MARKET PERSPECTIVE

By J Mulraj

JULY 27- AUGUST 2, 2024

The next 4 months will be dangerous

Having pulled out of the Presidential race, being self-admittedly  unfit for it, Joe Biden may well become a lame duck President, unlikely to take any significantly vital decisions. Knowing this, antagonistic world leaders like Xi Jinping, Putin, Khamenei, and others, may be tempted to make moves to achieve their geopolitical aims. The potential for conflict is high in the South China Sea, in Taiwan, in the Middle East and elsewhere. A lame duck president may be unable, or unwilling, to counter with force, and this could prove dangerous.

Tensions have risen in the Middle East after Israeli attacks on Beirut, in Lebanon, killed Hezbollah leader Shukr, and the elimination of Hamas leader, Ismail Haniyah in Tehran. This has sparked fear of a wider war.  Supreme leader of Iran, Khamenei, has vowed revenge, and Hezbollah have commenced missile attacks on Israel. A lame duck US President will have weak influence to call for cessation of hostilities and to negotiate a ceasefire before a downward spiral to Armageddon.

Typhoon Gaemi his hit, and caused havoc in, the Philippines, Taiwan and the Fujian province of China, where some 150,000 people have been relocated  and several dams have been forced to release water lest they burst, resulting in severe flooding in downstream areas. The Three Gorges dam, the world’s largest, is at risk too. Any release of water from it would affect areas like Wuhan (from where Covid started; divine retribution for the millions who died?) right down to Shanghai. A collapse of the damn would be an unimaginable nightmare as the water would inundate Shanghai. Navigation, and movement of freight, on the Yangtze River, where the Three Gorges dam is based, has been impacted. This will affect China’s GDP growth.

Will Xi try to divert public attention by embarking on a misadventure in Taiwan, evaluating a lame duck Presidency in the White House being unable to prevent it? If yes, will the Quad, which includes India, be pulled in?

The assassination attempt of Donald Trump has revealed the deplorable depths to which the American polity, the deep state, has sunk. Should another attempt be attempted, America, it is feared, may break into a civil war. Would a lame duck President be able to stanch it?

So there are several geopolitical hot spots. the world is like a tinderbox waiting for a match. It’s a dangerous time for its leading nation to be headed by a lame duck.

At its last meeting, the US Federal Reserve kept interest rates steady, but there are hopes of a cut in September. High interest rates, up 5% recently, have put rate-sensitive businesses under strain. Commercial Real Estate (CRE) is stressed and, unless a down cycle in rates starts soon, it could lead to more bank collapses, especially community banks, large lenders to CRE.

US stock markets are kept buoyed up mainly due to the Magnificent 7, namely Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla. These stocks are vigorously followed by large investors and are finely priced. This is evidenced by the quarterly results announced by Microsoft, which met or beat every expectation barring one; its cloud computing platform, Azure, showed a lower growth of 29% in the quarter, compared to 31% in the previous one. The stock fell 6%.

So stock markets are finely tuned and are sensitive to missteps.

The Indian stock market continues to be driven by the trend of new retail investors switching their saving patterns from the safe, but boring, fixed income instruments, mainly bank deposits, to the equity market, via mutual funds, which have provided both excitement and returns. Less than 10% of the population has entered the stock market, giving plenty of room for upside. They have committed to a monthly investment of about ₹21000 crores (₹210 b) for equity Investment. This pool of money will grow as more number of investors switch from fixed income to equity.

What can stop this?

One – external factors such as an escalation of conflicts.

Or a further collapse of US CRE leading to bank failures.

Or another foolish assassination attempt on Trump.

Or failure of our Government to tackle its several weaknesses. Lots has been written about the tardiness of the judicial system, the ineptness of the educational system and the insouciance of the investigative system, which winks at white caller crimes like Ponzi schemes.

But the Indian citizen also has to feed the insatiable appetite of hungry Governments, both Central and States, seeking ever increasing tax revenues. The latest is a tax demand on Infosys, arguably the best governed company, by the Karnataka GST department, seeking hopping ₹32000 crores in unpaid taxes! Former Infosys CFO Mohandas Pai correctly calls this out, as tax terrorism. Infosys has issued a press release that it has paid all its taxes, a claim everyone will trust and believe, over the averments of the State Government. If India aspires to be a developed country, as it declares its intention to, the mindset of Government must also be developed. It should not, in its greed for excess revenue, excessively pursue  unreasonable courses and, in doing so, denigrate one of the country’s best governed companies.

Last week the BSE Sensex closed the week at 80981, for a weekly loss of 351 points.

The turn of geopolitical events mentioned above, and the handling of them by the lame duck US Government will determine the movement of the index.

Picture Source: https://missourinetwork.tv/lame-duck-period-strikes-again/

Please send your comments to Jmulraj@asiaconverge.com