CNBC anchor Tanvir Gill on World Markets post-Covid
Everything was going pretty well for the markets up until March, you are talking about how things might peak in the US economy, the US economy through 2019 has seen a growth around 2-2.5 to 3 percent. Trump era policy is working and he is pretty much beating his own trumpet saying how much the economy has doubled in terms of jobs, employment in the US. And then the pandemic changed it all. The big risk factor in the 2019 was trade tensions, geo-political bi-lateral tensions in US and China and that sort of receded in the background because come 2020 everything changed. The Pandemic struck, China was first in and first out of the pandemic. They were the ones who went down in that lockdown mode in February 2020. Everyone was trying to wrap their heads around the virus, what is it and should it be something localised which turned into pandemic. I think at that time there was a lot of thinking when the virus was spreading around the world. there was a fair amount of scare and the fear factor was high in March and April 2020. Once of course we saw cases spread across not only in Asia but in Europe and US, things went out of the hand.
The moment the markets realised how bad it could get, you saw that crash in March 2020 world markets and that is when the FED, I guess many believe in hindsight was right thing to do, stepped in to support the markets with bond buying, injecting more and more stimulus, support banking system and credit lines so, that the economy would continue to function. That was in fact a very bold, brave step at a time like this to contain the problem otherwise we would have faced a health crisis and a financial problem.
Then you also had a crisis in the oil markets which was in May of last year when complete demand destruction because India was in shut down, China was just recovering, it had eased its restriction April 2020 onwards. So, it was coming out of the lockdown but the 2 major oil consumers of the world were still not certain and the demand destruction really sent prices down. From there, the recovery started because a lot of lockdown measures started easing A big theme of 2020 was how markets were trending at record highs, bouncing back strongly from the crisis while the economy was still continuing to labour at lower levels. That was explained by economists and market experts as markets being futuristic. So, markets were essentially pricing in the recovery that we see now that we have been seeing in the last 3-4 quarters and that was already priced then.
The other noteworthy change was that the shift to work-from-home and online functioning boosted tech stocks, banks, semi-conductor businesses, and the whole segment known as the growth segment of the market picked up whereas the value segment sort-of under-performed. So, that was pretty stark trend. Come 2021 everybody thought that with the click of a switch everything will turn around and the pandemic will ease, but that was not the case. Start of the year we saw case counts going up in US and UK. Thankfully, by the end of last year, as there was a change of power from President Trump to President Joe Biden, we saw vaccines come online and I think that has been the sole saving grace to sustain the economy. So, the first quarter was largely that story.
It is just sad that we had to go through what we had to go through in India because of the second wave and because of the ultra-variant which first moved from the UK in February. That kind of works on the India growth story as well, which was looking so good in 2020, last festive season was strong as we see on record. And now we are in a situation where we are dealing with these vaccinations that have stepped up, so, you are looking at uncoordinated response with economic activities. You see the US and Europe, UK, stepping up on vaccination waves significantly,while a lot of the other countries are still struggling. For India, I think Covaxin has pretty much delivered on expected lines and it is looking good. I think it is going to change for India. From whatever I have heard from the analysts say, the most severe impact on the economy will be in the first quarter of the financial year of India and then things will start looking up. Fingers crossed.
To sum up, where we stand right now is really a balance between taking vaccinations and containing virus flare-ups. We have to live with the virus, that is the reality, it has dawned upon us in last 18 months. This virus is not going away and soyou make the most of the realityby easing restrictions, maintaining social distancing, so, that the containment measures don’troll out. That is where we stand as of now, going into the future, one big concern is inflation and inflation is part of our lives. So, far we haven’t seen the big burst in activity as far as consumer prices are concerned, we are seeing in terms of producer prices. It is coming in from China, from commodity prices and so, that is going to be a big theme that we have to work with for in the next six months.
That just then ties with the Feds outlook on when the rates need to go up because this is not just about economy reviving but also about containing inflation as the economy comes back and just to ensure that the things don’t get over-heated because that is the big debate right now. Is the US,the economy is headed towards getting over-heated and if it is then you need to be ready to step in and look at the increasing rates?
