of as much as 1.8%.

The looser spending puts India on track to post one of the deepest budget deficits among major economies as nations spend their way out of the pandemic-induced downturn. 

The 2022 state elections are India’s equivalent of the mid-term elections in the USA. Four of the largest population states will hold elections. This will both influence the government’s majority and reflect public sentiment following the abandonment of the farm reforms. This article from the Hindustan Times may also be of interest. 

“We do have pockets of revenge demand coming in spurts but consumption still needs some hand-holding,” said Shubhada Rao, founder at QuantEco Research in Mumbai, who reckons that the impact of India’s ongoing third virus wave may have been factored in these estimates. “We are looking at 7.5% growth next year.”

Digging Deeper

Gross value added, a key input of GDP that strips out the impact of taxes on products, is seen increasing 8.6%. Manufacturing output is estimated to rise 12.5%, while mining sector is seen expanding 14.3%. Agriculture, which provided some cushion to the economy last year, is projected to grow 3.9%
Gross fixed capital formation, a proxy for investment, is forecast to increase 15%, whereas government spending is seen increasing 7.6%. The ministry sees a 6.9% jump in consumption as pent-up demand drove sales
The growth numbers, which benefit from last year’s sharp contraction, will serve as a key input to Finance Minister Nirmala Sitharaman’s annual federal budget, due to be presented next month
India’s growth is seen moderating to 8.5% next year, according to a forecast by the International Monetary Fund released in October

Everyone is dealing with inflationary pressures at present but countries like India have the potential to grow faster for longer than developed markets. That’s the primary appeal of emerging markets enjoying their demographic dividend. The productive capacity of hundreds of millions of young people in their prime, striving for better living conditions and aided by technology is a powerful secular bull market theme. Even in an inflationary environment, positive real growth is possible.

Equity team co-heads Atul Narayan and Erin Miles on other equity markets catching up with the US: Looking ahead, it feels that things are primed for the equity markets that have lagged the US (China, Japan, the UK, Europe, etc.) to catch up. There are several factors at play. First, COVID has been a material relative support to US equities from all channels—favorable sector tilt, less virus economic impact, more support from falling rates (versus, say, Japan, where yields are pegged), and compressing risk premiums, given safe-haven appeal for US equities, especially the FAANMGs. We would expect the COVID impact to gradually fade in the coming year and this to be a relative support for the markets outside the US.

Second, China is showing early signs of moving toward easing after a year when the structural goals (deleveraging, rebalancing, common prosperity, etc.) were prioritized. This again will be a bigger relative support for economies like Japan, Europe, and EMs that are a lot more exposed to China. Finally, if you look back over the last 100 years, it’s almost always been the case that the winners of a given decade end up being laggards in the next one because of the degree of exuberance (and pessimism) that gets priced in following the winning (and losing) stretch. Given how stretched the relative positioning and pricing is today (for logical reasons), we expect the US versus rest of world diff to finally start to revert after a decade-long off-the-charts performance. The main things we are watching closely are the evolution of COVID globally, China’s policy stance, and the retail flows in the US, which were the biggest support for US equities over the past year and a half.  

Based on valuations alone, there is a strong risk-adjusted argument for favouring ex-US assets. I also find the argument that a recovery for China’s economy would have a more positive effect on the Ex-US basket to be reasonable. However, momentum remains a tailwind for Wall Street which has been supported by the relative strength of the Dollar all year.

That needs to change. The NITI discussion paper on digital banks argues that the funding cost of India’s top nonbank consumer lender last year was more than 7%, while it was less than 4% for a well-capitalized bank. Why not license internet-only banks to take advantage of low-cost deposits, too, especially if they can use technology to fill $400 billion in unmet credit needs of small business owners? 
 

If banks keep squatting on their entitlements, customers will up and leave. Walmart Inc.’s PhonePe app moves 47% of online money in India, while homegrown Paytm has a 10% share. Alphabet Inc.’s Google Pay, which controls 37% of the market, is using its search expertise to influence customers’ choice of bank deposits. HDFC Bank and its bigger state-owned rival State Bank of India still have a stranglehold on savings. So, they’re the top remitters by default in phone payments. However, when it comes to receiving money, the leader is Paytm Payments Bank. It’s a narrow bank with a limit on deposits per customer. It can neither make loans, nor issue credit cards, though it has finally got access to the central bank’s emergency liquidity window.

Not allowed to function as a proper bank, Paytm hawks credit for others. Last quarter, third-party loans disbursed by the unprofitable fintech jumped six-fold from a year earlier. Still, the Paytm stock is languishing 27% below its recent initial public offering price. Instead of earning fees by creating $1 billion in yearly credit opportunities for partners like HDFC Bank, the app may be more valuable as a digital bank, lending on its own.  

A licensing regime that has fallen behind technological innovation has caused a regulatory vacuum. An RBI working group estimates the number of illegal digital lending apps in India at 600. Many of them “are collecting users’ entire phone contacts, media, gallery, etc.” and using that information “to harass borrowers and their contacts,” the group said.

India’s much vaunted unicorn IPO has followed the trajectory of most recent new issues and quickly unwound the post launch euphoria. Nevertheless, India’s online financial sector is a high growth market and should eventually help to streamline the provision of credit to businesses and consumers to help fuel growth.

Gundlach, 62, said the reason why Fed Chair Jerome Powell characterizes the economy as strong, but not strong enough to allow for a rate hike at this point, is that the underlying condition is in fact weak -- artificially propped up by an unprecedented degree of stimulus.

Here are some other takeaways from Gundlach’s remarks:
He focused heavily on inflation, saying the annual pace of gains in the consumer price index could hit 7% in the next month or two. He ran through numerous inflation measures and pointed out that shelter costs have climbed significantly. He also said it’s possible that the CPI inflation gauge won’t drop below 4% throughout 2022.

Markets could face more volatility now that the Fed has said it might quicken its tapering program.

Gundlach reiterated that he bought European stocks for the first time in 12 years, which he disclosed a few months ago. He still owns some of those and they’ve done just OK until recently. He didn’t own emerging-markets equities, though he envisioned a scenario when they might outperform U.S. firms. “We’re looking for major opportunities” and emerging markets could be one over the next few years, he said.

The dollar has been in structural decline since 1985, he said, reiterating that the twin-deficit problem (that’s the current-account gap and the federal budget deficit) will cause the greenback to fall over time, which bodes well for emerging markets.

I’ve been saying for most of this year that the Dollar is the lynchpin for a migration away from US Dollar assets. Wall Street has outperformed by a wide margin from the perspective of international investors since 2008.

A year ago, I began a series of reviews of longer-term themes which will be updated going forward on the first Monday every month. The last was on October 1st. These reviews can be found via the search bar using the term “Secular Themes Review”.

One of the most basic truisms in the financial markets is it is easier to make money in a bull market. The bull market that began in late 2008 and early 2009 has been liquidity fuelled. That was not obvious to everyone a decade ago but now everyone gets the message. Money printing inflates asset prices. As long as central banks are printing, we will have bull markets and the most speculative assets will perform best.

“India is on a 50-year rally,” even if there are short bouts of bear markets, Mobius said in an interview on Bloomberg Television. “India is maybe where China used to be 10 years ago,” he said, adding the government policies of unifying rules across states will help the country in the long run.

Mobius’ bullish view on India clashes with those of analysts at Morgan Stanley and Nomura Holdings Inc., who have downgraded the stock market after the benchmark S&P BSE Sensex Index more than doubled from a March 2020 low.

Emerging-market equities have trailed behind their developed-nation peers this year, held back by losses in China as the government has roiled markets with a widespread regulatory crackdown.

“People say emerging-markets look bad because China is dragging down the index, but they have to look at other areas such as India that are going up,” said Mobius…

Saying that India could be on a 50-year bull market is not incompatible with the risk of a reversion towards the mean which would correct the short-term overvaluation.

India represents a significant growth opportunity but is also subject to volatility. The Nifty Index remains in a reasonably consistent uptrend but is best bought following inevitable occasional setbacks.

Jefferies’ Chris Wood stays bullish on Indian equities and sees any selloff as a buying opportunity even as global research firms have started downgrading domestic markets citing expensive valuations. “If Greed & fear had to own one stock market globally for the next ten years, and not be able to sell it during that period, that market would be India,” the market veteran said in his latest report said. He remains "remains structurally...

Jefferies’ Chris Wood stays bullish on Indian equities and sees any selloff as a buying opportunity even as global research firms have started downgrading domestic markets citing expensive valuations.

“If Greed & fear had to own one stock market globally for the next ten years, and not be able to sell it during that period, that market would be India,” the market veteran said in his latest report said. He remains "remains structurally overweight on India".

India, from a macro perspective, looks in a similar condition to where it was in 2003 when the country embarked on the last property and capex cycle, Wood said. "Rising interest rates will not derail the upcoming investment cycle. Indeed, they will reflect accelerating growth.”

“The 10-year bond yield rose from a low of 5% during the 2003-2004 period to 8-9% during the next several years without impacting the then accelerating investment-led cycle,” the report said. Jefferies sees a similar situation now that will help accelerate growth.

A selloff triggered by a tapering or tightening scare on Wall Street will provide opportunities to add to Indian equities, most particularly if this coincides with a further likely rise in the oil price on an accelerating re-opening of the global economy, he said.

India's benchmark Nifty 50 has surged more than 26% so far this year, making it the best performer among world's major equity indices. And Jefferies' bullish stance is contrary to what some of the other research firms are saying.

Morgan Stanley downgraded Indian equities to ‘equal-weight’ from ‘overweight’ citing expensive valuations, following similar moves by Nomura and UBS. Morgan Stanley sees Fed tapering, higher energy costs and a likely rate hike by Reserve Bank of India in February as some of the risks.

Strategists at UBS downgraded Indian equities saying the valuation gap with Asean markets was “too wide to justify”. Nomura downgraded domestic equities to ‘neutral’ citing unfavourable risk-reward.

India’s stock market has more than doubled since the pandemic panic lows in March 2020. With a 10% overextension relative to the trend mean evident, it is susceptible to some consolidation but the current reaction is no larger than anything seen in the last eighteen months and suggests momentum is still dominant in supporting the market.

A link to the full report is posted in the Subscriber's Area. 

Every country had to break the piggy bank to deal with the pandemic. That helped to boost economic activity and demand for just about everything over the last 18 months. Going back to less profligate ways will be a challenge everywhere, but emerging markets have the benefit of growth to ease the challenge. They also have more recent experience of doing what is necessary to combat inflation which should be a useful skillset going forwards.

“Every department makes its own plans and typically the left hand doesn’t know what the right is doing,” Modi said, citing the example of how new roads were laid only to be dug up later by the water pipes or the telecom department. “These silos result in wastage of budgetary resources and India can no longer afford these bottlenecks,” he said.

The initiative comes as India targets spending $1.5 trillion in roads, railways, ports and gas pipelines, which are key for attracting investments and creating jobs in Asia’s third-largest economy as it recovers from a pandemic-induced downturn.

