Will 8% be the new normal for the Indian bond markets?
During the last one week, the 10-year bond yields decisively settled above the 8% mark. After touching a high of 8.06%, the bond yields settled around the 8.03% mark. What is material is that 8% is not the psychological barrier anymore and now appears to be the new normal. Why was the level of 8% breached so suddenly during the week? There are 3 things to understand here.
Rate hike soon enough…
Like it or not, but another rate hike may be inevitable in the next few weeks. The INR has already touched the 72/$ mark and despite some support at 72, it looks unlikely to sustain for too long. The CAD at 2.4% may be a temporary respite but the pressure of CAD touching 2.8% by the end of the year still remains. If the trade deficit figure stays around the $18 billion mark in the next few months then 2.8% CAD may not be too far off. That is already putting pressure on the INR. Additionally, with oil hovering around the $80/bbl mark in the Brent market, inflation in India will remain under pressure. An inflation level of around 5% appears to be the norm going ahead. The impact of higher MSP on Kharif crops could only put further pressure on the inflation front. Above all, the government may be keen to keep the yield gap high enough to sustain flows into India. All these factors clearly hint at a rate hike, which is reflected in the bond yields. For now, 8% yields may be the new normal.
Banks need better yields
The last few years have seen banks writing off bad loans in an aggressive manner. But there are still pain points like the power sector, which could add to the pressure on banks. They have another challenge. They need to quickly get back to profitability and that has to coincide with better yields. At the current yields, the banks are realizing that they may not be left with too much leeway to operate, especially considering the losses that they are taking on the NPA front. We have already seen the largest bank, SBI, hiking its rates by 20 bps and that only hints at higher yields.
Largely about capital flows
But the markets are expecting that the government may falter on its fiscal deficit targets by a big margin. That would put pressure on the government to sustain its capital flows through the FDI and the FPI source. The FDI growth has already saturated and is unlikely to grow sharply till the new government is in place by middle of next year. FPIs have withdrawn nearly $10 billion in the previous four months and that is the money that the government will be targeting to bring back. That is only possible with higher bond yields and a strengthening rupee. A couple of rate hikes could create that salivating combination. That is exactly what the yields are indicating!
Electric Vehicles
Gadkari’s projections may be ambitious…
When Nitin Gadkari painted his picture of the future of Indian auto, it looked exciting and also a tad ambitious. Gadkari expects Electric Vehicles (EV) to constitute 15% of Indian auto sector by 2023 and 100% by 2033. While the numbers may sound a bit lofty, his thinking is surely in line with what the world is thinking about. Here is what you need to know.
Shift to EVs will happen
Even the most fanatical oil fan has now started believing in the EV story. If you consider the projections of Wood Mackenzie, there are different scenarios for EVs by 2035. For example, in a best case scenario, EVs could constitute nearly 85% of all incremental vehicle sales in the world and the reality could be much lower. Even assuming that most of the incremental sales would come from electric cars; it will still leave a lot of fossil fuel driven cars on the road till about 2050. That is a long time away. There is also the projection of others like the Exxon and the OPEC which put the EV sales at 5% in a best case scenario over the next 15 years. Which direction we end up in will largely depend on the price of oil. It has been seen that when oil prices are at the lower end of the spectrum, the incentive for nations and companies to invest in EV capacity is quite limited. It is in the interest of the EV segment that oil prices stay high so that the momentum towards EVs is not lost.
What about infrastructure
That is the million dollar question. Making cars is not only about the capacity to make cars but also the infrastructure to sustain such cars. Let us first look at the costing. To be fair, the price of the Lithium batteries has been falling sharply. From $1200/KWH in 2008 to about $200 in 2018, is good but the real challenge to EV profits will be getting this price of Lithium to around $80/KWH. That is when the entire EV concept becomes feasible in a big way. The second challenge is the support infrastructure in terms of maintenance, repairs and other allied services. That infrastructure is today entirely tilted towards petrol and diesel cars. Unless that also shifts along, the real shift to EVs cannot happen.
An opportunity for India…
In a way, Nitin Gadkari is right in the sense that India needs to be ahead of the curve in this challenge. As of date the EVs made by Tata Motors and M&M are way too expensive to have a mass market. At least, not in a price sensitive market like India. China consumes more EVs today than the US and Europe put together. That is the lesson. For the next big growth story in the auto segment, India needs to be ahead of the curve. Targets for EVs may be ambitious but even if we get to the half-way mark eventually, it would be a case of a job well executed!
Big Companies
They are almost all from the tech sector
According to a recent study done by Price Waterhouse Coopers, the global market capitalization of the top 100 companies has increased by nearly $11.5 trillion in the last 9 years since the financial crisis. But what is striking is the dominance of a handful of stocks.
Looks like tech all the way…
If there is one big trend in the market cap gains since the financial crisis, it is the rise of digital. In fact, just the top 7 digital companies in the world have contributed to more than 50% of this market cap gain of $11.5 trillion since the Lehman crisis. These include Apple, Amazon, Alphabet (Google), Microsoft, Facebook, Alibaba and Tencent. It is these 7 digital companies that account for most of the market cap gains since the Lehman crisis. There are odd banks like JP Morgan and Wells Fargo or an odd pharma company like J&J. But the principal story of the market cap shift in the last 10 years since the crisis has been all about digital technologies.
Two major trends are visible
The PWC report is interesting and insightful in a number of ways. For example, the technology stocks with a combined market cap of $4.8 trillion dominate the market cap stakes for the first time overtaking financials at $4.4 trillion market cap. There are 2 very specific trends that are visible. There is a clear shift from old economy to the digital new economy. The top list is dominated by technology companies. Even Berkshire Hathaway has Apple as its largest single shareholding. JPM is the one that survived the crisis and J&J is positioned as a biotech company. Essentially, it is all about new generation ideas. Secondly, China is making its presence felt in the global scene. The two large companies that dropped out of the Top-10 were Exxon and Wells Fargo of the US. The two new companies that came into the top-10 list were Tencent and Alibaba of China. That probably says it all about the silent value shift happening globally!
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