Thinkpad: Don’t Rush
Districts representing nearly 50% of GDP are set to open up. What’s your favourite unlock theme?
If you have spent at least some part of your lockdown time scrolling through Instagram, then you are familiar with the ‘Don’t Rush’ challenge. If you aren’t, you really need to get with it! Not because the made-for-Instagram challenge holds any great life lessons but mostly because you will feel hopelessly outdated otherwise.
We digress. The reason ‘Don’t Rush’ came to mind is because we’re opening up and while everyone is eager to get out and about, it may be advisable to, well, not rush. Keep those masks on, folks.
An analysis by JPMorgan gave us an indication of how quick the unlock is going to be.
- About 60% of India’s districts currently have a positivity rate below 5% and are likely to re-open rapidly. In contrast, about 25% of districts have a positivity rate above 10% and could take longer to unlock.
- In GDP-weighted terms, currently, about 50% of GDP is in districts with positivity rates less than 5% while about 32% of GDP is in districts with a positivity rate above 10%.
This suggests that a large part of the economy is ready to open up. That’s the good news.
The stock market folks will say they have known this for some time now. They are always ahead of the curve. So what if lesser mortals are not entirely sure where that curve is headed sometimes.
BloombergQuint’s markets editor Niraj Shah has been discussing the ‘unlock trade’ for a few weeks now. As have a number of research houses.
The trades span the investment-consumption spectrum.
Ravi Dharmshi of ValueQuest Investment Advisors says that the first trade is financials because every economic revival is preceded by a boom in the credit cycle. “The good banks are willing to grow and are already growing at 12-15%. So that tells you that the corporate lending cycle is coming back.”
At the other end of potential beneficiaries is the leisure theme, highlighted by Neelkanth Mishra of Credit Suisse.
While Mishra spoke of a 150-year cycle in which leisure time has steadily risen due to “regulation, negotiation, and rise in productivity”, some of these trends, across sections of the population, could get a boost due to the Covid-19 crisis. “The sector has been a steady and large outperformer: a 152-stock leisure basket in Asia-Pacific has delivered 13% CAGR (compounded annual growth rate) since 2005, beating APAC indices in every 5-year period, and in every country, driven mostly by above-par earnings growth.” Normalisation post-vaccination can switch spending between some leisure sub-segments, Mishra wrote.
Elsewhere in the world, there were two interesting developments.
One, undoubtedly, was the U.S. inflation data, which as Daniel Moss writes, has left everyone looking for historical parallels as they try to judge how transitory (or not) these price pressures are.
Jefferies’ Chris Wood warns in a Greed & Fear report that there could be a third oil crisis coming, both because of demand and supply factors. “Oil price remains Greed & Fear’s best guess for the catalyst really to escalate the already commenced inflation scare – just as oil was the trigger for the stagflation scares of 1974 and 1979…” he wrote.
Just in case we do see another oil crisis, it’s a good thing India now has $600 billion in forex reserves. Leaves us a little less vulnerable.
The second interesting development is El Salvador's decision to make Bitcoin legal tender. Really really ahead of the curve, those Salvadoreans, huh? It’s highly unlikely that any large economy will rush to compete with El Salvador but the IMF wasn’t taking any chances. Adoption of Bitcoin as legal tender raises a number of macroeconomic, financial, and legal issues that require careful analysis, an IMF spokesperson said. The empire strikes back.
Back home, news emerged that India’s Enforcement Directorate has sent a show-cause notice to WazirX, which claims to be India’s largest crypto exchange, citing FEMA violations. Ridhima Saxena explains the allegations in this report. As the story details, the ED has cited certain broad Section 3 (a) in its notice to WazirX and said that, for the purpose of FEMA, cryptocurrencies are akin to “money”. Will this hurt other crypto exchanges? Again, the empire strikes back.
On the point about crime and cryptocurrencies, this piece by Ken Rogoff is an interesting read. He calls crypto, a curse worse than cash.
Till next week.