What I read this week: Can Ambani turn the heat on Amazon; an investment theme for Xi’s China

Xi Jingping has emerged from the Chinese Communist Party’s five-yearly congress with power unmatched since the days of Mao Zedong. The consequences for China and for the world are immense. This will have an impact on the investor portfolios. I must thank Diana Choyleva of Enodo Economics for allowing me to summarise this report for you. Then there is an article of rising currency with public which has almost reached 100 percent of levels seen before demonetization. I will take it seriously because I think it reflects not only that cash is back for doing business but also rising inflationary pressure which incidentally is also covered in next article where New York Fed is seeing inflationary pressures at 11 year high. Lastly there is an interesting article of a new entrant in the Flipkart-Amazon battle and it is none other than Jio.

I reiterate that this is only a sampling of some of the best content I read through the week, with a dash of my own thoughts. Until next week...

Three investment themes for Xi era

(Source: Xi’s New Era Heralds Three Key Investment Themes)

Xi Jingping has emerged from the Chinese Communist Party’s five-yearly congress with power unmatched since the days of Mao Zedong. The consequences for China and for the world are immense.

This could have an impact on the portfolio of investors.

Enodo Economics highlights three long-term investment themes from the aforementioned event. The first one, Diana believes that global equity risk premiums are likely to rise as geopolitical confrontation mounts. On account of the uncertainty, equity risk premiums could return to the Cold War era, which were much higher than what we saw in the Global Financial Crisis. Xi’s speech emphasized that it is time for China to take centre stage in the world and the relevance of “Socialism with Chinese Characteristics” for development beyond China’s borders.

The overly assertive posture could alarm China’s neighbours and may translate into a less cooperative relationship with its Western partners. The second theme is China exporting inflation. Xi’s speech outlined how a better life could be achieved with a focus on the environment and supply side reforms like removing excess capacity and reducing China’s dependence on coal.

The first policy initiative has already pushed up producer price inflation and the impact of the latter would unfold over the next few years. This cost-push inflation would be passed on by the battered manufacturing sector which will be more than willing to export it abroad. The third theme which Enodo Economics highlights is that China is expected to distort globally
competitive markets, especially in technology.

The likes of Alibaba, Tencent and Baidu will have an unfair advantage in the global marketplace given their near-monopoly positions at home and the blanket government backing. Whether these firms will ultimately succeed in becoming leaders in artificial intelligence can be debated, what is certain is that they will try.

The resulting impact on their western competitors will be profound and prolonged.

Cash, cash everywhere

(Source: Currency with public surges)

We had seen a sharp decline in the currency with public post demonetization last year. One of the motives behind demonetisation is believed to be that it would boost the digital transactions in the system. The digital transactions have definitely gone up, however, they may be slowing. The currency with public is very close to the pre-demonetization level.

RBI data shows that about 90% of the currency of the pre-demonetisation levels has come back into circulation. Rapid remonetisation, coupled with the introduction of Goods & Services Tax, may have reversed some of the progress made towards a cashless economy. The currency with public has gained momentum from July, which is the month when GST was introduced.

Economists believe the GST rollout could be another reason as small traders are now holding more cash. This is impacting the deposit growth rate, which most of the banks had enjoyed post demonetization. Increase of currency in circulation at the current rate does not augur well for the bank deposits.

Increasing the currency in circulation may not be good from an inflation point of view. Also, it may also lead to asset inflation in sectors like real estate as we have seen in the past. The Reserve Bank of India may have a difficult time in setting its monetary policy going ahead.


The inflation chase in the developed world

(Source: New York Fed’s “Underlying Inflation” Hits 11-Year High)

Most central banks have been worrying about the low inflation rates they are facing since almost a decade. In spite of the all the quantitative easing exercises they have conducted, the inflation has failed to reach the desired level. It is changing.

After the Bureau of Statistics released its Consumer Price Index for October, several other inflation gauges were released, all based on the different slices of the data pile of the bureau. One of them is New York Fed’s “Underlying Inflation Gauge (UIG)” which hit the highest level since August 2006.
Inflation varies for different people depending upon whether they have kids in college, the amount of medical expensed or high rents. The UIG like most inflation measures has two forms: the “core” inflation measure and the “full data set” which has all the variables of the “core” inflation plus other macroeconomic and financial variables.

The “full-data- set” UIG has surged to 3 per cent, last seen in August 2006. The New York Fed says that both UIG measures continue to indicate a firming in trend inflation. The inflation, if it continues rising, is not such a good indicator for the bond markets going ahead in the US and may just accelerate the increase in policy rates by the Fed which can be unfavourable for the bond investors globally.

Ambani enters Amazon-Flipkart turf

(Source: Ambani May Outsmart Amazon)

The $200 billion e-commerce market which is forecasted for India by 2027 has a new contender. Energy tycoon Mukesh Ambani has already disrupted the country’s telecom industry. His next big foray may be online retail.

He has a different plan. According to a report, Reliance Industries wants to leverage its Jio wireless service and hand out digital coupons, which customers can then use to get discounts at their neighbourhood stores. India has 432 milion internet users, but only 15 per cent are online shoppers.

Most Indians who have internet-ready phones have only bought them over the last couple of years. In other words, they are experiencing the web for the first time. The inflection point in a 10-year journey from $15 billion to $200 billion will come after five years because that's how long it takes for new internet users to get comfortable shopping in cyberspace.

Amazon and Flipkart are waiting for will come after new users’ buying habits change. But Ambani may want to speed up e-commerce by joining hands with bricks-and-mortar. Redeeming a gift voucher at a neighborhood store is a familiar transaction; a digital coupon is a
slight tweak. Even new smartphone users regardless of age or literacy, won’t leave money on the table at their grocer.

Amazon India has 160 million product listings on its Indian marketplace, compared with more than 400 million in North America. Jio, by contrast, will merely be giving its customers a digital key into an offline shopping world that already has the rich variety they want. The industry is poised for interesting times going ahead.