Geopolitical Developments: India May Be Functional Anarchy But It’s Economic Growth Signals The World Will Keep Growing Too

Despite Chinese tensions and the loss of Afghanistan the geopolitical situation is having little impact on US equities. The volatility risk premium points to a higher market over the next few days, but my technical reading of key stocks in the S&P 500 is neutral. And there are several negative factors across global asset classes. The action in currencies signifies $US strength. The US yield curve is rising and in the current context that is bearish. Inflation expectations are rising based on measures of Treasuries and TIPS. Taken together, expect the S&P 500 to be range-bound over the next few days.

Tensions with China and the rise of the Taliban have a profound geopolitical impact on the most populous nation in the world — India. And yet India is bullish, which is a sign investors should not discount the global economy too much and stay invested. With COVID receding and a nice flow of news re vaccinations and therapeutic treatments the stage is set for a renewed bull market as a few uncertainties are worked through in the current consolidation phase.

Chief among these uncertainties is whether stagflationary data will continue and force Central Banks to tighten, and whether the three big economies will ramp up growth from the current delta and supply-chain driven downturn. I see little prospect of long-term inflation since consumers substitute like never before due to online markets and are habituated to seeking deals. But as statism creeps into not just China and the EU but the USA too, there is a strong possibility growth remains subdued into next year. That leaves EM to pick up the slack and the news here isn’t great, since India is dealing with numerous problems even as its COVID situation improves.

The Indian newspaper The Hindu note “Fitch Ratings has cut India’s economic growth forecast to 8.7% for the current fiscal but raised GDP growth projection for FY23 to 10%, saying the second COVID-19 wave delayed rather than derail the economic recovery.” This downward revision also reflects the energy crisis hitting India. Al-Jazeera notes “India is grappling with an escalating crisis as stockpiles of coal, the fuel used to generate about 70% of the nation’s electricity, dwindle to the lowest in years just as power demand is set to surge. Coal-fired power stations have an average of four days’ worth of stock of the fuel, according to the latest data, and more than half the plants are already on alert for outages. Power Minister Raj Kumar Singh has warned that the nation could be handling a supply squeeze for as long as six months...While coal stockpiles at power plants are perilously low, it remains unlikely the operations will completely run out of fuel. Government ministries and industry are working to closely monitor stocks, and could move again to divert supplies away from industrial users — like aluminum and cement makers — to prioritize power generation. That’d leave those industries faced with their own dilemma: curb output, or pay high prices for imported coal...The country meets around three-quarters of power demand with locally-produced coal, and much of the rest is imported from countries including Indonesia, South Africa and Australia.”

Despite this gloomy news the Reserve Bank of India is actually ending its liquidity support, while the Indian stock market has raged higher. The fundamental fact about it India is its confidence in gaining economic and geopolitical ground after decades of horrible economic and social performance under left-oriented governments. Despite losing Afghanistan, losing a minor border standoff with China, and a horrible COVID experience, Indians are exercising their entrepreneurial skills and driving a dynamic economy. So while India is a modest part of global GDP, it’s success under a right-of-center government with a pro-business stance is likely instructive for other EMs, and a persistent slow-growth world looks certain as the major economies slow but EMs chug along. That means the bull market in US equities relies on the ability of US firms to wring out profits from a slow-growth world. The simple reason this is likely is automation, which forces the US labor market to by dynamic and keeps profits flowing.

My current market positions include a large cash position, and the following holdings: Activision (ATVI), Amgen (AMGN), Apple (AAPL), Gibraltar Industries (ROCK), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE) and a hedged position in the S&P 500 (UPRO and SPXU).