The Week’s Talking Points: The Many Gears Of This Business Cycle
In ‘The Week’s Talking Points’, Niraj Shah studies how top business leaders and market makers are navigating the pandemic-altered financial landscape.
A Very Different Recovery
Would the post-Covid crisis period be different than what we saw after the global financial crisis, because of the global capex we’ve seen recently? Bloomberg Economics suggests that with inflation jitters rising, central bank taper looming, and supply chain chaos continuing, the capex surge offers a rare ray of hope for the global economy into 2022 and beyond. It’s also a very different dynamic from the 2008 crisis when austerity and weak investment dragged on employment and wages for years to come.
As one Bloomberg story said, “On the supply side, blockages brought on by the Covid-19 pandemic are forcing businesses to invest in new production facilities; calls for a cleaner environment are spurring spending on electric vehicles, batteries and alternative energy; and the big semiconductor crunch has prompted a wave of investment”.
Talking Point took this conversation forward with Nilesh Shah of Kotak AMC. Shah believes government spends, both local and global, will spur an opportunistic business cycle for companies catering to the capex boom. An interesting anecdote from Shah was that of a small auto ancillary company that had recently come out with an IPO and was approached by a foreign buyer from the United States to get bicycle components. While the company initially conveyed that it was not a bicycle-part maker but automobile component maker, the buyer still wanted to use Indian company’s manufacturing prowess since it had expertise in mobility component manufacturing. According to Shah, such instances were not witnessed earlier and could be a feature of the future.
Will Capital Switch Lanes?
While business opportunities may flow from China to the other countries in the Asia Pacific region, what about fund flows? Would investors follow the business diversification? Ayaz Motiwala of Nivalis Partners believes that the Greater China allocation (including Taiwan) as per agencies such as MSCI is high and there is no going away from there. As of August 2020, the overall weight of China and China A-shares in the MSCI EM Index rose to about 41% and 5.1%, respectively. Thus, there is already a large amount of money put to work in China. India and some other locations are starting to emerge as large viable alternatives in the post-Covid post-clampdown scenario. Ayaz believes that when asset managers meet for allocations next year, the size of the opportunity and the economy that India is, there will be a hard look that investment committees will be forced to make, arguably in favour of higher allocations to India.
An interesting chart on the Bloomberg Terminal shows how August was already an example of FIIs favoruring India, with flows rapidly returning post the scare of the aftermath of the second wave.
More Talktime For Vodafone Idea?
In terms of reforms, banking and telecom were the talking points this week. While Ira will probably talk about the banking side in Thinkpad, here is what is interesting in telecom. The government seems to have done enough to make Vodafone Idea survive for now. The question is, can it become great again? Can it put up a fight to the Big Two, or is that still a leap too far, never mind the measures announced earlier this week.
Sanjay Kapoor, ex-CEO of Airtel believes the postpaid base of VI will now be able to stay on. He believes that there might even be possibilities that VI will remain a tiny, but profitable franchise. And while Kapoor admits that the endgame of Jio is unknown due to the lower tariff game it continues to play, he does believe that the other two players will raise tariffs even if Jio maintains low tariffs.
The chatter around higher freight rates and container costs continues. And it dominated a chat with Relaxo’s Ramesh Kumar Dua. Relaxo is a large footwear brand, constituting, as per various estimates, around 15-18% of the organised footwear market in India. Dua believes that both a supply crunch, as well as undue profiteering, have resulted in higher freight costs and thereby higher raw material costs for all things imported. Dua cited the example of a polymer called ethylene-vinyl acetate or EVA, which Relaxo imports.
EVA, which was at Rs 125 per kilogram landed cost last year, is now available in the market at Rs 300/kg. The government has put some quality control orders on EVA and that has put some doubts in the minds of the suppliers. And in India, suppliers are profiteering from the shortage of EVA. And on the container front, “sometimes the shortage is so acute that we have to arrange for containers for our suppliers,” says Dua.
He sees margin pressures continuing for a larger player like Relaxo, and thereby maybe even for the smaller players.
Niraj Shah is Markets Editor at BloombergQuint.