The master plan aims to nearly double the network of highways to over 200,000 kilometers and the number of airports to 220 by March 2025, and double the length of gas pipelines to 34,500 km, among others, during that period.

The International Monetary Fund sees India’s gross domestic product expanding 9.5% in the year to March after contracting 7.3% last year. While the forecast is for the economy to grow 8.5% next year, the outlook depends on the nation’s ability to create jobs and boost consumption, which accounts for some 60% of GDP. For that, India needs investments and infrastructure to attract businesses.

More than any other factor, investors have been demanding India build more infrastructure. That was true twenty years ago and it is still true today. The difference now is that the administration has a demographic imperative pushing for reform. The only way India will grow in a cohesive manner is to deliver better standards of living for its hundreds of millions of young people.

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on May 7th. These reviews can be found via the search bar using the term “Secular Themes Review”

Supply Inelasticity Meets Rising Demand was the phrase David coined to explain the last commodity-led bull market. After decades of underinvestment in commodity supply infrastructure, the market was not prepared for the massive swell of new demand from China; as it leaped from economic obscurity into one of the largest economies in the world. A decade of investment in new production was needed to supply China and that crested ahead of the credit crisis in 2008.

Today, we also have extreme example of supply inelasticity, and demand is breaking records for all manner of goods and services. The factors contributing to these trends are quite different from a decade though. Some will be resolved relatively quickly. Others will take years.

The structural bull story of the Indian markets, Wood said, remains in place with growing evidence that a new residential property cycle has commenced after a seven-year downturn despite the setback triggered by the delta Covid-19 wave.

“Pre-sales across the top seven cities rose 23% month-on-month and 41% year-on-year in July. Property registrations, indicating completed transactions, for July-September were up 45% in Mumbai and 56% in Delhi compared with the levels prevailing in 2019,” he said.

Also, unsold inventory is coming down sharply. “The inventory level in the National Capital Region, after stripping out stalled projects, has declined from a peak of 50 months of sales in October 2017 to 33 months.”

Affordability, according to him, too, remains at historically attractive levels. The housing affordability ratio, measured as home loan payment as a percentage of income, declined from 53% in FY12 to a record low of 27% in FY21, the report said. “This is clearly very different from, say, China.”

Greed & Fear has a 17% allocation to the property sector in the Indian long-only portfolio, while it “resists for now the temptation of putting any China developers into the China long-only portfolio”.

India’s home finance and property development sector went through a painful restructuring process three years ago and it is still ongoing for smaller companies. The reason for the decline was much tighter regulation of how property developers funded themselves.

Think, you may find interesting this Financial Times story that looks into the longer-term consequences of Evergrande saga - https://on.ft.com/3io45gH (open link). It seems that the Chinese real estate market finally (at long, long last) is crumbling, not without help of the country leaders. If it is so and given the fact that the property market accounts for 29% of the Chinese GDP (and land sales to developers, for the third of local governments’ revenues), the economic growth seems to slow dramatically in the coming years. What could be implications, in your view? We all remember that China and its industrialization were the major drivers of the global commodities supercycle in the 21st century. Also, every time China has got into trouble, the Communist party used the same recipe “more investments in infrastructure and construction, more leverage. If now China and its property sector grow much more slowly, not to mention possible contraction of the latter, it will need much less metals and materials, and also possibly less gas (to power plants and send it to homes) and even oil (fewer working trucks and construction equipment). What do you think?

Thank you for this informative email which may be of interest to the Collective. Here is a section from the FT article:

An even more consequential trend for China’s political economy is the collapse in land sales by local governments, which fell 90 per cent year on year in the first 12 days of September, official figures show. Such land sales generate about one-third of local government revenues, which in turn are used to help pay the principal and interest on some $8.4tn in debt issued by several thousand local government financing vehicles. LGFVs act as an often unseen dynamo for the broader economy; they raise capital through bond issuance that is then used to fund vast infrastructure projects.

The property market has funded local governments for decades. Without a solid trend of land sales municipal governments face bankruptcy. There is just no way the central government can let that happen. The first order solution will be to avert contagion into the rest of the property market following Evergrande’s demise.

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on May 7th. These reviews can be found via the search bar using the term “Secular Themes Review”.

If it walks like a duck and quacks like a duck, it must be a duck. Wall Street is behaving like it is in a bubble. The most important thing is the bubble is still inflating.

The arc of electoral expediency demands a saleable alibi, a villain, and a promise of prosperity at the end of the rainbow. The rash of legislation and the promise to expand the enclave of reservations may at best serve as a placebo. The spectre which could come to haunt India is up ahead. What is important to recognise is the scale of the challenge. India’s 2020 population is estimated at over 1.39 billion of which 67% or nearly 925 million are of working age. By 2050 India’s population will touch 1.63 billion – and the working-age population is expected to touch 1.11 billion.

Demography is not destiny. India’s politicians are right to fear the looming spectre of rising working-age population and unemployment but both the cause and consequence are of their making. India needs structural reforms to propel growth. Effectively the demographic dream rests on the hope that India’s rulers would tune policy to empower the willing millions. Without growth, politicians will only be left with poverty and promises to redistribute.

Most India commentators adopt a glass half empty perspective. The performance of the stock market tells a different story.

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on May 7th. These reviews can be found via the search bar using the term “Secular Themes Review”.

We are 17 months on from the panic low in 2020. At this stage it is quite normal to marvel at the speed of the advance and worry that the pace can’t possibly be sustained. The abiding sentiment is something like “surely, the world is not nearly as good as it was before the pandemic and therefore how on earth can prices be so high?”.

The world is not as good as it was before, millions of people have been deeply inconvenienced and many are traumatized by the events of the last 17 months. The counter argument is the quantity of money in circulation has only been matched during wartime and that has helped to inflate the price of everything. That’s the key to the argument. Having spent so much to achieve this recovery does anyone really believe central banks are going to endanger it? So where do we go from here?

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on May 7th. These reviews can be found via the search bar using the term “secular themes review”.

News today that Johnson & Johnson’s vaccine is effective against the delta variant should help to allay fears that the world is about to experience a round of upheaval similar to early 2020.

There is no question that the pandemic has acted as an accelerant. It forced migration and adaption to new conditions in a manner that might otherwise never have happened. Some of those changes will stick, others will fade away.

Everyone seems to think that the pandemic has to mean something and that we will never again get back to normal life. I don’t believe it. The surges back into social activity whenever restrictions are lifted is confirmation that humans are social beings. We crave physical contact and fellow feeling. That’s not going to change, even if we have a better appreciation for it today than since the demise of organised religion.  

As with every other crisis, the liquidity created to deal with the shock will remain in the system for much longer than it is strictly required. Central banks cannot afford to jeopardise the recovery they worked so hard to create. Meanwhile, populations everywhere are impatient for better conditions.

"The U.K. has shown that the variant is not such a health challenge if people have been vaccinated. We are concerned that Australasia and the smaller markets in Asean could continue to be impacted. We remain cautious on Asean equities. Watching for any sharp increase in Covid cases in Asean”

Kelvin Wong, an analyst at CMC Markets (Singapore) Pte.: “Tactically, it is likely to be more of a rotation play that may last into the upcoming third quarter where high-quality technology stocks may outperform over cyclicals”

“Hence for Southeast Asian equities that tends to be heavily weighted toward cyclical/financials and the external sector such as tourism are likely to underperform, for example Singapore’s Straits Times Index”

“The major key support to watch on the STI will be at 2,950/2,920 which also coincides with the 200-day moving average”

Alan Richardson, a senior portfolio manager at Samsung Asset Management (HK) Ltd. “It’s a speed bump that could slow the speed of the recovery but doesn’t change the direction to a post-Covid economy. The delta variant should increase the urgency for countries to reach three-quarters immunization”

Paul Mackel, global head of FX research at HSBC Holdings Plc in Hong Kong: Market is watching closely the recent Covid resurgence as it has caused short-term depreciation of some currencies

“But the elephant in the room is whether the dollar has bottomed or not” and “it’s not yet. But if the dollar is indeed getting stronger and the Fed is becoming more hawkish, it could challenge the outlook of some Asian currencies”

There is an incredible variety of perspectives on the merits of vaccination. The primary point I made last year was it doesn’t matter what anyone thinks, global governments have all followed a similar set of policies. Having made the decision to lock down, there has to be a set of requirements which need to be demonstrably met to open back up. Vaccinations are key to that decision making process. Variants introduce some doubt into the equation.

"The current situation on the border between China and India is generally stable, and the two sides are negotiating to resolve relevant border issues," Chinese Foreign Ministry spokesman Wang Wenbin told a regular press briefing in Beijing Monday in response to a question about troop deployment. "In this context, the words, deeds and military deployments of relevant military and political leaders should help ease the situation and increase mutual trust between the two sides, not the other way around."

The fear now is that a miscalculation could lead to an even deadlier conflict. Several recent rounds of military-diplomatic talks with China have made minimal progress toward a return to the quiet status quo that had prevailed along the border for decades.

“Having so many soldiers on either side is risky when border management protocols have broken down,” said D. S. Hooda, a lieutenant general and former Northern Army commander in India. “Both sides are likely to patrol the disputed border aggressively. A small local incident could spiral out of control with unintended consequences.”

The northern region of Ladakh — where India and China clashed several times last year — has seen the largest increase in troop levels, three of the people said, with an estimated 20,000 soldiers including those once engaged in anti-terrorism operations against Pakistan now deployed in the area. The reorientation means India at all times will have more troops acclimatized to fight in the high-altitude Himalayans, while the number of troops solely earmarked for the western border with Pakistan will be reduced.

India is a front-line country and NATO+ hope it will act as a counterweight to China in the region. That means it is likely to be afforded a helping hand in the form of aid, regulatory laxity and technology transfers to ensure it is capable of resisting Chinese adventurism.

India’s cabinet approved Wednesday an earlier proposal to distribute 20.4 million tons of free rice and wheat to people covered under the nation’s food program for five months ending November, according to a government statement.

* Govt will spend 672.7 billion rupees ($9.1 billion) as subsidy for distribution of food grains to as many as 813.5 million people

* The beneficiaries will get 5kg of rice or wheat per person per
month: statement

** NOTE: The free allocation is in addition to the sale of same amount of subsidized food grain each month

* NOTE: The announcement was made by Prime Minister Narendra Modi on June 7, before a formal approval by the nation’s cabinet on June 23

 

India has experienced some significant challenges in tackling its coronavirus outbreak and measures to support the poor are to be welcomed. Targeting the staple food sector also suggests Narendra Modi is working towards success in the 2022 interim and 2024 general elections.

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on May 7th. These reviews can be found via the search bar using the term “Secular Themes Review”.