So, that largely sums up where we stand today and where we have to go from here. Besides commodity prices, we are also looking at the oil prices that are more than doubled. Many of you may be tracking the story in the Middle East that alliancesare at loggerheads because UAE and Saudi Arabia are not able to draw consensus on how they should manage supplies as demand revives. India’s influence in the world market has been rising because China in other key-consuming markets has been able to diversify, by stepping up on their own supplies and building stronger ties with Russia in terms of gas supplies and oil supplies. India not so much, they were looking at a strong connection with US on oil supplies before pandemic. But it is still on the surface.
What is happening with the technology space? Regulation is playing an important role in technology. What we see in China and US, whether the best part of the game is behind us when it comes to tech? Or, whether we can still see some more returns from this sector. I think the shift is also happening towards rate sensitive and rate beneficiary so, the banks are doing really well. Markets in India have surprised us as well. That’s it.
Will the India stock market go up when the pandemic is over or will it correct? In China, the economy has become very strong because prices in China are high, any thoughts on that?
China was on full stream last year with first in and first out. 2020 was the year when China grew. Now, the economy is stabilisedand China is trying to ensure that the debt market doesn’t go out of hand. They have raised interest rates to bring some pressure on the capital, sothere is no free billing credit outflow. So, in China what we see now is more normalisation, it seems it is slowing but it is actually normalisation. The future for China is stepping up on new technology, building self-reliance when it comes to technology. I think they are innovating and investing a lot in that sphere. Fully focused on innovation and also in the semi-conductor business, investing and building their own chip technology and so, it is a chip race so to speak. They don’t want to be dependent on US or Taiwan. But it is normalisation, not as much as slowdown.
In India, the markets are doing very well. World markets, Europe are doing well. I think it is a recovery theme and also the support that has come from central banks world over, RBI, credit lines have been open from physical standpoint as well as with what madam Finance Minister did just a few days ago. So, I think the recovery will be strong. It is W, first V was played last year and after the 2nd wave the next V will play out which will help the economy. Good news in the economy is bad news for the market, bad news for the economy is good news for the market.
One trend that you haven’t talking about is the robin hood phenomena. Thanks to folks like us dwindling our thumbs at home and participating directly, I can talk of India, the explosion of d-mat accounts and especially those who jumped on after March 2020, who only need to show up and make money everyday, till the plug hits the streets. So, I don’t know about the ASEAN countries but it is equally true for the parts of the US. So, how much of that?
Since we are talking about market speculation, how can we keep crypto away. A lot of people think cryptos are also speculative and there is a frenzy across the globe because of the growing crypto evangelism. There is a strong and fundamental case for currency. I think as far as small caps and mid-capsare concerned, I can give you a perspective from a global standard point more than on India.
You are looking at those segments of the market who are also picking up. Now, for good reason or not, a lot of governments have extended financing alliances to the bottom-end of the pyramid and that money is just transmitting itself to help small business survive. That really was the sole aim when the pandemic hit in March last year. You have the small business support the economy, the bottom of the pyramid, if that gives in then the whole pyramid falls. So, I am seeing activity there. Now the important trend that I am seeing is how government is stepping up on infrastructure spending and bridging the economic divide and income equality issue and all that is focussed around looking at small caps and mid-cap businesses and how they benefit from those policies and measures. While the first wave was about the quality companies and the big companies, as the transmission happens and money trickles down the system, in the second wave I think they would look at small caps, globally at least.
Regarding the trends on crypto, what do you see worldwide, whether it has been accepted as an asset class or as a commodity or as an investment, what do you see in the trends?
When you look at big funds and big institutional investors, they have started taking minor position in bitcoins, it is like a token investment it is not a big investment. So, that tells you that the conviction is not very strong. Yes, institutional interest has come in the market, yes there is more depth in the market because there is a broader range of participants but that hasn’t dropped down the price.
