MARKET PERSPECTIVE

By J Mulraj

May 4-10, 2024

…Can spell disaster

Investors today need to analyze an Irish stew of different factors affecting it. The world is grappling with various trends, like climate change, technological disruptions, de-dollarisation, and increasingly hostile trade and economic wars. Which of these will dictate the narrative and influence stock market trends, at any point in time, is difficult to gauge . But as their impacts unfold, under weak American leadership, they can spell disaster.

Consider one of the pillars of America’s strength, the US $, accepted as the global currency. A bit of history is needed to explain how it became so. Following the 1973 Yom Kippur war, in which Israel beat Arab nations, OPEC, led by Saudi Arabia, in a retaliatory measure, gave the western world its first oil shock  by quadrupling the price of crude oil. US Secretary of State Henry Kissinger was sent as emissary to patch relations with Saudi Arabia, which hitherto, were good. He did this brilliantly, in a manner that led to the US $ becoming the globally accepted global currency.

He convinced Sheikh Faisal to agree to price its oil sales in US $, in return for a committed supply or modern arms and a security guarantee. This deal gave USA three advantages:

> it gave rise to the petrodollar, or dollars generated because crude oil was sold only in USD, and retained outside of USA, hence did not contribute to US inflation

> Saudi became a major buyer of US armaments

> the surplus petrodollars were often used to purchase US debt, providing it with a market to expand its debt. It’s now overblown to $34 trillion.

Henry Kissinger worked out a great deal for America, and must be turning in his grave watching a weak Biden wreck the system. Biden ignored Putin’s please to not admit Ukraine into NATO, as it posed, for him, an existential threat, and went against assurances given to Russia, when the Soviet Union split, that NATO would not expand eastwards. Putin, ignored, invaded Ukraine, and was sanctioned, by virtue of the US control over SWIFT, the payment gateway for international transactions.

The freezing of Russian assets led several countries to wonder whether their sovereign resources would be safe from sanctions if they were to incur the wrath of the US. This spurred the effort to look for an alternative currency; either the Chinese Renminbi, fully backed by gold (purchase of gold, instead of USD has driven up the price of gold), or some form of a BRICS currency.

The straw that will break the camel’s (perhaps the eagle’s) back would be if USA and EU seize the frozen Russian assets and give them as aid to Ukraine. Is Biden so addlepated to do that? It might easily lead to a nuclear war.

Besides the de-dollarisation trend, another trend is the possible splitting of the world into two or three trading blocs. The BRICS bloc of countries, with mineral and fossil fuel resources, trading with each other in their own currencies, or perhaps a BRICS currency,  and another bloc, of US, EU, Japan and others, financially wealthy, controlling the financial system, having some technology edges and trading in the US $ . This would lead to lower global trade, hence to lower global GDP, and a duplication of effort. Seems a distinct possibility.

Yet another trend is the use of emerging technology to boost efficiency and productivity. For example, when autonomous vehicles achieve acceptable levels of safety, and are on the road, the cost of personal transport will fall to, perhaps, a tenth of current costs. It will be a combination of EVs, with lower maintenance, autonomous vehicles and ride sharing apps, like UBER, which will bring about this change. But will the world benefit if there are two blocs? The Chinese have the largest manufacturing capacity for EVs and EV batteries, and the western bloc is more advanced in autonomous vehicles. Will they talk and trade?

Similarly, there are advances that would bring down costs in energy, in protein (cost of protein can fall by 90%  using precision fermentation, which will disrupt the dairy industry), in manufacture (3D printing) and in medicine (protein folding).

But the development and use of these is predicated upon collaborative efforts. Which will need strong and visionary leadership.

Last week the Sensex lost 1214 points to end at 72664.

Indian companies are declaring results for Q4/24. L&T’s net profits were up 10%, TVS Motors up 18%, Tata

Power 11% and Hero MotoCorp up 17%.

Rising tensions in the Middle East, between Iran and Israel, has led to a drop in stock markets at the end of last week. There is no global statesman who can stand up forcefully and stanch the Russia- Ukraine and Israel- Hamas conflicts. One will have to wait till November for that.

Picture Source: https://www.fairobserver.com/business/oil-now-makes-our-dollar-based-global-economy-inflammable/#

Comments may be sent to Jmulraj@asiaconverge.com