Economy Now - USA & India.

The world today is under a very extraordinary situation which no one could have been able to predict. The COVID 19 pandemic, that started around February 2020, had put the world to a standstill and the world being USA centric, USA was impacted very much as well. Though the pandemic brought hell along, it helped companies, governments as well as individuals bring a reality check on many things, especially our finances.

 

Economic condition of USA today.

 USA being the epicenter of the world trade and capital, was hugely impacted by the pandemic. The stock market had fallen down by 30% approximately. The unemployment went in the range of 20’s and the businesses were shut. But with the recent experience of 2008 recession, the Fed and the US Treasury were prepared with their “Bazooka” of liquidity. With quantitative easing, the Fed instilled a confidence in lenders and investors, thus resulting in today’s stock market rally upwards of 40% from the march low. The Government then, with the help of unemployment benefits transferred directly to the people, helped avoid the situation of financial turmoil on ground level go worst. With companies like JC Penny and Hertz Car Rental going bankrupt, every company is on a survival mode and with the help reduced interest rates, more capital is being raised through equity or debt by almost every company. But the market is estimating a positive future for the US economy with recent stock rallies. If we compare the companies that are hit most to those hit least, we can assume that the companies with more variable costs than fixed costs are the ones leading the rally. With pharmaceuticals and healthcare being an exception other industry like airlines, brick and mortar retail, infrastructure developers, hotels, realty, etc are the worst performers. The best performers include the technology stocks, online retail, online entertainment, etc. This brings us to forecast that businesses with more flexible models could be the future.

President Donald Trump seems to have an unpopular opinion even amongst the Republicans with his way of working especially the part of firing people, latest being US Attorney Geoffrey Berman. Other controversies of his Russian ties, his decision to remove troops from Germany, impeachment, etc doesn’t improve his chances to be re-elected as the US President. With Joe Biden as a tough competitor from Democrats, chances of Trump being a president further decreases. But we never know. Although less, there are still very marginal probability of him being re-elected. The Sino-USA trade war would cause some minor effects and changes but in long term, it doesn’t hold potential for radical changes as China is the top exporter to USA along with increasing Chinese capital in US economy. Although the world sentiments for China don’t look good for now, in my opinion, this negativity won't last long.

Although the market is optimistic, the market is leading indicator or in other words future predicting machine. The economic indicators are lagging indicators or in other words historical data. Currently the economic indicators do not look good for sure. The bond rates are still to reach pre COVID levels.

Below are the main economic indicators of USA. The GDP growth rate very close to zero, so are the treasury bill rates. Even the treasury bonds of 10yr and 30yr are 0.67% and 1.43% respectively. Below is the Yield Curve comparison with previous year.

 

With this information I estimate:

·        The full recovery of economy of the USA to be by the year-end 2022.

• The unemployment levels to be contained at pre-COVID levels at least by 2021 year-end. The unemployment would decrease at an increasing rate but gradually the rate will slow down because there would be permanent damages or core changes in the businesses and their human capital requirements. There is noticeable trend of IT companies moving towards ‘work from home’ model and the increasing automation needs are even pushed further with the employees and workers being susceptible to COVID 19. Automation can be expected sooner than before now.
• These interest rates are to remain close to zero at least till 2021. There have been no talks by Fed to increase the rates anytime soon but even further talks about capping the interest rates. This will increase the liquidity of the economy.
• With the increase in use of quantitative easing by the fed, the US government debt to GDP, which already at 107 is more likely to increase even further. This will be the cost of keeping the economy liquid.

 

Economic condition of India today.

India has been an important country in the emerging markets with good opportunities and growth since 1991 Liberalization. But with recent events the prospectus of India doesn’t look good.

The markets in India are in sync with US recovery but still lagging the rate at which it should recover. With strict lockdowns the government may have controlled the pandemic but the economy is suffering due to the extended lockdowns. The NPAs are still an issue of Indian banking sector. The ban on Chinese apps won't have a significant effect on Indian economy. It was necessary, in my opinion, as it was a question of India’s national security. The expansion of Chinese tech companies will suffer as although enough revenue was not being generated in India, there was a potential for growth in India.  As I earlier said the Indian markets are in sync with the USA, the trends look similar although the numbers make a difference.

These are the major economic indicators of India. Examining these indicators, you might conclude that India does not look good into the future.

 

As we can see in the above graph, the trend of India’s GDP growth is downward. And through this we can also conclude that India’s growth rate decline was before COVID crisis. The pandemic might have just given a push down early. The Rupee value has depreciated upwards of USD-INR 75 Rs. RBI has been very helpful in that matter as it has continuously made efforts to keep the Rupee in a certain bandwidth. The Moody has downgraded India to BBB-, which is just above junk rating.

With the initiatives like securitization, Dis-investment of public sector, etc. India seems to be making choices towards the right path. The ‘Make in India’ initiative is good for India in some ways, but it does have its own cons. This might be perceived as a socialist move or protectionist move by the world and thus FDI and FII might reduce. India, with is already implemented laws and regulations, is not viewed as an outsider friendly country with restrictions on foreign capital and, in my opinion, it's high time India should open up more to the world economy.

To conclude, in my opinion:

• With China in a negative side of sentiments of world this is the chance to open up and reduce barriers to the world and invite FDI. ‘Make in India’ Initiative may seem as a wrong choice in current world situation.

• The Indian economy seems a slight downtrend, which can be controlled or even reversed through major policy changes by the governmen.

• The online retail may seem to be an exciting battleground in India with Amazon, Walmart backed Flipkart, Avenue Supermarts and now Reliance Jio Mart.

• Banking sector might be in trouble although top banks like HDFC will survive and grow stronger after this NPA crisis.

• Telecom sector might see trouble for long time due to lot of debt and highly competitive market.

• Seeing how the Indians have fared outside India, Indians do seem to have potential. But somehow it does not reflect in India.

By Sarang Zagade (Student of the market, CFA Level 1 Exam Candidate).

    DISCLAIMER:

• These are writer’s personal opinions and can vary from the facts.
• This is just a bird view, personal analysis of the economies.