Of Trump, multiple humps and now, are we headed for a slump?

Image: Shannon Stapleton/ Reuters

One of the (extremely few, if at all) arguments in favour of the US President-elect was that he will be pro industry – the US domestic industry that is. His strong background as an entrepreneur/business executive would help in boosting the economy, “making America great again”, had a nice ring to it. Most people in India also believed that our ruling party is extremely pro industry. In fact, a respected fund manager has allowed his funds to continuously underperform by holding on to infrastructure stocks, out of this expectation. Behavioural economists call this ‘decision arrogance’, but today, I am not writing about that.

When demonetisation was announced, it was tempting to sing praises of an ‘anti-corruption’, ‘bold’, ‘pro-nation’ move. It seemed like a hump that we could cross, never mind the temporary discomfort. Some estimated such severe fiscal gains from this weird encroachment on money supply that it seemed to them, tax cuts could be afforded by the government. Such hallucinations better clear up now. We seem to be headed for tough times. The known enemy is a slowdown in consumption. Some may argue that the biggest spenders don’t use cash, etc, but demand for consumer goods is the highest among the blooming rural economy. That is where income elasticity of demand is the highest and that is where the hardest hit is being predicted. The estimate of demand slowdown is arguably between 1 percent and 2 percent of the GDP which, from public platforms, I gather we can absorb and have accepted.

The emerging enemy now is a slowdown in capital expenditure. Also, because there is no room for a rate cut (there never was), there wasn’t one today. The RBI is doing what it does, managing liquidity. What is an important unheard message in the latest monetary policy announcement is that the central bank will maintain a ‘liquidity neutral’ stance. So those of us who thought the release of CRR will give some spike to bond funds, should not be surprised to see rising yields across the yield curve for some time. We seem to have crossed over the FCNR unwinding ‘hump’ smoothly, but the pressures on our currency remain with rising oil prices as an imminent threat. If agriculture gets hit, food prices will surge causing inflationary pressures too. Several sectors are already bracing for at least two poor quarters. Time to take a vacation and ensure inaction methinks.

I end by paraphrasing Elroy Dimson of the London Business School who very aptly said, “Risk means, more things can happen than will happen”. On that note, we continue to look at asset allocation seriously, so that the considered risk of investing in financial instruments, results in gains over long holding periods. Hold on, this too, shall pass.