Talking Points This Week: Time To Bite The Bull(et)?

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

There are plenty of competing forces at work and it’s a coin toss which forces take the ascendancy, and when... through the year and beyond. While last week's piece was about how strategists from Morgan Stanley to UBS think of India (read caution), the fact that everyone is talking about being cautious may be the reason why caution may not be the winning strategy. From equity scarcity, ‘there is no alternative’ (colloquially called TINA), to money sloshing around despite central bank normalisation, there could be varied reasons for markets to stay stable. However, maybe the argument of return of capital being more important than return on capital might find more mention in 2022, considering what is making headlines is not equity performance, but inflation which in the United States is at a 39-year high.

This week, we talk about the bull versus bear argument, IT earnings and commentary, the conundrum for China, and, of course, Bitcoin.

Will The Bear Bite The Bull?

As Damian Kestel of CLSA observed in his Bits and Pieces note last week, investors have enough reasons to be both bullish as well as bearish.

The inflation argument stands out, especially in light of the latest data from both the U.S. and India. This would indicate, at the very least, the possibility of volatility in equity markets. Due to heightened valuations and any likely withdrawal of liquidity, there is a belief that corrections are more likely. However, timing the market is a game for a select few. Hence, for normal mortals, the following chart from an AlfAccurate Advisors presentation shows how despite drawdowns, if one stayed invested, the CAGR returns over the last many years have been strong.

Do note, what supports that TINA argument is that amidst all the chatter of liquidity drying up, there are oases of inflows. Saudi Arabia’s sovereign wealth fund is planning to invest about $10 billion more into listed stocks. The Public Investment Fund is looking to buy global stocks based on a thematic strategy that focuses on areas including e-commerce and renewables.

Can Indian Tech Bite A Larger Slice Of The Indices?

Three Nifty names and one non-Nifty tech company released their Q3FY22 earnings. While the numbers were chalk and cheese—and one can argue that Infosys was the best set of numbers of the three large-caps and all the four released till now—the common point was the commentary from all the companies that the demand environment is strong and expectations are of a strong year ahead. Infosys also spoke of higher pricing flowing into newer deals, TCS spoke about a strong demand pipeline, and Wipro spoke about how attrition has stabilised and is expected to moderate next quarter.

In a tech front-and-centre world, if indeed Indian IT services can continue showing growth and extinguishing equity via buybacks and expanding ROEs, then valuation multiples and index weightages may be on the way up. Multiple market veterans including Kenneth Andrade and Vikas Khemani have spoken about this possibility. Contrasting the demand environment for tech services companies versus the patchy performance of some of the other heavyweight sectors like banking, one would not be surprised if IT garners a larger slice of weightage in the indices.

Plenty Biting Into Bitcoin

Bloomberg's Tracy Alloway asks a pertinent question: “Right now, there’s tons of hype around things like Web 3.0 and the Metaverse, and Bitcoin doesn't seem to have as strong a narrative about how it might fit into that world. So the question now is how long does it take Bitcoin proponents to find a new narrative to drive up prices? And what might that narrative be?”

It would be interesting to see how the narrative turns out, or whether Bitcoin needs a new narrative in the first place, considering how some loyalists stick to their guns. Who knows, they might be the ones laughing their way to the bank in times to come. Speaking of loyalists and crypto, India is making waves. A factoid in a Jan. 17 Jefferies note caught my attention. It said, “The scale of crypto adoption is visible from the fact that leading crypto exchanges in India viz. CoinSwitch Kuber, WazirX, and CoinDCX now claim a user base of 7-14 million each, larger than 6-7 million user base that India's largest retail equity discount brokers i.e. Zerodha and Upstox have.”

Would you have imagined this?

Will China's Policies Bite Into Growth?

Omicron has flared in a port city that borders Beijing and spread inland before Chinese officials detected it, seeding the highly contagious variant at the doorstep of the nation’s capital, less than one month before the Winter Olympics begin. China is seemingly very alarmed by its spread. The city of Xi’an has temporarily closed two scandal-hit hospitals after their strict adherence to pandemic rules led to deaths, slashing medical capacity in the city battling China’s worst Covid-19 outbreak since Wuhan. All these drastic measures led Goldman Sachs to believe that in an extreme scenario where a national lockdown is decreed, annual growth could plunge to 1.5%, the lowest recorded since 1976.

Hong Kong residents have issues of their own. Policymakers continue their crackdown on civil society and brush off an increasing uproar over aligning with mainland China’s Covid Zero strategy. Stringent virus rules, including 21 days in isolation for all arrivals, have already prompted an exodus. Omicron is apparently pushing Hong Kong’s import supply chain to the brink of collapse. The city’s political elite are getting a taste of their own policies after many were sent to a quarantine centre following an official’s birthday party where Covid rules were flouted.

Now, imagine if the same rules were applied in India. Boy, would quarantine centres be full daily?

Niraj Shah is Markets Editor at BloombergQuint.