The pandemic panic is now one year in the rear-view mirror. It seems to have lost its ability to scare us so that begs the question what happens next? That’s the big conundrum

Some still believe that technology will solve all our problems and that the largest companies in the world will continue get even larger. Others believe that the inflation genie has been releases so it is inevitable that bonds will collapse in value. Others believe that we are in for a long grind of subpar growth because the debt is so large, it will sap the will to live out of every speculative asset. Others believe we are in a stock, commodity and property market bubble that could pop at any moment. Still other believe that cryptocurrencies are the solution, though no one is exactly sure what the problem is. So how do we make sense of these divergent views?

Personally, I have a strong feeling of déjà vu. In late 1999 and early 2000 I was selling Optus cable connections door to door in Melbourne. When I tired of backpacking, I went to London and within three weeks had started at Bloomberg. I was amazed at the speed of the Royal Mail. I saw an ad in The Times on a Wednesday for European sales people. I posted my CV that afternoon and had a reply back from Bloomberg delivered the next day. I had an interview on Monday and started on Tuesday. To say they were desperate for sales people is a gross understatement. I was in Belgium, visiting private banks, 10 days later. That was the top of the market and it was evidence of a true mania in the TMT (Telecoms, Media and Technology) sectors.

By the end of the Nasdaq bear market in 2003 the number of Bloomberg terminals being sold to mortgage bankers was surging. I was even offered a job by one. The Dollar was pulling back, there were fears about financial repression, China’s demand for commodities was only beginning, emerging markets were breaking out and gold was completing its base formation. A year later oil broke out.

You say that India has a significant demographic tailwind, taking the consensus view that that is an investment plus; one that is embedded in so many analyses on India. For a challenge to this listen to the Meb Faber interview with Vikram Mansharamani, 50 minutes in for 5 minutes, on his take on India and why in fact the demographics are a head not a tail wind: https://www.youtube.com/watch?v=cM40JZ3NSNk&t=30s

Thank you for this link and the discussion raises a large number of questions. There are two that I think are particularly relevant. The first is on the assumed ubiquity of the bullish India story and the second is the continued dominance of capital over labour.

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on March 5th. These reviews can be found via the search bar using the term “Secular Themes Review”.

After a crash everyone is wary. We all seek to learn lessons from our most recent experience because it is the only way to help us emotionally move past the trauma. Coming out of the pandemic most investors wished they had sold everything at the first sight of virus news in early 2020 and bought everything back again following the crash. Today they are worried that there is another big shock waiting around the corner that will cause a repeat of pandemic panic.

The challenge for investors is less to learn from the most recent mistake but rather to know when to deploy the lessons learned. The best time to be wary about a massive decline is when no one is worried about it. The time to take precautionary action is when it seems like a waste of time and when you are most afraid of giving up on the potential for even better gains. That’s the best time to remember the experience of the crash but the interval of time and the positive reinforcement of experience in an uptrend make it difficult.

“We expect markets to look beyond the short term on cases peaking, vaccine approvals and expansion,” Amish Shah, an analyst at Bank of America Securities India said in a note on Tuesday. The stabilization of new cases in Maharashtra state, location of the financial capital Mumbai, could be a “precursor” to the virus curve flattening over one to two months, Shah said.

The U.S. this week said it will help India by sending items needed to manufacture vaccines as part of an aid package. European countries are also pledging support after the South Asian country saw record numbers of new cases. India today began registering people from 18 years of age to get inoculations from May 1.

The headlines regarding India and feedback from domestic sources all point towards dire conditions. The reality is the Indian authorities were probably a bit too sanguine about their success in avoiding the worst effects of the pandemic and are now paying for that laxity. The bigger question for investors is if this spike is the result of superspreading religious events or a new variant.

Summing up our findings, the great historical pandemics of the last millennium have typically been associated with subsequent low returns to assets, as far as the limited data allow us to conclude. These responses are huge. Smaller responses are found in real wages, but still statistically significant, and consistent with the baseline neoclassical model.

Measured by deviations in a benchmark economic statistic, the real natural rate of interest, these responses indicate that pandemics are followed by sustained periods—over multiple decades—with depressed investment opportunities, possibly due to excess capital per unit of surviving labor, and/or heightened desires to save, possibly due to an increase in precautionary saving or a rebuilding of depleted wealth. Either way, if the trends play out similarly in the wake of COVID-19 then the global economic trajectory will be very different than was expected only a few months ago.

Should we expect declines of 1.5%–2% in the real natural rate, however? There may be at least three factors that could possibly attenuate the decline of the natural rate predicted by our analysis, but their presence and magnitude is uncertain and unknowable until therapies to fight COVID-19 are more developed. First, the death toll of COVID-19 relative to the total population might be smaller than in the worst pandemics of the past, but we cannot know for sure at this point. Second, COVID-19 primarily affects the elderly, who are no longer in the labor force and tend to save relatively more than the young, so the demographic channels could be altered, although the recent pick up in infections is now affecting younger individuals. Third, aggressive counter-pandemic fiscal expansion will boost public debt further, reducing the national savings rate and this might put upward pressure on the natural rate, even though our analysis suggests that this expansion of public debt should be easier to sustain in the long-run.

This report has obviously helped to inform the view of the Fed in how they expect the path of interest rates to play out. They are worried that the rebound from the pandemic will not translate into a sustained path of outsized growth because of the damage done to the economy and animal spirits will take time to overcome.

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on March 5th. These reviews can be found via the search bar using the term “Secular Themes Review”.

The pandemic has been an accelerant. The full ramifications of what that means are becoming increasingly clear.

The pandemic took trends that have been in evidence for a while and exaggerated them. At the same time, it introduced new challenges which require new solutions.

Corporations operating without the safety net of cash on the balance sheet has been a feature of the markets for decades too. They continue to be bailed out when they get into trouble. There is no evidence that the trend of using all available means to buy back shares has ended. In fact, buybacks are back at pre-pandemic levels. Companies were touting “resiliency” last summer. It appears to have been just talk. Buybacks represent a powerful tailwind for stock markets that were absent for much of 2020 but are now back in force. 

There is a common refrain that “demographics is destiny.” The difference between then and now is that we had a population profile with so much more vitality in the 1920s. We started that decade with a median age of the population at 29 years — today it is 38 years. The share of the population over the age of 65 was 7% in the 1920s; today that share is on the precipice of hitting 20% for the first time in recorded history. Not to detract from retirees and their dominance, but they are savers, not spenders. When you have half the population under 30 years of age as you did in the 1920s, well, that does blaze the trail for a spending boom.

And guess what? There was capital deepening back then. Company executives were less focused on financial engineering but on improving the capital stock. So, the 1920s was renowned for a decade that saw 5% annualized growth in manufacturing productivity. We had a central bank then that seems to have understood that we can actually tolerate mild deflation as was usually the case in peacetime periods (as my old chum Gary Shilling always points out). Only today is inflation seen as a desirable outcome — because today’s central bankers are consumed with bailing out debtors and penalizing savers. But inflation erodes real purchasing power — something today’s central bankers don’t tell you.

A link to the full report is posted in the Subscriber's Area. 

If demographics is destiny then India is the place to be. Half of the population is younger than 25 so the country’s demographics are better than the USAs in the early 1920s. That young population has also aided young countries during the pandemic so they are better placed to growth as the global economy recovers.

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on January 8th. These reviews can be found via the search bar using the term “Secular Themes Review”.

The rollout of vaccines to COVID-19 continues to accelerate and that will continue through the balance of the year and 2022. There is encouraging news about the number of different vaccines which have been approved and their success against variants. By the end of the year, the world will be inundated with doses which will provide at least some protection from the virus for anyone who wants it. That’s all the rationale any government needs for reopening the economy.

On Valentine’s Day 2020 Mrs Treacy and I went out for dinner with another couple. We talked about the news of a virus threat from China and how it could potentially cause ructions further afield. We told them we had stocked up on rice, meat, protein bars and batteries just in case. They thought we were crazy crackpots jumping at shadows.

It was hard to imagine then just how disruptive the decision to lockdown was going to be. A similar condition exists today. After a year of being confined to our immediate vicinity it is tempting to think this is how it will always be. The reality, however, is we are going to see a surge back to normalcy much quicker than most believe possible.

Humans are social animals and we yearn for social contact. We’ve been starved of that basic need for a year and we’ll overdose on it when we are able. That suggests we are looking at a boom in consumer activity over the coming couple of years.

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on January 8th. These reviews can be found via the search bar using the term “secular themes review”. 

Highlighting secular themes has been a hallmark of this service for as long as I have been a part of it. I first met David Fuller in Amsterdam in 2003. He was giving a talk to Bloomberg’s clients and we went out for dinner that evening. His way of looking at markets, with a focus on suspending ego to see what the market tapestry is telling us, answered all of the questions I had about how to interpret
markets. I felt honoured when he asked me to come work with him a few months later.

The easy way to find secular themes to is to look at long-term ranges. Prices can so sideways for a long time, sometimes decades, and the whole asset class can be forgotten by investors. These kinds of markets need a catalyst to reignite demand. Once that new theme gathers enough pace, prices break on the upside because the supply side is not capable to responding in a timely manner to the new phenomenon. Sometimes that’s because they don’t believe in the new trend, or it may be because they simply do not have the financial wherewithal to expand. As the power of the new catalyst gathers, it takes time for supply to respond and the market will proceed higher until there is a robust supply response. That can take a long time because demand continues to grow as the new theme increases its dominance of investor attention.

Stock-market sentiment has also been buoyed by the absence of new taxes on the wealthy and corporations in the budget. Traders expect the government’s growth push to boost corporate profits, which are already showing signs of a recovery. As the results season continues, 21 of the 29 NSE Nifty 50 firms that have reported earnings so far have beaten analyst estimates.

If the budget measures are executed properly, they have the potential to increase the share of corporate profits in GDP, and help bring about a new private investment cycle, recovery in domestic equity flows and earnings growth, analysts at Morgan Stanley wrote in a note.

The time to go big on fiscal spending is during a recession. It will mean the economy moves back into expansion mode quicker than might otherwise be case. Pushing out the ambition to contract the fiscal deficit by another few years was unavoidable and the stability of the Rupee suggests investors are reasonably comfortable with that idea.

Until the beginning of last year you often spoke on the theme of the early stages of a secular bull market. David had begun speaking about it as long as 4 years ago. But with the onset of the pandemic, you have been largely silent about it. Has it stalled or, in your view, already peaked?

Thank you for this important question. In October 2008, I remember sitting at my desk and looking at the calculation that the S&P500 was sitting on the widest overextension relative to the 200-day ever. Acceleration is always a trend ending and the crash signalled the beginning of the bottoming process. By the time Wall Street reached its nadir in March 2009 many instruments were well off their lows and by the end of the year the leaders were making new highs.

Gold, commodities, ASEAN and technology took off. Of these, technology is the only one which had uninterrupted staying power all the way through the bull market to date.  

I started writing Crowd Money in 2011. At the time a host of big international companies, with global franchises, that dominate their niches were breaking out of long-term ranges. It was a clear signal that a new secular bull market was underway. By the time the book was published in 2013, it was still a minority view that a new bull market was underway.

