By J Mulraj
June 3-9, 2023

How long can this bull run last?

The bull has run uphill from a Sensex low of 25600, in Feb 2020,  (after a sharp post Covid fall) to a little over 63000. That’s nearly 30% compounded, per year. After deducting around 5% for rupee depreciation, it is still an impressive 25% CAGR, in USD terms. In recognition of this, Foreign Institutional Investors (FIIs) who collectively have more money than Croesus, and several times more money invested in financial assets than the global GDP, are, once again, investing in India.

That inflow of FII money is fueling the bull run combined, of course, with the monthly fund injection by domestic retail investors, putting in monthly installments in their Systematic Investment Plans (SIPs).

Yes, there is an India story which is appealing, for several reasons.

Firstly, India has favorable demographics, with a majority of its population being under 30 years old. A long working, and earning, life ahead. The global fertility rate is 2.4, ie the number of children born to a female over her lifetime. A rate of 2.1 is needed to sustain a population. Ninety two countries have a lower rate. India is at 2.2. This means that, given increasing longevity, countries with lower rates will have fewer working people unable to sustain an older, non working population. Pension funds of several countries, having defined benefits, are underfunded. France’s efforts to raise retirement age, as a solution, ran into social protest.

With a young population, India has a long time to plan for when it faces an aging society problem. Till then, it will benefit from a virtuous cycle of employment leading to income leading to consumption growth.

Another strength of the India story is the strides it has made in digitizing the economy, with digital transactions using UPI (Unified Payments Interface) accounting for  86% of GDP! That’s the highest in the world! UPI is a system to facilitate instant payments between any two parties, at no cost! Using it, even a roadside peanut seller can transact, the payment going directly to his account. The Aadhaar card gives everyone a unique digital identity. With these two, it has become possible for 1.4 billion people to join, and propel, the economy!

The initiatives of Make in India and the Production Linked Incentive scheme, have attracted investment, both domestic and foreign, into manufacturing. Apple, the most valuable company in the world with a m. cap. of $ 2.8 trillion, plans to make 25% of its total Iphone production in India by 2025. India is also spending enormous amounts on sprucing up its infrastructure. Its plan, under the National Magnetization Program, to monetize Rs 6 lac crores of existing infra assets, and deploy the resources for building more infra assets, is a brilliant one. It serves to reduce the budgetary burden for new infra projects.

India is a large domestic market, which is attractive for FDI. It has over a century of stock market history; the BSE is the  oldest Exchange in Asia and the 10th oldest in the world. NSE has listed over 2000 companies (and many more securities).

So there is a case for the Indian bull to run a bit further, before pausing to catch his breath.

But, as depicted in the illustration, the bull must cross a few hurdles.

Persistent inflation is one hurdle. To tame it, central banks are raising interest rates, making it harder for borrowers to service debt, expensive for companies to invest in mew plants or expansion, and for individuals to buy durables like cars or homes. (Erdogan’s Turkey is swimming against the tide, lowering rates despite an inflation rate of over 40%. Despite high inflation, Erdogan was reelected). Uncontrolled inflation causes severe problems. It leads to a continuous cycle of wage demands to meet it, which further spurs inflation. Venezuela’s inflation rate is an incredible 436%, even though it has the highest oil reserves in the world, more than Saudi.

Higher inflation and higher interest rates to tame it triggers the next hurdle, viz. recession. Germany, #4 largest economy in the world, has entered one, and others are not far behind! Including USA, #1, China, #2, Japan, #3, France, UK, #5, and others. With the top 5 economies in, or near, recession, the heart of the Indian bull must be strong to go it alone.

The third hurdle is conflict. The ongoing one between Russia and Ukraine has been devastating, particularly for the latter. Ukraine’s population, 44 million before the war, has, according to retired colonel Douglas McGregor, shrunk to under 20 m. The rest have migrated or been killed in the war. An unbelievable tragedy, which was totally avoidable. The war has disrupted, among other things, energy and grain supplies, causing their own set of tragedies, again, which could have been avoided.

The energy crisis has caused the recession in Germany, a manufacturing powerhouse with hard working, efficient, workers. It was cheap Russian energy that gave German manufacture its strength. Germany had mis-planned its energy transition, cutting off its Russian supplier, whilst shutting down its coal geberated electricity plants (since reopened) and its nuclear plants (still shut). Its purchase of substitute LNG, from USA and others, was at a multiple of Russian gas prices. OPEC, especially Saudi, is cutting crude output to raise prices. India is highly dependent on imported crude oil. If prices stay high due to conflict, or policy, the Indian bull would need to huff and puff.

The other hurdle is the shortage of grain. Pre war, a third of global supply came from the warring countries. Once the conflict began, evacuating the grain became impossible. Ships couldn’t enter the Black Sea to evacuate grain without insurance, unavailable for war zones. A UN brokered deal was agreed upon, in order to stave off famine. This expires July 19. Russia may refuse to renew it because 1. Its bank, now sanctioned, should be  allowed to receive payment for the grain, a fair ask and 2. It is miffed at a recent attack by Ukraine on its ammonia pipeline. If the grain deal is not extended by Jul 19, the shortage of wheat will cause a big famine, especially in Africa, where upto 2 m deaths are forecast.

Some political leaders have completely lost their moral compass and are resorting to ecoterrorism, another hurdle. The destruction of the Nordstream pipeline released huge quantities of methane gas, destructive to the environment and oblivious to the pledges made by all countries for protecting it. Last week, a water reservoir in Ukraine was destroyed, inundating several towns and putting at risk the Zaporizhzhia nuclear power plant. Are policy makers so blinded by war to forget both humanity and environment?

Even if the bull manages to ignore the Ukraine conflict, it certainly won’t be able to manage if one broke out by a Chinese attempt to take over Taiwan. That would be a calamity.

Last week the BSE sensex closed at 62625, up 75.

Whilst the long term story is good, and there is a lot of funds flow from domestic retail investors, especially in monthly SIP investments, supplemented by FII buying, there are several hurdles for the bull to jump over. He may just decide to take a pause to gather his energy.


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