Talking Points This Week: The Mega (...And Meta) Reversal

In ‘Talking Points This Week’, Niraj Shah studies how top business leaders and market makers are navigating the pandemic-altered financial landscape.

The big talking point in global equity markets this week was what happened in the American technology space, with earnings beats and disappointments leading to stomach-churning volatility. In India, the union budget turned out to be a non-event for equities and a tough pill for bond markets. The budget did put crypto back in India with the government laying out a tax methodology even as Bitcoin prices recovered 14% from recent lows. Staying with crypto, noted economist Paul Krugman wrote that he’s 'seeing uncomfortable parallels' between the crypto market and the U.S. subprime crash, which brought the whole housing market to its knees and had triggered the 2008 global financial crisis. Not to forget the geopolitics and oil, but let's start with the biggest newsmaker, which is the volatility in Big Tech.

Reversal Of The 'Safety' Tag?

A Bloomberg report offered a revealing statistic: "Since March 23, 2020, the depths of the pandemic-induced market meltdown, five tech stocks — Microsoft, Alphabet, Apple, Amazon, and Meta — collectively have accounted for 27% of the S&P 500’s gain," and 36% of the gain on a five-year basis. That one-way rally is now being met with extreme volatility. In Thursday's after-market trade, Amazon was up 14%, Snap was up 60% and Pininterest was up 21%, on strong earnings. This was after the very same session where Meta recorded the biggest loss of market in a single day in U.S. stock market history, with a 26% fall after a dismal earnings showing. Mark Zuckerberg’s net worth plunged around $30 billion after the meta, errr... mega shock. While the Meta slump played its part in the corrective move at the U.S. markets on Thursday, the week was punctuated by strong earnings in other stocks like Alphabet and Amazon.

Hence, the talk of rising rates, mixed earnings, and heightened volatility is leading to the Nasdaq having extreme swings on a given day for some time now. While its impact on Indian digital platform stocks is difficult to quantify, Sanjay Mookim of JPMorgan has an interesting take. He believes that the Indian platform companies made their way to the public markets a bit too early. Going public when the per capita income in India is substantially higher than right now would have meant a shorter runway to positive cash flow and EBIDTA for investors in these companies. Can Indian companies surprise Sanjay and the others? Time will tell.

Crude Not Reversing At All

Crude oil has risen aggressively in recent weeks amid geopolitical newsflow, supply and demand imbalances, and distribution ebbs and flows. Since its December low, WTI is up about 41.7%, while Brent has jumped roughly 39%. The belief is that instead of the overextended rally cooling off, the prospects of rising geopolitical tensions in Eastern Europe may only exacerbate the situation and lead to a further uptick. If 2020 brought about negative oil prices, last week brought about the scenario for the six-month market structure for Brent being pushed into steep backwardation of $6.92 a barrel, the widest since 2013. Backwardation exists when contracts for near-term delivery of oil are priced higher than those for later months, encouraging traders to release oil from storage to sell it promptly. If investors needed one more reason to sell India, crude might provide them to do so.

Margin Gains Hit Speed Bump

There has been a wide divergence between sectors affected by rising input costs like chemicals, metals, auto, and industrials versus those not quite impacted by rising prices like technology or BFSI. One can argue that technology has rising input costs in terms of human resource costs, but we've discussed that in a prior piece. Entire sectors have been impacted across the spectrum in the product chain, from the leader of the pack to the lowest rung company. From a Gillette to a Vinati Organics, from Adani Ports to Blue Star, margin contraction has been the story of this quarter. It has been severe in some of the pockets where the commodity cost inflation has been more severe like steel. Most top-tier IT companies reported strong topline growth and a robust deal pipeline driving strong sales growth, but margin recovery was staggered, if not elusive. Input costs moving up hit chemical companies hard, with most first not able to confidently predict the road ahead. Rising prices and grammage reductions have impacted volumes in consumer staples while rising raw material prices hit gross margin. Autos were the standout pack, as a Motilal Oswal report noted, after witnessing continuous pressure for the last four-to-five quarters. However, for tyre manufacturers, higher cost inflation and a weaker mix led to a continued contraction in gross margin.

For the entire universe of Nifty 500, if indeed the crude oil, natural gas, and prices of some other commodities stay volatile, will we see an end to the positive margin surprise that India Inc. delivered in the Covid-impacted times due to cost control? Q4FY22 will be a litmus test.

Turn Away From Consumer-Focused Budgets

Finally, a word on the union budget. The one common talking point on the evening of Feb. 1 was whether the Finance Minister, in her quest for reviving growth, missed a trick by not boosting near-term consumption and direct intervention for the most-impacted spaces, and further support for SMEs. For long, consumption triggers, especially ahead of a busy state election season, used to be a norm. The chorus of support needed for the SME space was very loud. When asked about this, Ridham Desai of Morgan Stanley has a different take. He says, "instead of a waterfall strategy, this government has chosen a barbell strategy, which is, a barbell means that you have equal bags, you are trying to protect the retail risk of blowing up and at the same time you are trying to revive growth. So, I think during the pandemic, the effort was to prevent a blowup because if firm after firm blew up, then it would put so much pressure on the banking system, will never walk out of it. Now, I don't think that type of support is required."

India's MSMEs would be crossing their fingers that Desai is proven right.

Niraj Shah is Markets Editor at BloombergQuint.