I will be extremely bullish on profit pools a year or 18 months from now but the question is does the market price that today or does it take a little longer to price that in, asks Jeetu Panjabi, Macro Strategist for Global Emerging Markets, Capital Advisors.
Why are we looking at a disconnected world where data is very different from ground reality?
It is pretty clear that the health aspect is creating a trend where data and ground reality are divergent. In long 7-9-year cycles, there are always asynchronous data points. So, it is not unusual to see what we are seeing. We are seeing some patterns where things are really moving. There is a personal need and automobile sales are moving up. There are certain points where you do not have certain needs and that is an asynchronous factor at work. If we fast forward 6 or 12 months, I see the economy gaining a lot of momentum from external factors like the recovery in the US and Europe. This will be much stronger and it is going to be transmitted to India. We are very early in the cycle. We are seeing only a few cylinders firing. We will see a few more firing along the way and 18 or 24 months from now, we will have a super cycle coming up globally.
For a super cycle to globally come up, a profit pool has to get created. Where do you think that profit pool is going to come from?
The drivers of the cycle are extremely narrow now. As aggregate demand picks up, incomes move up, employment and credit growth, which are lagging indicators come back in cycle and we see a significant broadening of the cycle. As the cycle broadens, aggregate demand gets much broader and stronger. As that happens, profit pools come back.
There are pockets of the economy where you have seen cost cuts happening but you have not seen the aggregate demand move up significantly and thus operating leverage is not fully playing out. As you see operating leverage play out and capacity utilisations get better, profit pools are there. I would say the number of businesses or the number of companies per businesses has shrunk. So a very competitive environment gets less competitive which is great for profit pools. I will be extremely bullish on profit pools a year or 18 months from now but the question is does the market price that today or does it take a little longer to price that in?
In the EM basket, where does India stand?
In my view, India stands pretty good. I wrote up a note just last week which talks of belting up for the coming global super cycle and the world getting to a $100-trillion world. The core drivers of that is the deflator coupled with the weak US dollar driving capital flows and businesses and external demand into emerging markets. That bodes extremely well for Asia in general. I would not be surprised if in three or six months from now, we see a lot of US and European companies raise their purchase schedules from companies in Asia and India included.
As that plays out, demand will widen and we will see more credit growth and better capacity utilisations and businesses doing well. Now coming to India and emerging markets per se, my view is that there is one new phenomenon that comes out of this Covid environment which is geo neutrality and that basically means that you do not need an H1B to be doing a services business in the US in the same measure as you needed earlier.
If you take that in perspective, you kind of say that someone who is working in Mumbai need not work in Bombay, can work in Indore and someone who is supposed to work in New Jersey need not do so, it can be in India. As that entire phenomenon gets momentum and a lot of it is tech enabled and thanks very much for the broadband infrastructure that has been rolled out in the last few years, one sees the services boom. As that accelerates over the next few years, India does much better. Also you hear very clear active actions of Foxconn or Wistron or Pegatron working on building capacity for supply chains in India. A part of it is government initiative, part of it is opportunity and the geopolitics of what has happened in the last 12 or 18 months.
As both these trends play out -- one, the large manufacturing supply chain companies coming into India and setting up capacity and two, the services boom because of geo neutrality -- you see a significant boom in India. I am actually very bullish on India as this plays out. Greater capital flows will be concurrent to all of this. Reserves in the last 12 months are up $100 billion. Part of it is current account driven but part of it is capital flow driven.
What is the one big risk to this thesis playing out? Where can India falter?
The biggest thing is not breaking the global equilibrium. Let me explain that; whether it is geopolitics in this part of the world or reversal of tax policy by Trump, I do not want anything that breaks the equilibrium in the world because that is essential for businesses.
There are two external causes of disequilibrium in the near term: one could be US elections and reversal of tax policy. I think the tax policy will play a critical part from the US election standpoint. The second source of disequilibrium would be anything that could spark off a war. But barring those two key issues, I would say the cycle has taken off. I do not see anything external that is really hurting the equilibrium. From a local standpoint, the government may have to give a little bit of help from a fiscal standpoint, especially to sectors that are stuck up a little like infrastructure or maybe the low cost housing sector that needs a bit of push as well. Also, it should pay out the fiscal dues of the government to the private sector.
I think India is off to the races and I do not see anything stopping it. When you catalyse that with a weaker dollar and growing external demand, we will be in for it. It is going to be a great story a year or two years from now and we are going to be talking about a lot of bullish things.
How much of a risk could the upcoming US election pose?
In my view the one thing that is reasonably a given is the reversal on the stand of the Paris Accord that Trump has taken. I think that gets reversed on day one. It will take a few months to see crystallisation on which way the US-China policy goes.
The tax rate story is yet to play out. Depending on who his economic advisors are and depending on what they hear from businesses, the jury is out on that. It is a concern but that is the disequilibrium we worry about from US elections.