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Posted on 22-Mar-2019 Comments  0

Fed Status Quo

Fed holds rates but the bigger story could play out on liquidity

There was not much a surprise when the Fed announced on 20th March that it would maintain status quo on rates. That means; the rates would be held at the current level of 2.25%-2.50%. In fact the CME FEDWATCH, which gauges probability of a rate hike based on Fed futures pricing, was already assigning a 99% probability to the status quo. Hence the markets were almost resigned to a status quo on rates. But what really surprised the markets was the starkly dovish tone of the Fed. 

Dovish from December

After four rate hikes in 2018, the Federal Reserve had hinted at a possible 2 rate hikes in the full year 2019. That was supposed to keep the average rates relatively lower than the pre-crisis levels but that was understandable. What really surprised the market on 20th was the clear signal coming from Jerome Powell that there would not be any further rate hike in the year 2019. The rate hikes began in December 2015 and it was predicated on rising inflation, improving growth and solid labor data. A lot has changed since the trade war began in the middle of last year. The punitive tariffs imposed by the US and China now only slowed down these economies but also threatened to impact other global economies too. In fact, IMF has already downgraded global growth by 40 basis points. Weak growth would mean weak oil prices and therefore weak inflation.

Data points falter

There was a clear faltering in key data points. The GDP growth was downsized from 2.3% to 2.1% and could trend lower. Secondly, the unemployment rate had gone by 20 bps to 3.7%, which was again a cause of worry as jobs had actually been lost as an outcome of the internecine trade war. But most important was the expectations of the members of the FOMC. At the beginning of the year, 11 members had estimated two rate hikes during the year but by March that number had come down to just 2 members. And the CME FEDWATCH has also started assigning probability of a possible rate cut during the second half of the year.

Liquidity could be the big story

Back in 2013, when the Fed balance sheet reached $4.50 trillion, it started to taper. Fed stopped fresh issues of bonds but kept rolling over existing bonds, so the balance sheet stayed at the same level till 2017. Effective October 2017, the Fed has started to reduce the balance sheet by $50 billion per month. With nearly $800 billion of liquidity gone, the tightening was beginning to show. Now the Fed has indicated that it may stop reducing the balance sheet size. That may be good news for global liquidity, especially for risky assets like emerging market equities, which are driven by liquidity. That could be the big take-away for Indian markets!

Mindtree Story

L&T has no business to buy Mindtree; in fact history is against it

After a long time, India got to see something that is close to a hostile takeover. After VG Siddhartha of Café Coffee Day, the largest shareholder in Mindtree, approached L&T Infotech to buy his stake in Mindtree, the color of the deal changed drastically. L&T Info was not only interested in taking VG Siddhartha’s stake but also in taking over full control of Mindtree. Not surprisingly, the founding fathers of Mindtree were hardly amused by the idea of a Mumbai based conglomerate taking over a startup like Mindtree. But why is L&T Infotech so interested?

Willing to pay top-dollars

To begin with, L&T Infotech is willing to pay close to the high price provided they get a controlling stake. Buy why does L&T want Mindtree? There are quite a few reasons. Firstly, L&T Info has been too much of a BFSI focused company with clients like Microsoft, Citibank and Barclays accounting for a big chunk of their business. L&T Info is still a staid BFSI driven company, whereas Mindtree has made rapid strides in the field of digital client solutions. After all, that is the growth area for IT companies. If L&T Infotech needs to get into the big IT league in India, then an inorganic strategy would work a lot better. The best example is that of Tech Mahindra, which actually catapulted itself in the top league with the acquisition of Satyam. And therein lies another very interesting story.

Satyam and Reliance

As L&T Infotech prepares to make a hostile bid for Mindtree, there is a piece of history against it. Back in early 2009, L&T had made its strategic bid by increasing its stake in Satyam to 12%. Of course, it was called a strategic investment back then but it imploded when Satyam went bust. They were lucky to get an exit through Tech Mahindra but surely their experience in software buys has been less than flattering. Secondly, back in 1989, Dhirubhai Ambani had made a hostile bid to take over L&T. That was the time L&T management had fought hard and used the influence of institutional investors to resist the deal. Much later, Birlas had tried the same, before cutting a win-win deal for both parties. The same L&T trying to make a hostile bid for a professionally managed company like Mindtree looks insincere and daft.

Government must get involved

India has not had a history of hostile takeovers and that must continue. Unlike L&T, Mindtree does not have large institutional shareholdings. Hence the onus will be on the government to intervene and sort things out. There should be a middle path where L&T is allowed to hold a passive stake and Mindtree retains its independence. That would also be conducive to the start-up culture that the NDA has spoken about. It is time to sort things amicably!

Elections 2019

Why it may still be too early to take a call on the outcome

May 23rd is still a long way away and it is hardly surprising that that the pre election campaigning is already reaching a crescendo. Recent markets trends appear to hint that the mini-war with Pakistan may actually help the ruling NDA. In fact, it is also believed that the sharp rise in FPI flows to about $5 billion since late February was on the back of expectations that a stable government would come up at the centre; whatever it means. But in the midst of all the noise, the real trends are never obvious. Here is why.

Tyranny of English News

If one were to watch any of the English news channels, they would be led to believe that May 23rd is just a formality. That is an over simplification. Firstly, what do English news channels really represent? Let us look at the statistics. Out of the total TV viewership in India, just about 7% is news and just 7% of this group watches English News. Effectively, for a 0.49% viewership, there are more than 20 English channels fighting for mindshare. That gives you an idea of what and how much they really represent. Typically, most of these English channels would represent a very small group of people in largely urban areas only. As a barometer of the pulse of the Indian voter, these English channels amount to little. That really explains why their election predictions are way off the mark. They just don’t have their skin in the game.

Real story is elsewhere

More often than not, the tyranny of English news tends to draw us away from the real issues. These are the real issues that people are interested in. Why is jobs creation on the wane at a time when it should be the other way round? Why are farmers still under distress despite the MSP announced? What is this slip between the cup and the lip? The one thing that people do vote for is visible growth. It does not matter how much the TV channels may try to sell an idea. The voter at the booth will only vote on growth that is visible. We have seen governments like NDA in 2004 and the TDP also in 2004 were ejected from power because they did not have their skin in the game. May 23rd will ultimately belong to the party or set of parties that can convince the voters that they can make a tangible difference to their life.

Plus many X factors

Any election is unique because of its X-factors. What if the opposition plans to put up a joint front in most of the critical states? What if Priyanka Gandhi manages to sway women and youth voters in the last one month? Does a strong leader really matter; at least Chhattisgarh showed that it doesn’t. The moral of the story is that we are basing out estimates of outcomes on some internalized assumptions. As we have seen in the past, it does not work!

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