Homegrown auto major Tata Motors on Monday said it has entered into partnerships with leading private banks, including HDFC Bank, ICICI Bank and Yes Bank, to fund its commercial
vehicles.

The tie-ups aim to enhance value offerings for customers of both new as well as pre-owned vehicles throughout the customer lifecycle, Tata Motors said in a statement. The offerings arising out of these tie-ups will include ancillary financial provisions such as fuel financing, working capital financing, aggregate financing and service cost financing. It will enable customers to avail attractive
financial schemes from all the partner financiers with minimal formalities, it added.
 

India’s positive demographics and massive pharmaceuticals manufacturing capacity puts in a very positive position to come out of the pandemic in a strong position. The USA published its geopolitical template for East Asia last week. India is a big part of that. The Western world wants to build up India to counterbalance China’s dominance of the region. That suggests an easier path to development for India over the coming decade. 

Wish you, Mrs. Tracy and your lovely children a very Happy Christmas and a great holiday season.

I have always loved your optimism on India ever since we first met in Singapore nearly a decade back. Regretfully I was unable to share the same sentiment then and unable to do so now.

For instance, internet connectivity is poor even in Mumbai. At home I am at a handicap, while at office in the prime Nariman Point area we have three redundancies, and still lose out, though rarely.

The only way to enjoy your lovely "Eoin's World View of Markets" as I like to think of your daily videos, is to download them and then listen offline. In the absence of a download icon over the past two days, the streaming media loading every now and then has been highly irritating.

I sincerely hope you will be able to restore the download facility so that we in the internet challenged parts of the world can enjoy your uninterrupted services.

Wishing you and your family fun times in the meanwhile.

Thank you for this email and I’m sure the Collective would welcome additional perspectives from on the ground subscribers in India. I would be particularly interested, for example, in hearing how good your Jio 4G connectivity is? How does it perform when watching videos?

That would offer me some insight into how the service is being consumed internationally but it is also likely to be of particular interest to anyone invested in Netflix which has taken a big bet on penetrating the Indian market. Without reliable internet access the value proposition for streaming/ecommerce/online banking/social media companies is much less compelling.

It came to my attention last week that the Subscriber’s video was being re-posted by a competing subscription service. That forced me to limit all forms of sharing for the videos until the issue was cleared up. It is also why one of the videos was posted via YouTube before the Christmas break.

For the record, FullerTreacyMoney has been producing podcasts since that was even a word. I daresay we are the longest running financial markets podcast provider anywhere. I introduced the first videos four years ago and they continue to be among the most popular features of the service.

We do not have a marketing budget. Sales are driven entirely by word of mouth. There are more lucrative business models which other newsletter providers deploy. They create sales funnels, income maximisation plans and bombard subscribers with marketing material. David and I made the decision a long time ago to avoid that kind of sales strategy for better or worse. I want to continue in the same manner for as long as possible; putting the welfare of subscribers above that of the business. I don’t have an issue with sharing the occasional video or article with someone who might be a prospective subscriber, but I will cancel the subscription of anyone who abuses the service.

Generally speaking, an investor’s primary motivation for making a portfolio allocation to emerging market equities is the desire to tap into superior structural growth. However, equity market returns rarely correlate tightly to economic growth. There are many attractive secular growth companies in emerging markets—and they exist regardless of the economic growth conditions of their domestic economies. Investors wanting to tap into the powerful long-term benefits of superior structural growth trends can benefit from seeking out highly active strategies. In our experience, a strategy succeeds by continuously seeking out innovative companies with superior growth trajectories. A clear and consistent investment philosophy and repeatable investment process can help to ensure that a portfolio reflects bottom-up decisions that incorporate the superior growth available in EM equities.

The growth opportunity set is bigger than is generally thought. EM companies face challenges and problems different from those of their developed market counterparts, but their distinct circumstances often spur them to innovate and disrupt existing practices. EM companies are moving up the value chain, from export-oriented business models built on low-cost labor and cheap manufacturing to higher-value-added businesses based on technological and scientific innovation. Low recognition of these dynamics by investors and indexes creates an opportunity for growth-minded investors. Add to the mix companies that execute well to exploit a superior economic growth backdrop, and the opportunity set expands.

A link to the full report is posted in the Subscriber's Area.

China’s success in developing domestic champions has been truly impressive and they are now among the largest companies in the world by market cap and revenue. Success in expanding internationally has been limited in the technology sector to the Chinese diaspora because the global market tends to be much more competitive than the sheltered environment domestically.

A link to the full report is posted in the Subscriber's Area. 

On November 24th I posted a review of candidates I believe likely to prosper in the emerging post-pandemic market. It was well received by subscribers so I will post an update on my views on the first Friday of the month going forward. That way subscribers can have an expectation that long-term themes will be covered in a systematic manner and will have a point of reference to look back on.

Media hysteria about the 2nd or 3rd waves has not led to new highs in the number of deaths. The success of biotech companies in deploying vaccines means there is going to be a substantial recovery in the economic activity in 2021 and going forward.

The stay-at-home champions saw their sales growth surge in 2020. It will be impossible to sustain that growth rate in 2021. That’s particularly true for mega-caps. One-way bets on the sector are likely to work less well in the FAANGs going forward.

A link to the full report is posted in the Subscriber's Area. 

If reflation is the new buzzword for governments, resilience is what companies are focusing on. Many were caught flat-footed by the pandemic and they will now actively transition to greater diversity of suppliers, holding more inventory and nearshoring manufacturing capacity.

I hope life for you in California is more fun than it is here in England. But let's hope we really are past the low point as far as the virus is concerned. I had thought that would be true for economies too, but this latest move by President Trump (summarised in the article by Ambrose Evans Pritchard) does raise questions. With this move, which asset classes do you think will benefit and which will lose on a 3-6 month timescale?

Best wishes to you and family. 

Thanks for the well wishes and this article which may be of interest to the Collective. All is well with us since the streets were blessedly free of protestors following the election. I guess they got the result they wished for. Here is a section from the article:

He instructed Fed chairman Jerome Powell to return the unused portion of a $454bn (£342bn) account approved by Congress during the market meltdown in March. This seed money gave the Fed $4.5 trillion extra lending power under a policy of 10:1 leverage and had an electrifying effect on market confidence, helping avoid the errors made in 2008.

Krishna Guha from Evercore ISI said the Fed’s market stabilisation policy had been politicised. Congressman Bharat Ramamurti, a member of the House oversight committee on stimulus, called Mr Mnuchin’s move an unjustified and ideological decision by the treasury department.

The Fed retains its monetary policy powers and can purchase further US treasury bonds but that is a blunt tool at this juncture unless it is married to aggressive fiscal expansion, which the Republican Senate has vowed to block.

The Fed is concerned that more QE will chiefly inflate asset prices without doing much to help the real economy, exacerbating social inequality.

Congress stripped the Fed of its discretionary powers under Article 13 after the Lehman crisis. The Fed now needs permission from the treasury to go beyond its normal mandate. This was granted immediately during the panic in late March.

#1: A global synchronous recovery: We expect a broad-based recovery, both geographically and sectorally, to take hold from March/April onwards. Driving this synchronous recovery will be a more expansive reopening of economies worldwide and the extraordinary monetary and fiscal support now in place. Global GDP, already at pre-COVID-19 levels (based on seasonally adjusted GDP levels), continues to accelerate and is on track to resume its pre-COVID-19 trajectory by 2Q21. We expect China to return to its pre-COVID-19 path this quarter, and the US to reach it by 4Q21.

#2: EMs boarding the reflation train: After a prolonged period in which EMs have faced a series of cyclical challenges, macro stability is now in check. With the COVID-19 situation improving in a broad range of EMs, their pace of recovery is catching up. EM growth rebounds sharply in 2021, helped by a widening US current account deficit, low US real rates, a weaker dollar, China’s reflationary impulse, and EMs ex China's own accommodative domestic macro policies.

#3: Inflation regime change in the US: We see a very different inflation dynamic taking hold, especially in the US. The COVID-19 shock has accelerated the pace of restructuring, creating a significant divergence between the output and unemployment paths. With policymakers maintaining highly reflationary policies to get back to preCOVID-19 rates of unemployment quickly, wage pressures and inflation will pick up from 2H21. We expect underlying core PCE inflation to rise to 2%Y in 2H21 and to overshoot from 1H22, with the risk that it happens sooner.

A link to the full report is posted in the Subscriber's Area.

With millions of people out of work it is easy to form a gloomy picture of economic potential. However, even at a US unemployment rate of 10%, there are still 90% of people with jobs. Moreover, many people who have held onto their employment have boosted savings this year.

When 90% of people come through a crisis in OK shape and a significant minority come out ahead, there is ample scope for a significant bounce back in activity. There is a great deal of pent up demand in the global economy and all that cash on the side lines is fuel for bull markets. The fact monetary and fiscal policy is aimed to improving the outcomes for the remaining 10% suggests loss credit and low rates are here to stay.

Pfizer and BioNTech shares both dropped on Monday -- reversing a surge in response to positive test results last week -- after rival Moderna Inc. said its Covid vaccine was 94.5% effective in a preliminary analysis of a large clinical trial. Moderna also said its candidate has a much longer shelf life at refrigerator temperatures than the Pfizer-BioNTech jab, which would make it easier to store and ship globally.

BioNTech is working on the storage issues, and Sahin said he’s confident that some of the current requirements around cold storage will change in the course of next year.

The successes in the clinic come even as the pandemic looks increasingly bleak in Europe and North America. The U.S. surpassed 11 million coronavirus cases on Sunday, while in Germany, BioNTech’s home market, Chancellor Angela Merkel pushed for a tighter lockdown.

The best-case scenario is all of the primary vaccine candidates prove both safe and effective. That would open up manufacturing capacity of as much as 7 billion doses by the end of 2021. That suggests there is real scope for massive overcapacity and that vaccine production will return to a low margin business.

“It is extremely difficult to project growth 15 years out and, although we view growth of 5%-6% over 2021-2025 as likely, growth above 5% over 2026-2035 appears quite challenging,” Nomura Holdings Inc. economists, led by Ting Lu, wrote in a note.

To overcome some of those challenges, the Communist Party is promising to build the nation into a technological powerhouse and focus on quality growth over speed. Key to that objective is developing a robust domestic market and becoming self-reliant in technology -- especially in chips, the building blocks for innovations from artificial intelligence to fifth-generation networking and autonomous vehicles.

The greater the size of the economy, more difficult it is to grow quickly. That is why standards of governance are so important. If graft and political ideology gets in the way of innovation and the pass-through effect to a greater wealth effect the headwinds to growth only growth stronger. China has demonstrated repeatedly that subservience to the party comes ahead of every other factor. That was particularly clear this week with the smack down of ANT Financial’s IPO.

