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Posted on 05-May-2017 Comments  0

Fed Holds Rates


The only worry is whether US growth is actually faltering…



The US Fed, not surprisingly, decided to hold on to rates in its Fed May meet. However, the Fed has clarified that this is only a temporary pause and the trajectory of rates remains upwards. The Fed has also clarified that they are on target to implement two more rate hikes during this year taking the overall Fed rate to the level of 125-150 basis points by the end of 2017. However, there are 3 factors that may impact future rate trajectory from here on…


How inflation shapes up…


The way inflation shapes up in the coming months could be a key criterion for any rate decision. As it stands, the rate of inflation excluding food and oil (non-core inflation) was much closer to the targeted 2%mark. That makes a strong case for further rate hikes by the US Fed.However, things may be getting into a state of flux. If oil and commodity prices start moving down, as is evident in the last few weeks, then the overall impact may be to depress down stream inflation. With the US not relenting on shale supply, the price of Brent crude has fallen below $50/bbl despite the supply quotas imposed by the OPEC. That is an indicator that crude oil prices could fall further from these levels. Commodities are another X-factor for US downstream inflation. Commodities like iron ore, zinc and copper have already corrected sharply on China growth worries. That may keep prices subdued and induce lower inflation.

How the world economy shapes…


As much as Trump may talk about an isolationist policy for the US, he will be forced to take cognizance of the global economic situation.Firstly, if the BREXIT starts putting pressure on the European economies then the US Fed may have to go slow on rate hikes.Secondly, if China which is the engine of global growth shows signs of slowing down then also the US Fed will be forced to go slow on rate hikes. The US Fed will have to worry about the risks of global volatility caused by monetary divergence. That is something the US will also want to avoid and it may make a strong case for the Fed not hiking rates aggressively.


It could be all about US growth…


In the final analysis, the real worry could be on US growth. The first quarter growth at 0.7% is really disappointing. Too much of expectations have been built around bold reform measures by Donald Trump. But if the struggle over Obamacare is any indication, then getting bills across is not going to be that simple. If the Trump government is not in a position to deliver on its promises of aggressive tax cuts and infrastructure spending, then the expectations of demand-driven growth may peter out. In fact, the stress on GDP growth in the US is clearly visible. While the Fed tom-toms about rate hikes the real challenge for the US may actually come from within!


Brent Crude Oil


Oil may be staring at a really tough year ahead…



With the price of Brent Crude dipping below the $50/bbl mark, the market has given up on most of the gains that it saw since the OPEC supply quotas were first implemented in November last year. There is already the uncertainty over whether the OPEC will agree to extend the supply cut by another 6 months or let oil find a lower normal. There are 3 reasons why oil may be staring at a tough year ahead…


US may not relent on Shale…


What has confounded the oil market is the incessant supply coming from the US. Most of the shale wells that had become unviable when prices had dipped below the $40 mark have now turned viable. Remember, shale oil operates on a very diverse set of economic conditions. There are certain grades of shale that have seen a substantial reduction in their break-even price. For example, according to oil industry estimates, the average break-even price for shale has fallen from$98/bbl in 2013 to a low of $35/bbl. That means; the current price of around $50/bbl leaves a margin of nearly $15 for US shale companies. This improved efficiency, better economies of scale and better utilization of resources has been at the core of the incessant supply of US shale at current prices. With a margin of $15 still available, expect US Shale to continue to flood the global crude oil market in 2017 putting further pressure on the Brent Crude price levels.

OPEC may be forced into quotas…


The OPEC may actually find itself in a very piquant situation. The decision on whether or not to continue with the supply cuts of 1.8 million bpd will have to be taken soon. Even as the US continues to flood the global oil market with lower cost shale, the OPEC will be forced to sustain its supply cuts merely to ensure that the prices donot nosedive from current levels. The US Shale still has a $15 margin from current levels, a luxury that the OPEC does not have. Most OPEC nations produce oil at much higher break even levels. Additionally,most of the OPEC nations are also predominantly dependent on oil for the national revenues and hence this is likely to widen budget deficits.


Oil may face a volatile year…


The crude oil prices could turn pretty volatile during the current year as the US shale and OPEC oil slugs it out in the global oil market.The US has the irrefutable advantage of a much lower break-even and the OPEC will be forced to continue with its supply cuts purely to maintain a semblance of sanity in the oil markets. This two-way pressure will add substantially to the volatility in oil prices. An economic pull back in the US and China may partially contribute to a pick-up in oil demand. But the big story for oil in 2017 could be one of extreme volatility in an uncertain oil market!

The Patanjali Story


What other FMCG companies can learn from their growth…



Baba Ramdev’s Patanjali has clocked fabulous sales of Rs.10,000 crore for the full year 2016-17. This makes Patanjali the third largest FMCG Company in India after Hindustan Unilever and ITC. From sales of Rs.450 crore in 2011, the company has grown to Rs.10,000 crore in 2017; nearly 20-fold. Going by that trend, the company’s projection to touch Rs.20,000 crore sales by next year does not seem entirely impractical. So, what are the lessons that other FMCG companies can learn from Patanjali…


Pricing with Quality is the key…


One of the basic driving business logic for Patanjali has been pricing.In fact, if you take any of the Patanjali FMCG products and compare with other FMCG products, Patanjali is substantially cheaper. In a market that is still driven by the “Value for Money” principle,Patanjali has found the perfect positioning in the minds of the Indian customer. Of course, the feedback is that quality is also of a high order.


In sync with Indian values…


One of the key advantages of Patanjali is its identification with traditional Indian values. For example attributes like purity,absence of harmful chemicals, and use of natural flavors are normally at the core of the Indian consumer’s value system. That is precisely the customer mindset that Patanjali has attacked and also managed to deliver.

Distribution is the key…


Probably,no other FMCG company in India has the kind of marketing investments and distribution presence as Patanjali has. Apart from distributing through aggregators, Patanjali has also set up its own dedicated distribution network across the length and breadth of India. This ensures that wherever you are in India, you will never be too faraway from a Patanjali products outlet. The company has also focused heavily on rural and semi-urban areas where price continues to be a predominant factor in buying decisions. With its earthier image and more granular marketing and distribution module, Patanjali has effectively captured a big chunk of the incremental spending in the rural and semi-urban areas.


Understand Indian ethos…


In a nutshell, what Patanjali has displayed is that they have much sharper insights into the Indian ethos. The overall shift in India is towards more traditional approaches and the timing of the big push for Patanjali was also perfect. They also understood that if you deliver value consistently at a low price, then existing brands and brand strength does not really matter in India. We have seen products like Good Night mosquito repellants and shampoo sachets take Indian markets by storm. They had no brand or pedigree to fall back on. Just an idea that worked! 


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