Good morning. In today's edition–we explore how Dalal Street analysts are stumbling through market predictions; dissecting a consumption slowdown; unravelling vanishing food grains from PDS systems, and Delhi's fog disrupting aviation.

THE TAKE

Modi Stocks, Trump Tariffs, and the Unpredictability of Geopolitics

In May this year, brokerage firm CLSA Ltd. put out a Modi stock portfolio, listing 54 stocks it was betting on to ride the Modi wave when he returned to power. Which he did, but clearly not in the way that CLSA or most of the markets had expected, so CLSA revised that portfolio to just two stocks: Oil and Natural Gas Corporation (ONGC) and Reliance Industries.

In early September, it emerged the so-called Modi stocks had climbed only 2% as the government completed its first 100 days in office after that third term win in June. In contrast, consumer and software stocks rallied 20% and 34%, respectively, Bloomberg pointed out.

Over the weekend, CLSA was back trying to grab attention by putting out a report called 'Pouncing Tiger, Prevaricating Dragon', the meaning of which is not so clear to me but must be to the authors. It said that CLSA was reversing its earlier tactical allocation shift from India to China.

As a quick backgrounder, in October 2023, CLSA upgraded India from 40% underweight to 20% overweight, citing a favourable credit environment, lower energy costs due to discounted Russian crude, and strong GDP growth prospects.

A year later, or last month, CLSA reduced India's overweight to 10%, while adding to China amid what appeared to be early signs of a market recovery in the Dragon nation. 

This is obviously independent of the Modi stocks proposition put out in May and has more to do with the big exodus of foreign capital that happened starting September 27 and has crossed over US $13 billion now.

Now CLSA says it has reversed its tactical allocation in early October, returning to a benchmark on China and a 20% overweight on India. It also points out that both MSCI China and India have corrected by 10% in US dollar terms, so they did not lose making the switch.

It further adds that the chief risk to Indian equities is a frenzy of issuances or Initial Public Offerings (IPOs) swamping the market, with cumulative 12-month issuances being equal to 1.5% of market capitalisation—a tipping point.

On that, I agree. So what’s changed?

Obviously, it is the return of Donald Trump, who has threatened to hit China with 60% import tariffs into the United States - imports from China were around US $165 billion in 2023.

India will get hit too, between 10% and 20% as per the promises made or threats issued so far.

Which figure will hold by end-January, when the presidential transition occurs, is tough to say at this point. Remember, if all countries get hit, then the relative damage is lower, and countries like China are better prepared now.

Anyway, a fresh report in Bloomberg yesterday points out that CLSA and Citigroup are taking opposite stances on Indian equities. India is least likely to feel the heat from potentially higher Trump tariffs, and India offers a relative oasis of forex stability, and the recent stock declines have made valuations attractive, CLSA says.

Citigroup, on the other hand, has downgraded Indian stocks, citing concerns about weaker earnings momentum. But then, in May, Citigroup downgraded Chinese equities to neutral and upgraded India to overweight, saying they liked markets with inflecting earnings and strong Earnings Per Share (EPS) momentum.

It would take much concentration to keep pace with these shifts. On the other hand, almost everything we discussed so far is now out of the window. Which tells us a few things.

One, no one is able to accurately predict anything beyond a few months, particularly when geopolitics is involved, and that is increasingly playing a role in our lives and stock prices. Most predictions are based around events and not a longer-term view.

If there was a longer-term view on a sector or company, which there would have been, it would not matter either way because something else would happen and supersede it. 

Finally, stock analysts are human and can sometimes rush to make up for lost calls, including with fancy charts which you and I are not good at.

The good news is that Donald Trump is human too and he might change his mind before January 20, 2025.

CO:RELATION

Withering Consumption

Investors worry about both the macro and micro factors being equally proportionate. Today’s share prices are a function of tomorrow’s profits. However, the profit growth is limited by India’s skewed development. Consumption-oriented companies have underperformed the Nifty 50 for five years now. Previously, it was rural consumption that was causing problems. For the past couple of quarters, the lack of urban spending has hurt businesses. 

