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BIG NEWS – Jul 28th 2017


Posted on 01-Aug-2017 Comments  0

US Economy


It’s no longer the driver of global economic growth…



The July update of IMF was revealing in more ways than one. Firstly, the IMF expects that neither the US nor the UK is likely to drive global growth in the next couple of years. In fact, the US economy is likely to grow at just about 2.3% in the current year while the world economy will grow at around 3.5%. Secondly, the growth is going to be driven by Western Europe, Japan and China. Interestingly, Western Europe could emerge as a beneficiary of BR EXIT and a strong dollar.Thirdly, India will continue to be the fastest growing large economy in the world with real GDP growth rate of 7.5%. So, why exactly is the US going to be less of an influence on global growth?


Getting on without the US…


In the last 9 months since Trump was voted to power, the US has gradually weaned itself away from world affairs. It has walked out of the Trans-Pacific trade deal and is now threatening to walk out of the NAFTA. The US has also expressed serious reservations about the Paris Climate Accord. All these actions have indirectly opened the door for China to exert a much greater influence on world growth. The inward-looking “America First” policy is forcing nations to look for alternatives platforms to cooperate. Mexico cooperating with Russia and OPEC on oil supply is one such instance. The bottom-line is that the US is becoming a less influential force in global decision making.


What about the Trump Trade?


The big news in the world markets was the Trump trade post November last year. His announcements on plans to cut corporate tax rates and give a push to infrastructure were received with enthusiasm by the markets. However, the flip-flops on the alternate Obamacare proposal have raised serious question marks. Analysts and fund managers are now beginning to doubt if Trump will have the numbers and support in the senate to push the tax reforms and infrastructure spending proposals through. Both these measures were expected to give a big boost to the US economy and the world was waiting for its downstream benefits. That looks unlikely to happen any time soon!


Trump’s dollar dilemma…


This could actually be the Catch-22 situation for Donald Trump. To prop up growth he needs to cut taxes and invest in infrastructure. But, that will add strength to the dollar. When the dollar strengthens, global US companies tend to lose out and Europe and Japan are the clear beneficiaries. The irony is that neither can Trump keep the dollar weak for too long. A large chunk of the US influence and exorbitant privilege comes from a strong dollar. The US policy makers are caught between a rock and a hard place. The IMF has a point. The US may be actually less of a global influence in the coming years! ©



Global Oil Demand


Why oil demand could peak by 2024…



A recent report by Goldman Sachs has estimated that oil could touch peak demand by 2024. That is not great news for the billions of dollars that are currently being invested in prospecting and extracting new sources of oil. The US has virtually spurred a shale boom supported by low interest rates and better directional drilling technology. So, why exactly is the investment bank expecting peak oil demand by 2024? There are 3 broad reasons …


Cartelization could emerge…


Even though crude oil prices may not get back to the peak levels of 2014 in a hurry, there is always the threat of peak oil demand. That worry will force most oil extractors to make the best of the oil reserves while the party still lasts. Currently, the crude oil prices are hovering in the range of $45-$50/bbl. However, this is more because the OPEC is gradually losing out on its bargaining power as it accounts for just about 35% of the world oil production. But if oil was to have a shorter life span, then even the US and Canada will look to make the most in terms of oil prices. Even if the price eventually settle at around the $60-$70/bbl mark, the US and other oil producing economies stand to benefit immensely. It is therefore not entirely inconceivable that the US may also cooperate with the OPEC to restrict supply to have a better control over oil prices.Higher crude prices will depress global demand in a big way!


Weak global growth…


Estimates of growth coming from most of the key global research organizations are estimating sub-par growth from most of the large economies due to fundamental challenges. The US will find it hard to get back growth unless the tax cuts and infrastructure spending actually happens.China will continue to reel under the pressure of its huge debt and its parallel shadow banking system. While UK will struggle with the aftermath of BREX IT, both Europe and Japan may, at best, flatter to deceive in terms of growth. The big challenge for oil in the coming years will be insufficiency of demand and that will come from more environmental caution as well as efficient cars.


Actually,it is about electric cars!


The big game changer for the oil industry could be the mass production of electric cars. Thanks to Tesla, the demand for electric cars is at a tipping point. The demand for electric cars is expected to grow 40-fold in the next decade and that will contribute largely to the reduction of demand for fuel. Cars continue to be the biggest consumers of fossil fuels and this shift will actually lead to oil demand peaking. The mass production and demand for electric cars has already started and if the trend catches on, we may see the peak much earlier. The news is not good on the crude oil front! ©



Demonetization


Did it actually lead to a shift in savings pattern?



A full 9 months after the demonetization drive was announced, the jury is still out on the relative merits and demerits of the drive. The supporters of the drive argue that demonetization has surely helped in slamming the brakes on the creation of black money as well as the circulation of black money. They also point to the rapid growth in digital transactions leading to better audit trails. The critics still hold on to the view that demonetization put industry in general and SMEs in particular behind on the growth curve. But the real question is whether demonetization led to savings shifting from real asset to financial assets?


Dr.Viral Acharya thinks so…


The deputy governor of the RBI, Dr. Viral Acharya, strongly believes that the demonetization drive had the effect of catalyzing a shift in the asset mix. For a long time, the Indian households preferred the safety of property and gold. With demonetization putting the brake son cash transactions, both these asset classes have got impacted. The result is that money is flowing into financial assets. If the massive response to IPOs is any indication, then Dr. Acharya surely has a point. The second indicator is the way mutual fund inflows have picked up in the last couple of years. Increasingly, investors prefer the financial assets route where the KYC norms will ensure that they do not worry about the taxman.


Look at banking stocks…


Even as markets over all have been in a broad range, there are specific the mes that are playing out smartly. For example, private banks have done extremely well in the stock markets with most of the large private banking names at their all-time peaks. The shift to financial assets has specifically benefited the banks with low NPAs as they are best positioned to capitalize on greater demand for financial assets.The second list of beneficiaries consists of the brokerage stocks.Most of the leading brokerage companies have done very well in the stock markets in the last 9 months on the back of greater buoyancy in the capital markets brought out by this shift. Stock market performance clearly seems to be hinting at this shift


Yes, there is a shift!


Frankly,it may be early days to pin down on a fundamental shift. But economists, who were predicting a $70 billion retail infusion into equities in 3 years, are now sharply upgrading this estimate. Most market watchers also believe that demonetization may have actually been the tipping point. For too long, the household exposure to equities was too low by global standards. Since 1992, this ratio has been on a downtrend. If this shift actually happens, then we may see Dr. Acharya’s predictions come true. For equities; it will be time to rejoice! ©


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