Popley Eternal, a jewellery megastore in a busy neighbourhood of India’s financial capital Mumbai that has traded for nearly 100 years, typically caters to the bustle of customers shopping for gold necklaces and earrings ahead of weddings and festivals. Items start at around Rs50,000 ($680).

But footfall has not recovered to pre-pandemic levels since the shop reopened in June after the country’s strict coronavirus lockdown was lifted. The three-month lockdown brought virtually all economic activity to a halt. Suraj Popley, the owner, says the company has cut its staff by around a quarter to 20, with sales so low that any item sold in the current environment is considered a “bonus”.

Indian consumers hurt by the economic fallout are opting instead to sell their family jewels or borrowing against the precious metal to make the most of high global prices. “People are coming to sell gold, in case they require cash, in case they require liquidity,” he says. “Very few people are coming to buy.”

The number of weddings that were delayed because of the coronavirus is likely to have been substantial and that represents a loss of significant source of demand for the global gold market. Rather than focus on the loss of consumer demand in the short-term, it probably suggests there will be a glut of marriages next year. After all, once people decide to marry, they are more likely than not to follow through, albeit with a delay.

“The PBOC is sending a signal that it will not tighten monetary policy quickly, but also it’s less likely to use broad easing measures such as a reserve ratio cut,” said Xia Le, chief economist at PingAn Digital Economic Research Center. “This will benefit government bonds in the short term. But in the longer run, the performance of the debt is more dependent on China’s economy and the U.S. election.”

The yield on 10-year government bonds dropped 4 basis points to 3.11% as of 4:15 p.m. in Shanghai. The yuan last traded at 6.7815.

The PBOC offered 600 billion yuan ($88.1 billion) of one-year funding with the medium-term lending facility, according to a statement. That will more than offset the 200 billion yuan in loans that come due on Thursday, implying a net injection of 400 billion yuan, the largest monthly addition since July 2018. It kept the interest rate on the funds unchanged at 2.95%.

Chinese lenders -- the main buyers of government debt -- are compelled to buy 1.13 trillion yuan of new debt this month and repay 1.7 trillion yuan of short-term interbank debt. Financial institutions are also hoarding funds for quarter-end regulatory checks. Adding to the liquidity strain is the authorities’ crackdown on high-yielding financial products, which has limited their ability to attract deposits.
 

Chinese stimulus has taken a slightly different path to that followed by the Fed or ECB but it is certainly present. China’s steel and aluminium production are hitting new highs and Chinese demand for copper is the primary factor behind recent strong pricing. The clear message here is that China is pulling on the traditional levers for growth which is spurring infrastructure and industrial development. They clearly intend to come out of the pandemic in a stronger position than before they went in.

In a detailed statement, the Army said on Tuesday that the Chinese troops were "attempting to close-in with one of our forward positions along the LAC and when dissuaded by own troops, PLA troops fired a few rounds in the air in an attempt to intimidate."

"It is the PLA that has been blatantly violating agreements and carrying out aggressive maneuvers, while engagement at the military, diplomatic and political level is in progress," the Indian Army said.

The Army's statement came after China claimed that Indian troops "illegally crossed" the LAC near Pangong Tso on Monday and accordingly Chinese troops were forced to take "countermeasures" to stabilise the situation.

It added that despite this provocation, the Indian troops exercised great restraint and behaved in a responsible manner.

"Indian Army is committed to maintaining peace and tranquility, however, it is also determined to protect national integrity and sovereignty at all costs," it further said and refuted the statement by the Western Theatre Command (one of the five commands of China's PLA) as an "attempt to mislead their domestic and international audience."

India recently outflanked China by taking control of strategic height near Pangong lake's southern bank. It thwarted an attempt by the Chinese army to transgress into Indian areas near the southern bank of Pangong Tso near Chushul in Ladakh.

India and China have been engaged in a standoff since April-May over the transgressions by the Chinese Army in multiple areas including the Finger area, Galwan Valley, Hot springs, and Kongrung Nala.

With the world focused on the chances of delivering a vaccine in the near term, it is worth remembering that the world keeps turning. For military planners the pandemic represents an opportunity to probe defences and the commitment of adversaries to continue with active resistance.

They are not alone. Other players in the “banking services via a messaging” space include Kotak Mahindra Bank in India (on WhatsApp) and ICICI in WhatsApp (India). However, neither of these can do actual provisioning of the card and addition to Apple Pay and Google Pay in the messengers, which is what Zelf can do.

With Zelf, users get an account and a virtual card via their Facebook Messenger, WhatsApp, Viber and Telegram accounts. For offline and online purchases Zelf supports Apple Pay and Google Pay. This lightweight onboarding means card issuance takes less than 30 seconds via a Passport or national ID. Users then get a virtual Mastercard debit card available in their favorite messenger app. Operating inside the EU’s “Single Euro Payments Area” means it’s pretty easy for the startup to scale its offering to other countries.

One of the biggest advantages emerging markets have is they are afforded the opportunity to skip whole stages of development. This is because technology is immediately available to them without having to develop it themselves. China has been able to progress meaningfully because of its adoption of technological knowhow and the introduction of India’s 4G network offers India the same opportunity to evolve the entertainment, communication, banking and ecommerce sectors.

Kōno said Japan would welcome an invitation to join the Five Eyes grouping.

He warned the growth of the Chinese economy has allowed China to purchase foreign tech companies, adding: “This is a development we must monitor closely. Tech-partnerships with countries like the UK will be critical to countering China, pooling our investments and encouraging our people to study the skill sets needed for our high-tech sectors to grow.”

He added China was attempting to become independent of the US dollar economy through fast money-sending services, the introduction of their own internet, launching a digital renminbi and introducing a Chinese international order.

Kōno in his remarks stressed he was not seeking a military conflict with China, and was instead hoping to provide the Chinese Communist party with the space to cut defence spending, allowing democratic nations to take parallel steps.

Urging caution about economic decoupling, Pascal Lamy, the former World Trade Organization director general, predicted a more autonomous and closed China was likely to prove more dangerous. But he warned: “The west cannot coexist in a free trade relationship with a country that subsidies 30% of its economy. If China is not willing to accept global disciplines on state aid then we have to review a number of trade commitments – whether it is on public procurement or in specific sectors.”

The coronavirus crisis has been an accelerant for just about every trend. That is particularly true of the Anglosphere’s awakening to the threat posed by China’s increasingly ambitious program of global domination. There is no getting around the fact that many countries are heavily reliant on Chinese suppliers for essential components and products to fuel their economies, and are also reliant on Chinese demand to absorb their exports. Therefore, the process of decoupling was never going to be a simple process but it is underway and is likely to persist.

India has auctioned 41 coal mines with 17 billion tons of geological coal reserves to enable private companies to commence commercial extraction. All of these mines are largely fully-explored, enabling them to come into production quickly. Four of the mines will be dedicating their coal for use by steel-making plants. The 41 mines represent both large and small mines with peak-rated capacities (PRC) of 0.5 to 40.0 million tons annually (mmt/y). These mines will provide a total PRC of 225 mmt/y when in operation. Given the sizes and locational challenges of some of the mines, we can expect to see more pictures of women hauling baskets of lump coal from the mine to shipment points. This is one way to help the nation’s employment situation.

The increased use of coal is designed to help India deal with its economic challenges, of which employment is one aspect. However, lowering, or at least keeping stable, the cost of energy is also crucial for political peace. The impact on India’s climate goals remains an open question. The long-term outlook for India’s energy mix suggests that fossil fuels will remain the dominant supplier. Even if coal, which accounted for 56% of India’s energy in 2017, were to fall below 50%, and all of that decline went to renewables, it would only triple its contribution – rising from 3% to 9%. Making further gains in reducing carbon emissions will become a huge challenge for government policymakers.

The China story has become more interesting, given that it has become the largest emitter of carbon dioxide and other pollutants, while still paying lip-service to its environmental commitments to the 2015 Paris Climate Accord. China still consumes more than half the world’s coal, and that seems likely to remain the condition for a while, despite the large push for renewable power.

China recently approved two new coal mines with a combined output of 3.6 mmt/y, at a cost of $566 million (4 billion yuan). Those two new mines will have nearly as much output as China’s current coal production, which in 2019 was 3.75 mmt/y. Behind approving the new mines is the government’s plan for shutting down small and outdated mines in favor of larger ones located in coal-rich provinces.

A link to the full report is posted in the Subscriber's Area.

Energy security is a major consideration for every consuming nation. Neither India not China have any hope of achieving energy independence any time soon. The virtue signalling China, in particular, engages in at climate conferences contrasts starkly with the reality on the ground. China is building more coal fired power stations all over the world than ever.

India’s phased loosening of restrictions will see malls, restaurants and places of worship reopening as of June 8 after the world’s toughest stay-at-home curbs to stem the Covid-19 pandemic muted economic growth.

“The gradual easing of the lockdown has boosted sentiment,” Ajit Mishra, vice president of research at Religare Broking Ltd., wrote in a note Monday. “The recent surge indicates markets are focusing more on the optimistic side and anticipating a favorable scenario.”

Still, Moody’s Investors Service on Monday reduced the country’s sovereign rating by a notch to the lowest investment grade, which may undermine India’s efforts to attract foreign capital into its debt market to fund a ballooning fiscal gap and avoid the first economic contraction in more than four decades.

With the RBI easing and stimulative measures from the government, the biggest uncertainty has been about the impact the coronavirus would have on the Indian economy. The lockdown is now easing and the country’s youthful demographics has helped it weather the storm better than many. That is helping investors look beyond the downgrade of sovereign debt. 

One of the most commonly asked questions by subscribers is how to find details of my open traders. In an effort to make it easier I will simply repost the latest summary daily until there is a change. I'll change the title to the date of publication of new details so you will know when the information was provided.

Xi’s China is thus not the inevitable culmination of prior Chinese history. When he was elevated to head of the Party in 2012, many Chinese elites hoped that he would deal with mounting corruption—which he did, in a highly authoritarian fashion—but also lay the ground for a more liberal China that would permit more freedom to talk, think, interact, and even criticize their government. They were bitterly disappointed when he moved in the opposite direction, placing priority above all not on the welfare of the nation as a whole, but on the survival of the Chinese Communist Party. Why he did this was the result of his personal quirks and history; another leader may have gone in a very different direction. There was no historical inevitability to the present outcome.

The dangers of a regime that seeks totalitarian control were laid bare in the early days of the COVID-19 crisis, when speaking honestly about the unfolding epidemic, as Dr. Li Wenliang did, was severely punished. For all we know, the flow of misinformation is continuing today. It is wrong to hold up the CCP’s totalitarian approach in dealing with the virus as a model to be emulated by other countries. Nearby South Korea and Taiwan, both healthy liberal democracies, achieved even better results in the pandemic without the draconian methods used by China. One of the great dangers today is that the world looks to Xi’s totalitarian model, rather than a broader East Asian model that combines strong state capacity with technocratic competence, as the winning formula in facing future crises.