So, all those saying that 2021 is a better year for crypto currency than 2018, if you just highlight the kind of price movements, it is an on-going debate. We are not able to answer that clearly but I think a lot of people will see bitcoin as a gold proxy, as an investment proxy. For big funds, it is just a token position, nobody is making a conclusive or strong place on bitcoin. Yes, you have articles saying ‘50 years hence bitcoins will be the currency of the world…’ but where will we be in 50 years? It is still in-conclusive. I will say this, what El Salvador has done, introducing crypto as legal tender, is telling of a trend that can build for bitcoin within emerging markets. Countries like Zimbabwe, suffering from hyper inflation and they do not have a strong monetary system, can they adopt crypto currencies as a parallel institution? Some of the weaker, developing nations can do that. When? We need to see that. Right now, we are seeing prices coming off and also what is off-putting for investors is this whole carbon footprint, energy consumption, bitcoin mining, how can that be shifted and made eco-friendly? Till that happens the big guys will lie low and take up low investment.
With US projecting a 6.4% GDP growth this year on a 19 trillion-dollar economy, do you see that continuing in 2022?
For US, we are looking at 7-7.5 % and for next year we would be 4- 4.5% depending upon whose reports you are reading.
What is driving that kind of growth? Because it kind of impacts everything around the world.
Well, the fact is a lot of pandemic-hit sectors – tourism, travels, and multiplexeswere down to nothing last year. So, we saw a bounce back as the way settled in March and it is like a revenge demand. So, you will see that burst of activity. The second V, so to speak. Is it sustainable enough? I am not sure. 2023 onward growth will normalise to 2-3 % in US. The aim of the government is to make it more equitable because in the pandemic, the rich have become richer and poor poorer. So, the government is trying to bridge that gap.
Is the US still free of oil imports?
Yes, they are, mostly. They are now putting away nearly 20% of the world’s oil production. Because of what is happening in the oil markets, they have a commanding position, they have seen self-reliance, they produce oil and they consume oil. So, it is very well-balanced for the US. In fact, they are now looking at exporting excess oil from sheer technology. They are looking at India as a friend in terms of forging ahead and strengthening energy partnership with India. The share industry went through a very horrible phase last year, there was a concern about how lot of share businesses would tumble and would go bankrupt. Thankfully that didn’t happen, we avoided a catastrophe. There has been a lot of consolidation in the sector, now the big oil companies like Shell are quite positive.
How long can you sustain negative rate of interest?
It is hard. We have stayed in a lower rate of interest environment for a very long period of time. Just when people were thinking that the rates are going to start to go up, at the US, rates dipped further negative entries. For India as well there was no option at that stage to bring down rates, which has impacted the depositors. Will it change? It is hard to say now. As of now a lot of emerging markets like India take their cues on rate cycle from the US. India inflation is not that much of an issue as of now, so, I think the RBI is still biding time, seeing how long can they continue with lower rates before they start hiking once again but I think the cues for that will come from the FED. The FED has signalled that not before 2022 end are they thinking of rate increase. So, unless the cost of capital goes up in the US, I don’t know whether in countries like India we will see the cost of capital going up. However, I would say that some countries like Russia, Turkey, Brazil have been increasing their rates.
Due to the pandemic the service sector has been hit badly, how can it recover? Which sector can be profited the most?
Most people are saying that banks are doing well, financial sector. But in specific we are also looking at some of the battle-scarredsectors to come back, so restaurants, travels, tourisms, hospitality, those sectors can also be served very closely. From an evaluation perspective, it has been hit so badly, it seems they are on their way back. On to services, it is a mixed picture, it is case specific. We thought the US service sector came back quite strongly but just yesterday we got data where it says that consumer spending is a bit patchy. The fear factor has gone up, so, people want to hold on their money. May be this fear psychosis will not let them spend immediately until they know that their job is stable, income is stable, saving is stable. So, it might be a little patchy on the services side.
People say that there might be a correction coming soon.
Valuations are looking stretched so, the markets might seem to be ripe. If you look at the period chart, 2013 to now, the fall that we saw seems like just an adjustment. So, in a long trending market, even if we do see a correction in coming times, that would just mean short term.