Hard Landing and Soft Landing

Hard Landing and Soft Landing

Arth-Samvaad: Monthly Market Commentary – May ’22

“It’s a paradox of our time that the path to radical progress begins with moderation. Extreme optimism and fatalistic pessimism may seem to be stark opposites but they both end in apathy. If things were sure to improve or bound to collapse, then our actions wouldn’t matter one way or the other. ~ Peter Thiel.

The seemingly stretched war, fresh stringent covid lockdowns in China, higher inflation and increased interest rates; all have contributed to the rout of stocks, bonds and even commodities. Gold and Bitcoin (the new gold) also couldn’t resist the mayhem except for a few commodities of metals & energy. Entering into the third month, the Russian-Ukrainian conflict is becoming further convoluted with the US and other NATO members sending arms to Ukraine even as Russia halted its gas supplies to two members of the NATO. While this is aimed at fracturing the unity, the resolve of the block seemed to harden, amid concerns of chemical and nuclear weapon usage.

Possibly some of the harshest sanctions were imposed on Russia including nullifying its forex reserves, rendering ruble to rubble as the war began. The insistence of Ruble trade by Russia has ensured their currency recovered to their pre-war levels and beyond. Despite the discussions of the European oil embargo, the region is doped with Russian gas for their survival, and would likely stay out of the sanctions in the near future, helping Russia to avoid a looming sovereign default. Also, the barter trade with India and China might help it to stave off any immediate crisis for their oil industry.

The nascent supply chain revival is being threatened by China’s zero-covid strategy. The strict implementation of restrictions, testing & quarantines have become stressful for the urban residents who began to defy the compliance. Residents now complain about ‘Dabai’ or ‘Big White’, as is known for those astronaut looking-dresses of the lockdown enforcers for their inhuman treatment. For now Xi’s single minded approach is casting doubts ahead of the party’s crucial meeting later this year.

Central banks remained weaponised since the Great Financial Crisis, 2008 and played a pivotal role in the economic revival. While enough beans were spilled about the inevitable tightening, pain began to surface as reality began to unravel. Though these measures are necessary, they’re still way behind the curve in addressing the runaway multi-decadal inflation. We opined the need for at least one fed rate hike in the last calendar year itself, which was evident from JP’s recent ‘hindsight’ remark. If they want to crush inflation they risk being a Volcker, difficult for the politically aligned central banks. Especially as the current situation is more due to the aggravated supply issues than excess liquidity (alone), I need to watch how this would impact. The world is facing an impending food shortage; the agri output along with monsoon prospects define India’s food security.

What’s in it for you:

Equity: Tech stocks have shown what rate hikes would do to their business models. With no precedent to rising inflationary and expensive monetary regime, their stocks were subjected to severe tests, correcting heavily. The seemingly old economy stocks which were traded at discount made a comeback as value, commodities and energy themes thrived in these conditions.

One has to remember that no conditions remain the same forever, the dynamics of the economy always find ways to bring balance. So, the current extreme pessimism is unwarranted as opportunities turn up which only moves the needle to the middle. It’s just a matter of time for equilibrium to reach. During this flux, it’s important to stay diligent and stick to the goals. Staggered investments into equities help make exceptional returns in the medium to long-run and asset allocation remains critical. Hybrids would provide a fillip to the portfolio in the near to medium term.

Debt: Central bankers may have plans on how to land their economies or avoid a hard touch down but market participants act at their own logic and rarely could be controlled. While tweaking the monetary policy to control inflation, it just can’t create more food, more commodities or more energy. We need to brace up for some harsh realities, however the war turns, as the sanctions wouldn’t roll back to normal dramatically nor the supply woes would be wiped out immediately.

The LIC IPO is already a victim of the situation and we’ll see how the cost of capital begins to pinch the growth in the next few quarters. It’s a catch-22 situation for the central banks which waited far too long to act and the results may not be to their liking. Cash suddenly stands to gain along with floating interest rates and overnight funds. The spreads in the medium term still are attractive, it should be approached in a staggered way with a higher risk appetite.

Crypto: King Dollar made a comeback after about a half-a-decade and investors don’t seem to have enough of it. This has put a spotlight on cryptos which were supposed to counter the (most abused) fiat currency. Andreessen Horowitz, the venture firm has spent about $3bn till date on crypto start ups while Blackrock infused into coinbase. The NFT market collapsed witnessing heavy reduction in sales from their peak from last Sept. Tiger global, another serial venture firm slumped about 40% year till date. Having the winter set firmly on cryptos is a moot.

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