Talking Points This Week: The Good, The Bad And The Ugly

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

A section of a column in The Guardian caught my eye. “It now seems Omicron is highly efficient at evading two doses of vaccine. What we don’t know yet is how likely it is to cause serious disease and death. Given that hospitalisations lag after infections and deaths after hospitalisations, it is simply too early to tell.” The key words... it is simply too early to tell. Three doctors I spoke with on reading this, concurred.

Markets took note of it this week, with equities globally on the backfoot for the first half of the week plagued by uncertainty in the lead up to the U.S. Federal Reserve meeting and Omicron worries; the dollar index gaining; and Bitcoin in its fifth week of correction. Is it starting to look ugly just before Christmas? Or is all still good? The coming week will tell, I reckon. Meanwhile, we talk about the Fed moves, and the pulls and pressures on inflation, growth, and fund flows.

The Good: U.S. Fed Outcome And Risk Assets

Fed Chairman Jerome Powell hinted in multiple ways that the U.S. central bank’s run of ultra-easy policy since the beginning of the Covid-19 pandemic is nearing its end. The Fed made aggressive policy moves in response to rising inflation, which some people believe will last through the course of the next two or three calendar years. The Fed also said it will accelerate the reduction of its monthly bond purchases. However, what the markets may have taken heart from is the mild lift-off trajectory, which won’t derail the economic growth. What seems certain, however, is that the ‘Fed Put’ is no longer a given and markets will have to mark their own path, likely leading to higher volatility if not a fall. The mild lift-off trajectory will probably ensure that financial markets do not immediately react adversely to the normalisation. What can perhaps lead to a fall is a surprise on the rates front. The impact on emerging markets like India will be a moving variable, to be constantly reassessed in the wake of rate and currency moves.

The Bad: Inflation Not Transient

Globally, inflation is front and centre of everyone’s attention. Locally in India, it remains to be seen how a wide range of pulls and pressures play out. There are multiple elements, including the excise cut-led fall in fuel prices, a telecom tariff hike, volatility in vegetable prices, correction in global commodity prices, and early signs of easing supply chains globally, the last carrying a risk of reversal due to the Omicron strain. From global stock markets’ perspective, the U.S. Fed’s thought process could probably be the ultimate driver. There are fears of the Fed being hawkish, but Mahesh Nandurkar of Jefferies believes that based on the experience of the last two incidents of 2013-14 and 2017-18, the Fed is likely to go slower on the interest rate hikes. On Indian monetary policy, Nandurkar says we might see the RBI tightening, in a measured way, which may lead to a few pullbacks. That said, he believes that the economic tailwinds are strong in India, and strong earnings growth may ensure that the Indian market remains a buy-on-dips market.

The (Really) Bad... Or Even Ugly: Growth Slides As Attention On Inflation

The key question might be whether it is starting to look like we are in for a growth scare and maybe not as much an inflation scare? While it is always foolhardy to try and pre-empt exact growth numbers, it pays to look at both sides of the argument. For Europe, which is facing the Omicron wrath, IHS Markit’s Flash Composite Purchasing Managers’ Index, a good indicator of overall economic health, dropped to 53.4 in December from 55.4 in November, its lowest since March and below the 54 predicted in polls. U.S. growth hasn’t faltered but could be lower than in 2021, as the base effect may come into play. Wage growth in India, arguably a good marker of housing and durable goods demand, isn’t exactly going gangbusters. As fiscal effects fade and if the export economy slows materially, in the absence of any major local growth driver, India’s growth may come in lower than expectations. However, there could be a scenario that India will be an outlier even with slightly lower growth, as the world at large grapples with growth. In the history of emerging markets, there have been time periods when the economies in Latin America or Southern Africa had high growth when the rest of the emerging markets were not doing as well. Can India repeat that?

The (Really) Ugly: FII Selling

Picture this: foreign institutional outflows in equities year-to-date total up to over $17 billion, with nearly $12 billion in just the last three months of the calendar. Opinions differ on how this will play out in the months to come. Veteran emerging markets strategist Geoffrey Dennis, formerly of UBS and Citi, believes that as long as the dollar continues strengthening, emerging markets as a set and India will continue to see outflows in the light of the taper and higher interest rate trajectory in the west. Others believe the outflow will ebb soon. Nandurkar asserts that because India has outperformed so significantly in the first nine months of 2021, things might just be normalising on both performance as well as fund flows front since the FII selling has intensified in the last quarter of the calendar. He adds that the selling in Indian financials in the last 6-8 weeks is more than the selling that happened in the month of March 2020, which was to the tune of about two billion dollars then, and hence, he expects a rebound soon.

Light At the End Of The Tunnel... Gets Further Away

Much as auto companies quibble over when will the semiconductor shortages end, the CEO of Intel warned that the global chip shortage is set to last until 2023, stressing that demand continues to soar amid the coronavirus pandemic even as semiconductor manufacturers expand production. In December 2020, we were hopeful of a normal 2021. In December 2021, it seems that normalcy is a while away. Sigh!

Niraj Shah is Markets Editor at BloombergQuint.