Two sets of data point to plausible reasons. Convergence in economic growth is essential to enhance national growth and balanced regional development. Higher-income states experienced faster economic growth than lower-income states in India from FY 2002 to FY2023, leading to a lack of convergence in real per capita GDP, according to a new working paper published by the International Monetary Fund. A Reserve Bank of India study of municipal corporation finances showed that municipalities in Maharashtra account for 40% of the total revenue receipts and more than 50% of the surpluses.

These two data sets point to a skewed spread of urbanisation in India. Income inequality is an outcome of that situation. As long as we get to read such outcomes in macroeconomic data studies, consumption in India will remain skewed. The IMF study calls for the central government to increase economic and social growth allocation in poorer states.

NASSCOM CONVERSATION

Harnessing AI’s Potential in India with Srikanth Velamakanni

From transforming healthcare to reshaping customer service, AI is making a tangible impact across industries. In this episode, Srikanth Velamakanni, Co-Founder and Group Chief Executive of Fractal Analytics, discusses how AI is augmenting human capabilities and driving real-world outcomes. What does this mean for businesses in India? How can India leverage AI responsibly to stay ahead globally? Srikanth and Govindraj Ethiraj tackle these questions and dive into India’s role in the evolving AI landscape, as well as the ethical and societal implications of this powerful technology. Tune in for an in-depth look at AI’s future in India.

Spotify | Apple

CORE NUMBER

Rs 69,000 Crore

This staggering figure represents the amount of grain meant for India's poorest that vanishes annually, according to the Indian Council for Research on International Economic Relations (ICRIER). Much of the 20 million tonnes of rice and wheat allocated to feed 814 million people under the Public Distribution System (PDS) is siphoned off to open markets or exported. Though wastage has dropped from 46% in 2011-12, issues persist. States like Arunachal Pradesh and Nagaland struggle due to limited digitalisation, while Bihar and West Bengal have dramatically reduced leakage. Uttar Pradesh still leads in absolute losses, highlighting the urgent need for stronger safeguards against diversion.

FROM THE PERIPHERY

—😷 Dense fog and pollution wreaked havoc at Delhi airport on Monday, delaying over 370 flights by 2 PM. Flightradar24 reported 110 delayed arrivals and 269 departures. According to The Business Standard, IndiGo, the airport’s top operator with 490 daily flights, flagged visibility issues, while SpiceJet echoed concerns, noting disruptions across schedules. Such disruptions have a significant impact on the aviation industry and the broader economy. Flight delays and cancellations lead to lost productivity, missed business opportunities, and increased costs for airlines and passengers. Moreover, they can disrupt supply chains and affect tourism, impacting overall economic activity.

—📱 India's smartphone production-linked incentive (PLI) scheme has generated  Rs 1.10 lakh crore in revenue, primarily driven by Apple manufacturers and Samsung. This represents a significant return on investment, with the government earning Rs 1,04,200 crore after disbursing Rs 5,800 crore in incentives, the Economic Times reported. The industry also contributed through duties on mobile parts and components, as well as incremental GST. While the scheme has been successful in terms of investments, production, exports, and job creation, its success has been largely attributed to Apple's contract manufacturers and Samsung, who have consistently met targets and received incentives.

—👔 The unemployment rate in urban areas for individuals aged 15 and above decreased slightly to 6.4% in the July-September quarter, down from 6.6% in the previous quarter, according to data from the National Sample Survey Office (NSSO). This marginal improvement comes after a period of elevated unemployment rates following the COVID-19 pandemic, which caused widespread job losses and economic disruption. The female unemployment rate in urban areas (for those aged 15 and above) decreased to 8.4% in the July-September 2024 quarter, down from 8.6% in the same period last year. However, it was higher in the preceding April-June 2024 quarter at 9%.

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