How then should the United States and other Western democracies deal with Xi’s China? The starting point is to recognize that we are dealing with an aspiring totalitarian country like the mid-20th century Soviet Union, and not with some kind of generic “authoritarian capitalist” regime. There is no true private sector in China. Although there are quasi-property rights and ambitious entrepreneurs there, the state can reach into and control any one of its supposedly “private sector” firms like Tencent or Alibaba at any point. Although the Trump administration’s campaign against Huawei has been clumsy and in many respects self-defeating, the goal is essentially correct: It would be crazy for any liberal democracy to allow this firm to build its basic information infrastructure, given the way it can be controlled by the Chinese state.

That word, resiliency, just popped up again. The one lesson we have learned from the coronavirus is how fragile the global supply chain. The simple fact is we are wholly dependent on an increasing antagonistic country for essential products. That is something that is going to change in the coming few years as the theatres of great power competition expand significantly. 

Providing land with power, water and road access may help attract new investments to an economy that was slowing even before the virus hit, and is now staring at a rare contraction as a nationwide lockdown hit consumption.

The government has hand-picked 10 sectors -- electrical, pharmaceuticals, medical devices, electronics, heavy engineering, solar equipment, food processing, chemicals and textiles -- as focus areas for promoting manufacturing. It has asked embassies abroad to identify companies scouting for options. Invest India, the government’s investment agency, has received inquiries mainly from Japan, the U.S., South Korea and China, expressing interest in relocating to the Asia’s third-largest economy, the people said.

The four countries are among India’s top 12 trading partners, accounting for total bilateral trade of $179.27 billion. The foreign direct investments by the four nations between April 2000 and December 2019 stands at over $68 billion, government data shows.

Making unused land available in special economic zones, which already have robust infrastructure in place, is also being examined. A detailed scheme for attracting foreign investments is expected to be finalized by end of the month, the people said.

India has the most favourable demographics of any large population country in the world. May people speak English and it has a democratic imperative to deliver on improving standards of living. The missing link has always been the corrupt bureaucracy which stands in the way of infrastructure development and industrialisation. If that is finally starting to change companies will have the benefit of lower labour costs to lure them away from China.

Facebook's investment of $5.7 billion in India's top telecom operator Reliance Jio highlights a broader bet on India’s online growth beyond ads. Jio has more than 388 million subscribers with reach in content, payments and ecommerce, all of which Facebook can scale up via its 380 million WhatsApp, Facebook or Instagram users in India. Plans to integrate Jio’s small businesses to enable shopping on WhatsApp shows an acceleration in e-commerce.

THESIS: Facebook will be the hardest-hit internet company in 2020 from the virus fallout as a sharp ads decline and small and medium business exposure can take growth down to low-single digits, while surging usage hits profit harder. Yet we believe exiting this uncertainty with a higher user base and new habits means diversification into new businesses and a 2021 ad rebound will make its growth emerge the strongest among peers. More than 60% of Facebook's sales are in the U.S., the U.K., Germany, Japan, France and Italy. Small and medium business make up the majority of Facebook's 7 million advertisers. Earnings in 1Q will likely reset growth expectations, creating room for longer-term sales outperformance as Facebook pushes into diversifying its business post-virus.

Where are the largest tech companies going to find the next billion users? There are only three potential options. China, Africa and India. They have been cut out of China as it champions its domestic firms. Africa is a continent rather than a country, and on aggregate is further down on the per capita income scale. That leaves India with a massive young population, large number of English- speaking consumers, an independent judiciary, financial market norms familiar to westerners and a democracy intent on raising living standards.

One of the most commonly asked questions by subscribers is how to find details of my open traders. In an effort to make it easier I will simply repost the latest summary daily until there is a change. I'll change the title to the date of publication of new details so you will know when the information was provided.

Speaking in an interview with Bloomberg News in Mumbai just hours before finance ministers and central bank chiefs from the G-7 economies were scheduled to discuss policy options, Shaktikanta Das said “there is a strong reason for coordinated policy action.” For India, options include a rate cut and supporting the market through liquidity measures, he said.

 Inflation, which had kept the central bank from easing since December, is expected to moderate, he said in an interview at the RBI’s headquarters. He argued the bank’s flexible inflation-targeting framework allows the central bank to look through recent price pressures and loosen policy.

“We’re ready for a response should the situation warrant,” Das said in a meeting room decorated with framed portraits of his predecessors. “I think the G-7 countries are having a conference. And going forward, in the near future, I do expect some discussion through video conference or telephone conference among the central banks of the large economies, including India.”

The challenge the RBI faces is in how to lend assistance to the economy while tempering inflation and encouraging foreign investors to remain in the market. The low oil price should weigh on inflation but the coronavirus’ potential impact on India’s underdeveloped medical system is weighing on the currency.

The beleaguered Indian lender has been struggling to raise capital for the past few months, amid concerns about the quality of its assets and its exposure to the stressed shadow banking sector. Firms including JC Flowers & Co., Tilden Park Capital Management, Oak Hill Advisors and Silver Point Capital have submitted non-binding expressions of interest, Yes Bank said in a stock exchange filing in Mumbai on Feb. 12.

Shares of Yes Bank rose 0.4%. The bank’s 2023 dollar bond climbed about 1 cent to 84.5 cents, according to Bloomberg- compiled prices.

“A high pedigree long-term investor could make all the difference for the bank which is under investor scrutiny,” Kranthi Bathini, an analyst at WealthMills Securities. “The ball is in the regulator’s court now.” The Hindujas already hold a stake in IndusInd Bank Ltd., another Indian private lender.
 

Yes Bank is India’s fourth largest lender. The predicament it finds itself in is quite similar to the policy which led to Standard Charter’s decline a few years ago. In that case Standard Chartered made big loans to commodity producers and infrastructure developers on the assumption Chinese growth would accelerate indefinitely. When those loans turned bad it shaved near 80% off its share price.

For the non-bank financial sector as a whole to turn around, the government needs to put aside fiscal discipline for around two years and jump-start the economy, said Bajaj.

“We need the tailwind from the government to rebuild the sector.” Sanjiv Bajaj, MD, Bajaj Finserv
India’s non-bank lenders have been reeling since the latter half of 2018, when IL&FS Ltd. group companies defaulted on debt and triggered an industry-wide credit squeeze, raising borrowing costs for small lenders. The government and the RBI stepped in to support by assuring increased liquidity and a provision for a partial guarantee to help these firms sell loans.

Bajaj said midsize players which aren’t perceived as being “pristine” have had trouble raising funds, especially from banks. “The only answer is either economy to pick up or more equity to come in or the liquidity problem will become a solvency problem in their case.”

“If the government help doesn’t come, we’ll see some deterioration or stagnation,” said Bajaj.

The big question for India watchers in the aftermath of the IMF downgrading growth yesterday is how long it will take for measures taken in the third and fourth quarters of last year to transmit into economic growth.

“The PBOC is likely to continue to use interest rate and liquidity tools to loosen monetary conditions in 2020, though the easing will probably be less pronounced than last year,” David Qu, a China economist at Bloomberg Economics in Hong Kong, wrote in a note. “We expect the PBOC to stick to a stance of measured easing to counter the economic slowdown.”

For the year, consumer inflation for 2019 stood at 2.9%, in line with the government-set target of 3%, while producer prices declined 0.3%. Core inflation, which removes the more volatile food and energy prices, stabilized at 1.4% in December, signaling ongoing weakness in the broader economy.

China’s economy has shown signs of recovery in recent months as global demand steadies and trade tensions ease. As commodity prices rise and factories start restocking, PPI deflation is set to continue to moderate and some see it turning positive as soon as January.

The outlook for the Chinese economy represents the lynchpin for the global reflation trade and the prospects of steadying growth and continued stimulus are helping aid in the positivity surrounding the hiatus in the trade war.

A link to the full report is posted in the Subscriber's Area. 

The easiest prediction to make is that by 2030 ten years will have passed. The 600 million people under the age of 25 now living in India will be ten years older and hundreds of millions of them will be in their prime productive years. The only country that has had a demographic boom of that scale is China. India’s population is larger and its standards of governance defined by minority shareholder interests, an independent judiciary and free press are more attractive to a long-term investor.

Thank you for your wonderful service once again. My day starts every morning with listening in to your Video Commentary of the Day along with my tea. All other comments and blogs are seen much later after I reach office.

As I recall, from our first meeting in 2012 you have always had a strong positive view on governance in India. At a closer range the warts are more visible to us.

You may find a different viewpoint from your stance on the going-ons in India. This is an article published in the Times of India, the foremost newspaper in India and traditionally and currently pro- the current regime. You may find it interesting.

https://timesofindia.indiatimes.com/blogs/Swaminomics/how-bjp-is-fast-becoming-like-congress-in-graft/

Hope all is well at your end.

Thank you for your kind email and article on corruption in India. The issues of graft in Indian society did not evaporate with the election of Narendra Modi and might even be expected to increase because checks and balances are reduced when there is single party government.

On Wednesday, Indian authorities went into overdrive. The government decided to sell its entire stake in the country’s second-largest state refiner, and its biggest shipping company. It also approved a proposal to pare stakes below 51% in some companies and pushed for an introduction of a new industrial code bill. Meanwhile India’s central bank seized a troubled shadow lender to try and contain defaults from spreading in Asia’s third-largest economy.

“This is Modi’s renewed attempt to instill confidence in India’s economic potential,” said Priyanka Kishore, head of India and Southeast Asia Economics at Oxford Economics, Singapore.

She added it was imperative for the Modi government to announce these measures as it attempts to bridge a widening fiscal deficit following the dismal tax collections and cuts to corporate tax rates worth $20 billion. Earlier this month Moody’s Investors Service cut the country’s sovereign debt outlook to negative amid concerns over slowing growth and revenues.

Cutting corporate taxes, privatising non-essential industries, finally intervening to stop the slide in nonbank lenders setting up a strategy so the country’s potential to become a manufacturing hub is not squandered are all very positive for the medium-term future of India. In fact, one might think of them as necessary components if the country is to continue to progress economically.

“If they are able to raise this capital then it will sustain Yes Bank’s growth for next one year,” said Kranthi Bathini, director at Wealthmills Securities Pvt. “But we need to know the name of the investor, timing of the capital infusion and the Reserve Bank of India’s comfort with this proposal.” Gill said in an interview earlier this month that the share sale will happen “much sooner than the market expects.” The company has been in talks with private equity investors,
technology companies and family offices.

The liquidity crisis in India’s housing finance sector has resulted in many related shares trading down in excess of 80% from their peak values a couple of years ago.  Issues relating to overvaluation of luxury properties and corruption within the boards of companies has come to light over the last year which has been very deleterious to sentiment. The challenge the sector has had was in raising fresh capital to plug holes in balance sheets left by write-offs. 

