The trade and tariff war between the US and China has been one of the spoilers for global trade and the global economy
The New Year brings with it lots of new hopes and aspirations. There are several events, which we have lived with in the last one year, and some of those may fade away from relevance during the course of the next year. But, a few of them, are bound to stay seeking more or less permanent resolution.
US-China Tariff War:
The trade and tariff war between the US and China has been one of the spoilers for global trade and the global economy. The trade issues are still alive, and they so far have eluded any resolution, which means the solution is still away.
This will continue to hit trade and economies for more time to come. The reason for the slowdown of the US economy as well as the European economies is attributed to a large extent to the uncertainties arising from the trade war.
China is Important:
China is important not only for the interest of investors in FPI and FDI in the country but also for the Chinese interests in the rest of the world.
The magnitude of this is massive and would serve as a measure of the direct or indirect impact of Chinese developments on the global economy.
Foreigners hold close to $5 trillion of Chinese assets as of 2018, of which about half of it is FDIs and the rest is FPIs and bonds. This growth has happened over the last one and a half decades, from relatively small ownership of $500 billion.
The Chinese ownership of foreign assets is about $7 trillion in 2018, a seven-fold rise from the $1 trillion in 2005. A slowdown in China or the Yuan moving down against the Dollar will have consequences for all major markets.
If the trade war escalates, the consequences will be felt around the world due to its linkages. That is why China is important in the larger scheme of things. A resolution of the tariff war is at the heart of a better order in the world markets.
There are several geo-political issues that serve as dormant volcanoes. The situation in Iran and the rest of the Middle East, Korea, are challenges that may persist, and have far-reaching consequences for the world economy.
These issues have remained with us for more than a year, and we carry them on to the New Year as well. Some of them may elude solutions in the immediate term.
Global Economic Slowdown:
It is irrefutable that there is a general economic slowdown in the global economy enveloping many of the larger economies including the US, the EU, China, and even India.
The Fed has already cut rates a few times, as a mid-cycle policy correction, and the ECB has already indicated that they would be going in for quantitative easing. So, measures have been initiated to counter the fall in growth, but it may yield results only over a period of time.
In many developed markets, the debt servicing capacity of corporates in the manufacturing sector has been coming down since the middle of this decade because of two reasons – post the withdrawal of quantitative easing interest rates started moving up and the Fed also hiked rates to combat inflation, both of which led to higher borrowing costs. And earnings growth has been slowing, which indicates lower profitability for the companies.
The weaker servicing capacity often indicates the potential for an economic slowdown as also for corporate debt to become cheaper due to selling from those who hold substantial amounts of the same. This requires a significant amount of diligence to be exercised while investing in debt, in any form, with an accent on credit risk.
Domestic Vicious Circle:
While most of these issues are of consequence to domestic markets as well, there are specific things that we need to encounter in the economic realm which is India-specific.
The GDP growth is sagging, and it is at low single-digit and the earnings growth would also be in line with this. This will affect the expectations, and thereby, the markets.
Though there have been some measures already taken by the government and the RBI, we need to see some more measures which are demand-centric to stimulate aggregate demand. This may be incorporated in the budget exercise, which is due in Feb 2020.
Unless the revival is supported by stronger investment and consumption, the economy will continue to stagnate. This requires more spending by the government, and that again is difficult in the absence of buoyancy in government revenues.
The likelihood of fiscal slippages, a rising CPI resulting from higher food prices, the lack of credit flow to critical sectors like the non-banking finance sector, the sector-specific issues faced by auto and telecom, are all issues that are crying for resolution at this moment.
Investors should focus on quality portfolios both in equity and debt. Quality in equity, in the present context, means companies which have good governance standards, and which are in a secular growth phase with proven business models, with consistency in cash flows and revenue generation as well as governance standards.
The best proposition will be to invest in portfolios that contain quality stocks both from the mutual fund space and the portfolio management services space.
This selection will have much to do with the fund managers and the house which is responsible for the product in terms of their track record, experience and the philosophy behind the product.
This is equally important in the fixed income space too where there have been downgrades and defaults.
While we are going through a growth slowdown it is imperative that there should be extra diligence on credit risk aspects as the pains on account of credit risk is likely to linger on for another year.
Therefore, the portfolios that one chooses to invest in should be credit-risk proof to the maximum extent possible.
The fundamental direction set by risk profile should be pursued and the asset allocation must reviewed from time to time by individual investors, to gauge their progress, at least once in 12 months. One should not be dismayed or too much swayed by the flow of news but should stick to the chosen path consistently.