I am sure we are collectively experiencing Deja-vu all over again. The US had been attacking Iran daily to which Iran and now the Houthis have responded in kind; the conflict which was famously brokered by our Western enemy and signed with not so much of fanfare in June has come to a nought. Oil was trading above $100 a barrel as on Friday and the world now has learnt a new geographical location- Bab-al-Mandab strait!
We have maintained since the beginning of this war that the actual reason for conflict does not lie in either Jerusalem or in Tehran but in Washington & Beijing. The US is not the predominant hegemonic power in the world anymore and the global order has shifted considerably over the past four months. The world did not run out of oil but now stare at dwindling reserves, higher interest rates globally and any talks of inflation being transitory has vanished. The AI trade has possibly been stalled and possibly the top was made sometime in the last month.
This year the best trade has been to not do anything in Indian markets. Cash and cash-like instruments have outperformed every possible instrument with zero volatility and anyone who was bullish on anything else- gold, silver, bitcoin, equities have had such gut-wrenching moments that not many would have had the courage to hold on or to add to their positions over the past seven months. The Indian equities have remained in a narrow range with a see-saw pattern depending on what the FII does based on what happens elsewhere.
If you have followed this pattern carefully, our markets are not decoupled at all. Or else, the FII would have lined up at our doorsteps by now as the KOSPI tumbled close to 30% in last one month. I will repeat this at the risk of sounding like a broken tape- India markets will not be decoupled on the way down if there is a major risk-off event globally. In plain English, if the US markets go down, so will we.
This year, a large part of my study was devoted to figure out which historical pattern has emerged as we stare at the mega AI build up globally and has the unprecedented bull market finally made a mega top. In this journey, we identified similarities with the Dot-com era of 1999-2000 as far as the AI valuations and concentration was concerned, with the sub-prime era of 2007-08 regarding the private credit and with the 1970s as far as the inflation was concerned. As things stand today, and Singapore just raising its target exchange rate, the historical bells of 1970s ring the loudest. The inflation Gini is out of the bottle with all major bond yields globally making fresh highs in the last week. With dwindling SPR and US crude oil inventory at 40 year lows, we are not sure if the might of the US treasury alone will be able to keep the brent futures prices low on a sustainable basis.
This year, the US has already released over 100 million barrels out of its SPR to contain price rise against its commitment of close to 170 million barrels and with no end in sight of the conflict, the world now needs to assess how long can the judgement day be delayed, if not avoided. The Saudis managed to supply close to 5 million barrels a day through the Bab-al-mandab strait but with the Houthis joining in the party with Iran, the defining image of a Ship up in flames after hitting a mine is likely to send a bigger signal than any Axios headline.
With memory prices skyrocketing, it is getting difficult for even the hyperscalers to justify the valuations they are trading at. Today, a Chinese memory company CXMT just raised close to $8 Billion in its IPO, the biggest in Asia this year and is to be joined by Samsung ADRs in the US very soon. When so many companies of a particular sector raise so much money with so much fanfare, its generally not the most bullish sign but rather an indicator of how the insiders are trying to cash out as long as the going is good. Just for a reference, Space X is down over 50% from its high, erasing over $1.2 Trillion in less than a month!
Closer home, the IPOs are coming thick and fast. Large IPOs are expected to raise over 1.2-1.5 lakh crore INR over the next six months and I have my doubts if this much liquidity can be absorbed when the floor is slowly shifting. With WPI inching closer to double digits, Dollar-Rupee at all time high of almost 97 despite everything and bond yields inching up, a rate hike is around the corner.
A central bank raising rates does not naturally mean that equities will fall. What we are trying to convey is that there is a tectonic shift globally with regards to the cost of money is concerned. In the markets, bond yields are the only gravitational force and the current bull market which was born at the altar of near zero interest rates in the entire developed world is possibly hitting an iceberg. An Entire generation of policymakers and citizens have spent all their working lives with near zero rates in Japan & mainland Europe and with rising energy prices, I have my doubts whether the current bout of inflation will not have its ramifications on domestic polity of these countries.
With NATO in shambles, the Russia has won the Ukraine war despite suffering heavily on ground. If the US can’t protect its allies in the Middle East when its own bases are attacked, who will Russia fear even if the Ukraine is admitted in NATO. The image of a burning aircraft carrier and Qatar gas-fields on fire must have had a chilling impact on the Taiwanese and the Koreans which have spent decades feeling protected under the US nuclear umbrella.
The geopolitics will have an outsized impact in the way investing returns are going to be made in the short-term which is close to three years for us. We remain skeptical on the idea of a forever rally in the Indian small-mid caps, especially in the sectors which are today considered high-growth and rated accordingly. We also have our doubts whether the US markets will deliver strong return over the next 5-7 years periods and for that to happen, a mega reset is due. It may happen this year or may be next but the equity cult in the US, Korea and the SIP culture in India will be tested strongly. The equity is not an asset class with linear returns and our friends are yet to experience a year where buying the dip means losing another 50% of the capital.
Does this mean we are bearish on equities? No chance. The Indian equities will provide the greatest buying opportunity for those who raise some cash and keep the commitment to buy when the world appears to be ending because, the world doesn’t end that easily! The only problem is, when the world appears to be ending, people generally run out of cash or courage or both! Thus, the blog has been so titled!
Life is all about Compounding! 