Indian stocks rose for a second day on expectations that the government’s surprise $20 billion company tax cut will revive economic growth and boost company earnings. The S&P BSE Sensex jumped 2.8% to 39,909.03 at the 3:30 p.m. close in Mumbai, while the NSE Nifty 50 Index advanced 2.9%. Both gauges surged 5.3% on Friday, marking their biggest gain since May 2009, after the corporate tax rate was lowered to 22% from 30%.

Analysts increased earnings estimates for both measures by as much as 10% to factor in the lower tax burden. The government’s move follows a series of other measures unveiled over the past month aimed at boosting consumer demand and attracting investment.

Investors buy stocks rather than countries and a significant cut to corporate taxes is likely to provide the same boost to Indian shares as it did for US shares. The move brings India’s corporate tax rate into line with the Asian average rate and represents a clear fiscal stimulus for the wider economy.

Official data on Friday showed that gross domestic product in Asia’s No. 3 economy grew 5% in April-June from a year earlier, below the weakest estimate of 39 economists polled by Bloomberg and the slowest pace in six years. The five straight quarters of slowing growth mark the longest slump since 2012.
 
Under the hood, the numbers offer more cause for concern on whether output – once adjusted for inflation -- will increase fast enough to ensure borrowers cover their interest payments. A Bloomberg gauge of high-frequency indicators suggests that economic activity continued to weaken in July, with investment and consumption both falling. Economists at Nirmal Bang expect GDP growth to bottom out in the quarter ending September but believe that “a counter-cyclical government spending boost is required.”

The consolidation of the state-owned banking sector announced last week is a positive. India is a fast-growing economy with strong potential to become a future manufacturing powerhouse not least because factories are seeking a new home as they exit China.

“Just increasing the size of balance sheets and combining operations of banks will only reduce the number of state-owned lenders but asset quality stress is unlikely to be taken care of,” said Avinash Gorakshakar, head of research at Joindre Capital Services Ltd. in Mumbai. “The bigger issue still remains as how risk profiling would improve banks’ bad-loan ratio ahead.”

After returning to power with a stronger mandate, Modi has been grappling with an economy still hurting from the fallout of his cash ban in 2016 and the botched rollout of a nationwide sales tax. A bad-loan clean up in the banking sector has contained credit to companies and a crisis among shadow lenders is denying consumers loans to buy goods like cars and refrigerators. Meanwhile unemployment is at a 45-year high as companies refrain from new investments.

Data on Friday showed gross domestic product growth slowed for a fifth straight quarter to 5% in the three months ended June. That’s slower than the 5.7% expansion predicted in a Bloomberg survey. The rupee pared gains in the offshore market.

Crude oil’s weakness and the compression of India’s sovereign bond yields represent important tailwinds for the Indian economy which should help to stabilise growth not least because they should offer the RBI space to cut rates even further.

Samsung has since closed all but one of its smartphone plants in China. It now assembles around half of the handsets it sells worldwide in Vietnam. Samsung’s subsidiaries in the country, which employ around 100,000 people, accounted for nearly a third of the company’s $220 billion in sales last year.

A Samsung spokeswoman said about 90 percent of those sales involved goods shipped from Vietnam to other countries. That implies Samsung alone accounted for a quarter of Vietnam’s exports in 2018, although even that might not fully capture the company’s effect on the wider economy. Samsung’s success in Vietnam helped convince many of its South Korean suppliers that they needed to be here, too.

“When you are a big company and you move to a place, everything follows you,” said Filippo Bortoletti, the deputy manager in Hanoi at the business advisory firm Dezan Shira.

Some Vietnamese business owners say the blessings are mixed, though. Foreign giants, they say, come to Vietnam and work largely with vendors they already use elsewhere, leaving little room in their supply chains for local upstarts.

Samsung has 35 Vietnamese suppliers, the spokeswoman said. Apple declined to comment.

When Samsung first set up in the country, it bought some of the metal fixtures used on its assembly lines from a local firm, Vietnam Precision Mechanical Service & Trading, or VPMS. But then more of Samsung’s South Korean partners started coming into the country, and after a year, Samsung and VPMS stopped working together, said Nguyen Xuan Hoang, one of the Vietnamese company’s founders.

Price and quality were not the issue, Mr. Hoang said, over the hissing and clanging of machinery at his factory near Bac Ninh. The problem was scale: Samsung needed many more fixtures than VPMS could deliver.

The sheer scale of China’s manufacturing operations is not going to be easily repeated elsewhere. However, no one ever thought China would achieve the manufacturing might it now possesses either. The history of major manufacturing hubs is they evolve where labour, land, transportation and electricity are cheapest and where the tax and regulations are most lax.

Just as they emerge from the worst bad-loan problem in two decades, India’s banks are staring at another potential surge in soured debt as a result of their exposure to troubled non-bank finance companies. In its latest Financial Stability Report, the Reserve Bank of India warned that any failure among the largest of the NBFCs or housing finance firms could cause losses comparable to a major bank collapse.

The central bank selected the non-banks to monitor based on the size of their balance sheet, the scale of their operations, as well as governance practices and credit behavior, he said.

There have been some instances of governance lapses and “we are dealing with it,” Das said, without naming any company. “But there are a large number of others who have encountered business failures and certain external factors which impacted their business model.”

Das said lenders which haven’t been diligent in their lending practices “will have to pay” the price for it.

Property in India is more expensive than one would expect based on the size of the economy but not compared to the size of the population. Nevertheless, housing finance companies have gotten into a difficult position because the prices they paid for land are out of character with even the loftiest prices they are asking for the houses already built

The bank, which is currently in capital conservation mode, will be able to return to a focus on growth once the fundraising exercise is complete.

This growth, however, may be more modest than what was seen under the previous chief executive Rana Kapoor.

Yes Bank will be looking to grow its loan book at 20-25 percent for some time to come, bringing down its growth rate from the over 40 percent year-on-year growth seen until a few quarters ago.

Yes Bank is also in the process of adjusting its exposure to a few corporate groups, where the lender was in breach of the Reserve Bank of India’s large exposure framework, the person quoted above said.

The private sector bank will move from an asset-led growth strategy to a liabilities-led growth strategy as it aims at bringing in more retail and small business customers. It intends to do this by leveraging its 1,100 branches and mining customer data from its digital offerings such as the Unified Payments Interface (UPI). A liabilities-led growth could help the bank bring down its cost of funding by 100-150 basis points, the person quoted above said.

Yes Bank’s new CEO has stated they have already accounted for most of the bad loans on the balance sheet. With a central bank employee sitting on the board, if that information is factually inaccurate it represents a major problem for the credibility of the RBI. The earnings announcement tomorrow is going to help to at least answer that question.

Climate change activists have long argued that water will be the political flashpoint of the 21st century. Water-stressed India will likely be one of the first places to test that theory. The state of Tamil Nadu complains that it doesn’t receive its fair share of the waters of the Cauvery River; recently, the authority that nominally manages the river accused the government of neighboring Karnataka of holding onto water that it should have allowed to flow down to the Cauvery delta.

Things might get even testier up north, where more than a billion people depend upon rivers that rise in the Himalayas. Bangladesh and Pakistan feel that India is being stingy with river water.  Indian strategists constantly worry that China will divert water from the Himalayan rivers that rise in Tibet to feed the thirst cities in its own north.

The floods in Chennai are a warning. As the world warms, the rains on which India depends have become erratic: They frequently fail to arrive on time, and they fall in a more disparate and unpredictable pattern. The country can no longer afford to waste its dwindling resources.

A rapidly urbanizing and developing India needs to drought- proof its cities and rationalize its farming. Water-harvesting must be a priority, alongside mechanisms for groundwater replenishment. As it is, every summer is hotter and less bearable. If Indians run short of water as well, one of the world’s most populous nations could well become unlivable

India’s population is likely to exceed China’s sometime in the middle of the 2020s and peak around 1.6 billion sometime in the middle of the century. That’s a lot of people in a country that already seems crowded.

Generally speaking, water shortages are usually more about mismanagement of resources than an absolute lack of the precious commodity. There are exceptions of course but when rains fall every year the question is less about quantity and more about the quality of governance. In just the same way countries need clear national energy, commercial, military and political action plans, national water managements plans are also necessary for the long-term welfare of populations.

4. Is the crisis spreading?
Mortgage lender Dewan Housing Finance Corp Ltd. missed debt payments in June and Care Ratings Ltd. slashed its AAA credit rating to D this year. A news site alleged in January that the company diverted funds to shell companies, a claim Dewan Housing has denied. Other companies including Reliance Capital Ltd. and Piramal Capital & Housing Finance Ltd. have also had their credit ratings cut on liquidity concerns. Access to funding has gotten tougher for many non-bank financing lenders in credit markets, and they have a record 1.1 trillion rupees ($15.9 billion) of debt due in the third quarter of 2019.

5. Where is this heading?
The worst is probably still to come. Observers warn the credit crunch may hit the property sector next. It is heavily dependent on funds from shadow banks, and concerns are already being reflected in some realtor bonds. The nation’s conventional banks may also see more pain, as about 7% of their loans are extended to non-bank financing companies.

6. How are shadow lenders coping?
As access to funds in onshore debt markets has dwindled, shadow lenders are tapping overseas markets where they have to pay 25 to 50 basis points more than onshore rates to get cash.

7. What’s the economic impact?
India’s consumption engine is sputtering because the shadow-banking sector plays a key role in the nation’s financial system, particularly in delivering credit at the grassroots. A prolonged slowdown in lending from the sector poses a significant challenge to the Indian economy, where consumer spending growth has cooled on everything from toothpaste to air tickets. It expanded just 5.8% in the quarter ended March -- the slowest pace in five years and lagging behind China.

India’s shadow banks are experiencing a liquidity crisis which is throwing the wider market’s valuation premium into focus. We know how this process ends. First, a bad bank will need to be set up and filled with the nonperforming assets of the housing finance companies/shadow banks. If shadow banks are to be rationalised, the conventional banking sector will need to pick up the slack in terms of liquidity provision.  

There is some evidence of that happening, even with the previous, smaller tariffs. Since the third round of U.S. tariffs on China went into effect in late September, U.S. imports from China have faltered. An 8% growth rate in October turned to an 18% decline on the year in March. Yet import growth from Taiwan has risen from 12% to 21% over the same period. Imports from Vietnam grew 34% in March, up from a 15% rate in October. And imports from South Korea also surged in the first quarter: They were up 18% on the year, against just 9% in the fourth quarter of 2018.

Some of those shifts might represent manufacturers in China rerouting goods through neighboring countries. Chinese export growth to Southeast Asia and Taiwan accelerated in the first quarter of 2019, even as its overall export growth slowed. Regardless, the result is probably more expensive goods in the U.S. and lower employment in China, as Chinese companies shift elements of supply chains across borders or lose market share to pricier but tariff-free Asian competitors.

Many U.S. policy makers would argue that some pain for U.S. households is worthwhile if it achieves broader strategic goals. In the meantime, however, the big winners from the Sino-U.S. trade conflict are still across the Pacific.

