In this briefing:
- Farm Loan WaiversTo Dampen Credit Growth Cycle
- Are US Stocks A Buy Yet?
- Monthly Geopolitical Comment: Redrafting of Global Map of Political Alliances to Continue in 2019
- Direct Income Transfers Likely Soon; Universal Basic Income Possible By 2024 Funded by RBI Reserves
- Larsen & Toubro (LT IN): Slowdown in New Orders Is Risk for 3Q, Markets Can’t Ignore It for Long
1. Farm Loan WaiversTo Dampen Credit Growth Cycle
The NPA growth cycle affects credit growth cycle negatively. The recent farm waivers announced by many state governments and the speculations of a nationwide farm loan waiver by the Central government do not augur well for the banks’ credit space in India.
2. Are US Stocks A Buy Yet?
- 5%-like rallies on Wall Street are signs of a bear market not a bull market
- Bull markets require strong liquidity and low risk appetite, neither yet apply
- Risk appetite readings at minus 12.6 are still above the minus 40 criterion for an upturn
- Recent large fall in risk appetite consistent with upcoming economic recession
3. Monthly Geopolitical Comment: Redrafting of Global Map of Political Alliances to Continue in 2019
The year 2018 has proven tumultuous for global markets. Rapidly changing geopolitical priorities of the US, an erstwhile hegemon, have played a role no less significant than the withdrawal of liquidity by leading central banks or US monetary policy tightening. The US has openly declared that it is in a state of “cold war” with China. Despite the recent truce, signs are abundant that the confrontation between the two global superpowers will continue into 2019 and beyond. In 2019, we expect more countries to find themselves in a position where they must choose who they want to side with, the US or China. There are other tectonic shifts, too, which are causing re-alignment of global geopolitical alliances.
4. Direct Income Transfers Likely Soon; Universal Basic Income Possible By 2024 Funded by RBI Reserves
Direct income transfers to farmers are likely to become reality as competitive loan waivers are fast becoming a norm than an exception and every party is offering a larger waiver.
Direct income transfers have been quite successful in the South Indian state of Telangana with KCR promising one at the national level if the Federal front (that he is proposing) is voted to power in the general elections.
Cost of each of the measures (from loan waivers to universal basic income for all Indians) is between 0.7% to 2.7% of GDP with Universal Basic Income (Rs 7620/individual for 75% of Indians) costing the highest.
Even as initial fiscal costs are alarming, a gradual scale up (like in the Rural Employment Guarantee Scheme) and transfer of reserves from RBI in tranches could mitigate some fiscal impact. We expect the expert committee of the govt and the RBI to identify transferable reserves between Rs 1.0trn – 3.0trn.
Overall, the freebies to Rural India will certainly power the consumption story strongly in 2019 with products sold in rural areas like FMCG, tractors and motorcycles expected to gain.
5. Larsen & Toubro (LT IN): Slowdown in New Orders Is Risk for 3Q, Markets Can’t Ignore It for Long
Larsen & Toubro (LT IN) has reported the new orders worth only Rs95 bn after 2Q FY19 results (reported on 31st October 2018). This is much lower run rate as compared to 2Q FY19 (Rs419 bn) or 1H FY19 (Rs781 bn). All these orders by Larsen & Toubro (LT IN) have been received from construction segment where margins are relatively poor e.g. the construction and infrastructure segment of Larsen & Toubro (LT IN) in 2H FY19 has reported 6.8% EBITDA margin, much lower than 11.8% for the company on an overall basis.
Unless new orders pick up in next few weeks, there is a strong likelihood that there could be a negative surprise in 3Q results on order inflow for Larsen & Toubro (LT IN) . This is despite the fact that overall number reported for a quarter for order inflow is a bit higher than the sum of individual orders announced and reported by the company. While the market has not noticed decline in new orders so far and may have been still hopeful about a recovery in order wins, it is highly unlikely that this will continue to get ignored by investors if the trend doesn’t change and get better in next couple of weeks.