In the cryptocurrency world, “trust” is the buzzword. It occurs to me it is also the primary asset which has been lost in the pursuit of the trade war. The USA and other countries were willing to tolerate China’s misdeeds for years until the populist revolution highlighted just how much damage had already been sustained by the middle classes. Now the unfair trade practices and theft China has engaged in are no longer being tolerated and normal trade practices are being demanded. China is not in a position to accept those terms and that is setting up the conditions for a protracted disagreement which is likely to ebb and flow for years.

The cloud over Yes Bank is the result of the Reserve Bank of India (RBI) announcing last Fall that the bank’s co-founder and former CEO, Rana Kapoor, had not provided adequate reserves for bad loans in 2017. The RBI asked Kapoor to step down and find a replacement, which is a fairly radical move.

When Gill took over this spring, he immediately took large write offs to clear the decks, but has since changed his tone and become much more optimistic (I am referring to his interview on 5/17/19 on CNBC India). He is adamant that there are no more skeletons in the closet.

I am inclined to take him at his word, since the RBI has been closely scrutinizing Yes Bank for the past 6 months and knows the full extent of any problems. Also, the RBI found no issues in its most recent review of Yes Bank’s reserves, released just after Gill took the helm (but before his first earnings announcement in which he wrote off everything). The RBI also just appointed a representative to the board, so Gill is being held accountable in real time.

Local investors remain nervous that there is more bad news coming in the next quarters, but I hold the view that the bank has adequate collateral for its important exposures (ADAG and Essel group), will get through this phase, and that perceptions will change – I think the shares will return to their historic valuation range in the next two to three years, providing excellent returns from the current price.

The capital raise in the next 6 weeks could also be a catalyst in this process. That could be when the bank announces a capital raise, possibly with the participation of a Private Equity firm or other marquee investor. Tier 1 capital is now 8.3%, and the bank needs the capital to continue to grow.

Long term shareholder returns from private sector banks in India have been excellent (HDFC Bank, Axis Bank, or Kotak Bank compare very well to the S&P 500 over 5, 10, or 15+ yrs. In USD). Yes Bank is trading at a severely distressed level compared to its historic valuation range, and I believe there is a strong possibility of making a 2x return in 3 years, and more over a 5-7 year time horizon.

I am set up to invest in India (which is no small feat, 4-6 months of paperwork)

The market capitalization in USD is $4.7bn, book value is $3.88bn, price/book is 1.21x. This is the lowest p/b ratio since the financial crisis (See chart below). In Aug 2013 the p/b ratio got down to 1.5x and recovered to 4.37x book by Jan of 2015. The mean p/b during the bank’s history appears to be around 2.7x, which is normal for private sector banks in India due to their continuing high growth and high ROE.

Here is a chart of Yes Bank’s p/b range since 2009. It is important to note that when the shares reached 1.5x book in 2013 they were INR 49/share, compared to today’s price of 137/share, owing to the bank’s very fast rate of growth in book value.

Veteran subscribers will be familiar with the fact that India is our favourite market for the long-term. The challenge for many investors has always been in how best to express that view since it is difficult to transact in Indian shares and the number of Global Depository Receipts is limited. That leaves funds which may or may not perform.

Allen Benello is fund manager, a long-time subscriber and dear friend who has gone through the 4-6-month process of being set up as a Foreign Portfolio Investor (FPI) by the Securities and Exchange Board of India (SEBI). He has offered to answer any questions subscribers might have about opening a brokerage account in India and can be reached at [email protected].

On our latest grassroots research trip to India, we visited three lower-tier cities — Ahmedabad, Pune, and Lucknow — to meet with middle-class consumers between the ages of 20 and 30. We also conducted an online survey of 1,200 millennials across the country. This paper outlines our observations and offers potential investment implications driven by a rapidly changing “Young India.”

High-level observations
• India is home to more millennials than any country in the world, with nearly 473 million people born between 1985 and 2000.1
• Digital democratization is driving lifestyle convergence between metro and lower-tier cities.
• Expanding internet access and a wave of national pride have begun to shift consumption trends.
• The desires to bridge tradition with modernity and gain independence without losing family ties have boosted markets for inventive products and aspirational experiences.

Trend: Digital democratization is reshaping consumption patterns Internet and mobile penetration in smaller cities like Pune and Lucknow are beginning to match that of large, metro cities like Delhi and Mumbai. Data prices in India have plummeted 95% to approximately 18 rupees (US$0.26) per Gigabyte (GB) since 2016 (Figure 1), contributing to an eightfold increase in usage with the average user consuming nine GB of data per month as of the end of 2018 (Figure 2).

 A link ro the full report is posted in the Subscriber's Area.

The evolving populist, followed by nationalist trends first root in India. There is increasing evidence that this two-fold pattern is evolving elsewhere. The success of populist candidates in a large number of countries and the increasingly nationalistic rebasing of political dialogue that has occurred subsequently suggests there is a clear trend underway in the global market which is supportive of regionalisation rather than globalisation.

As you say, the US has many alternative sources of cheap goods but there are limited sources of US technology. China also has no alternative buyers of its products. Round One of the international confrontation will be won by the US.

Buyers can always look elsewhere because there is always someone who is willing to provides services at a lower cost or who can manufacture a copycat item which is “good enough” Sellers have to focus on retaining that competitive edge but often have a hard time replacing lost customers, particularly when they are have already maxed out their growth.

Match, which is owned by billionaire Barry Diller’s IAC/InterActiveCorp, runs dozens of dating sites like Tinder, OKCupid, Plenty of Fish and Hinge. But the bulk of the company’s earnings gains were fueled by Tinder, which lured in more than 384,000 new subscribers in the quarter, boosting direct revenue 38 percent from the year earlier period.

The online dating app, where users swipe right to indicate interest in a potential date, now boasts 4.7 million global subscribers. Overall, Match’s average subscribers increased 16 percent with most of the new users flowing in from outside North America.

“The world is changing," said Mandy Ginsberg, chief executive officer of Match. “I’ve been here a long time and 100 percent of the revenue used to be in the U.S. and now the growth and more revenue is outside of the U.S."

With arranged marriages on the decline in India and the stigma towards online dating eroding in Japan, Ginsberg is concentrating on international expansion. There are more than 400 million single people living outside North America and Europe, two-thirds of whom have not yet tried a dating product, according to Match. Ginsberg recently revamped the company’s leadership team in Asia -- appointing general managers in Tokyo, Seoul and Delhi -- to try and grow Match’s footprint across the continent.

Economic growth in India and the subtle shift towards female empowerment represent major growth opportunities for social media and online dating companies. Narendra Modi’s election five years ago as the first low caste Prime Minister represented a signal that social striation enshrined by the caste system and sustained by the system of arranged marriages may be changing. A more open society would represent a significant change for India which has historically been socially conservative.

Narayana has made Shetty one of India’s best-known doctors and the proprietor of a lucrative business, with about $8 million in profit in 2017. But he now faces a problem that might be even more complex than heart surgery: how to make his hospitals cheaper still. The reason is Modicare, the national health insurance program that’s one of Prime Minister Narendra Modi’s signature initiatives. Under way since September, it’s perhaps the most ambitious public-health effort in history, intended to give basic coverage for the first time to 500 million of India’s poorest. At first it seemed no one was in a better position to gain from this flood of new patients than Shetty. But his enthusiasm gave way to anxiety last year after the government published its list of reimbursement rates, which are lower even than Narayana’s prices. Those rock-bottom payments mean that to thrive under Modicare, Narayana needs to find ways to cut costs further—and then keep cutting.

Shetty thinks he can do it and, in the process, create a model for ultralow-cost health care that can be applied anywhere. “We are trying to produce a pilot for the rest of the world to follow,” he said over a lunch of curries and fried fish after scrubbing out from the heart operation. He was still
wearing his surgical cap. “In 10 years, India will become the first country in the world to dissociate health from affluence. India will prove that the wealth of the nation has nothing to do with the quality of health care its citizens can enjoy.” It’s a noble vision, and Narayana is as well-positioned as any provider to help make it a reality. But it’s hard to overstate the scale of the challenge Shetty faces. For a surgery like the one he’d just performed, Modicare would provide only $1,300.

These kinds of good news stories were a rarity five years ago but there is no doubt momentum is building around the narrative that India is capable of fixing its most intransigent problems. That’s a complete about face from the perception before the Modi era when the only story people were talking about was the raping of women in the street and the dire conditions for athletes at the Commonwealth Games.

Sustained increase in manufacturing will depend on, among other factors, the continuation of a favourable incentive regime into the next government, the official said. Mails sent to Foxconn and Apple seeking comment remained unanswered.

The company began its India manufacturing journey through another Taiwanese company Wistron, which had started with the iPhone SE from its factory near Bengaluru two years ago and later advanced to iPhone 6S model. Wistron now makes iPhone 7, a sign analysts foresee as a bump-up in local manufacture of multinational technology companies keen on the Indian market. Around 290 million smartphones were assembled in India in 2018 up from 58 million in 2014, according to data from the Indian Cellular and Electronics Association.

"In the short-term, the Differential Duty and the Phased Manufacturing Programme worked as far as import substitution is concerned. Now the challenge is to move from 290 million to 500 million phones and then to one billion by 2025," Pankaj Mohindroo, National president for ICEA, said.

"The National Policy on Electronics, 2019, gives a broad framework, but we will have to put a robust action plan behind it, which will enable exports..."

The ICEA has as its members brands such as Apple, Xiaomi, Vivo, Oppo, and manufacturers such as Flex and Foxconn.

India has the twin advantages of a massive young population and low costs. If we think about how manufacturing generally evolves, it is usually attracted by the presence of a low cost base and regulatory change which incentivises growth. Infrastructure usually comes later but it does need to be built. That is potentially where India is today. It is successfully attracting manufacturers but will need to do what is necessary to ensure they stay.

One in five of the world’s consumers will live in Africa by the end of the next decade, and more and more of these people will fall under the category of affluent or middle-class. Growing discretionary incomes will lead to higher demand for high-quality, niche, and foreign-produced goods. Urbanization, such as in Nigeria where eight cities already host populations over 1 million people, promises to increase competition for formal retail centers and the development of efficient production and distribution chains. Rebounding oil prices in Algeria, Angola, Nigeria, and Egypt may contribute to an increased market share for luxury goods. Though, ultra-high net worth individuals(whose net assets exceed $30 million) reside throughout the continent—in South Africa, Egypt, Nigeria, Kenya, Tanzania, Ethiopia, and Morocco. Growth in GDP per capita will lead to greater purchasing power among these classes of the population, and luxury goods retailers should look to the continent for entry points.

Fast moving consumer goods companies need to be where the people are. The countries with the most favourable demographics in the world today are all either in Africa or Asia with India, Indonesia, Nigeria and Ethiopia notable for their high populations. The global birth rate has already peaked which means companies have at best the next thirty years to capitalise on the demographic dividend before the global population starts to contract.