The Lehman Moment💥
As we bid adieu to one of the most rocky 6 months, economies continue to face problems that surfaced during the start of this period. Whether it is inflation, increasing borrowing costs, war, real estate crisis or unplanned liquidity boost. But one common theme that runs across most of these events is that they all fall under the banner of “the Lehman Moment”
What is the Lehman Moment? It is the point at which one company or country’s disaster becomes everyone else’s problem. Back in September 2008, Lehman Brothers filed for bankruptcy due to mounting losses on its bets on the America’s subprime mortgage market. The mistake of one however spread like a disease throughout the world leading to the worst global financial crisis since the Great Depression. The timing is also quite spooky as all this happened exactly 14 years ago!
It is those 2008 scars which has caused economists to lose sleep and become nervous. While the current events may not be as catastrophic, they may not be very easy either. But if there is one lesson to learn from the Great Recession, it is FEAR but NOT PANIC.
On this note, lets look at top 5 stories that consumed much of our news feeds in the last 6 months
Inflation Saga- A vicious circle 📈
Global inflation has persisted for almost a year now. Underpinning the whole inflation saga is of course the government spending to boost the economies post pandemic.
Hotspots: As crazy as this may sound, in Argentina, prices are rising at a rate of 100%, and interest rates have risen to 75% in response! Thats not it. Home prices in Istanbul are up almost 200% as Turkish inflation has sky rocketed to 80%. This is when winter fuel demand has yet not begun!
Hike it till you make it: In response to the increase in inflation, Central Bankers around the world have been using their favourite tool – raising interest rates. The scene in India is no different.
But, the one question which is still left unanswered is, why did Central Bankers make such a big forecasting blunder? These criticisms are only getting louder and ruder.
While no one could have anticipated such shocks like pandemic, war, China’s absurd covid policy one after the other, but warning signals had started honking much earlier.
We might get everything under control which, if we crash into a recession, could happen pretty soon (what a dim silver lining!)
Lessons from this crisis will, however, long remain etched in the memories of our fellow bankers.
India is Binge-spending 🛍️
What’s happening? The savings of Indian households dropped to lowest level in the last 5 years. In numbers, savings have fallen from 15.9% of the GDP in FY21 to 10.8% in FY22.
Skyrocketing transactions: Despite pandemic-related pay cuts and job losses, the credit card and UPI business is booming like never before. In fact, the value of UPI transactions and credit card spending surged to Rs. 10 trillion and Rs. 1.16 trillion respectively in July – that’s almost Rs. 37,200 Cr. a day!
Revenge Spending: During the early days of pandemic, people had saved money as a protection for their health and jobs. However, as the economy started to open up, they went on a spending spree to make up for lost time. As a result, many are spending way beyond their budget and depleting their savings. Capitalizing on this attitude, e-commerce giants are aggressively pursuing their own strategies to woo customers.
Takeaway: Savings need to be revived as high consumption combined with inflation and weak income growth can deplete savings even further. Amid so much uncertainty, it is the right time to channel your inner Monisha!
Dollar + 1 💸
What’s happening? Interest rate hikes has triggered currency pressures across the world. Even RBI could not save the Rupee despite spending close to $100 billion. The only Silver Lining: Rupee is not the only currency that has depreciated and intact fared much better compared to Euro, Pound, Yen, Renminbi.
King of bad times: The American $$ is the king of the financial system since the end of World War II. It gains even more power during crisis as a safe haven when money runs for cover. But this dominance is creating more problems than solving any. Just like a China +1 for supply chain problems and Russia + 1 for energy issues, dollar +1 strategy is needed for all money problems.
Who is plan B? Country that is stable, transparent policies, active in global trade. has a matured financial system in place could be an alternative. If not one, there could be several currencies that could take the dollar’s place. Infact many countries are already reducing the amount of USD reserves. RBI too has allowed trade with other countries in Rupees.
The bottom line: It may be a good time to do some innovation. Afterall, crisis is an ideal time for disruption!
Investors burning hands 🔥
Investors have burned their hands across most asset classes this year be it equities, bonds, gold, FDs and cryptocurrencies. The investment outlook for the remaining months doesnt look very promising either.
Indian equities, despite falling by about 3% in FY23 so far, have proven to be the safest best. They have fared much better than their global counterparts like S&P 500 index (down 19.5%) and MSCI Emerging market (down 23.5%). Safe havens like gold declined by around 10% but the biggest drawdown was seen in cryptocurrencies which crashed by more than 50%.
Our age old FDs also lost their sheen due to negative inflation adjusted returns.
Indian stock market indices have been the least affected by the global turmoil. But how long can India fly against the wind, certainly not for long. Global events are bound to impact India, sooner or later
So is Cash the king? While these are unprecedented times and there may still be tough times ahead, sitting on 100% cash will be foolish, to put it bluntly. Just keep your focus on asset diversification as they meet different needs. Dont fret too much as the long-term story is still intact!
Recap: Sector Performance 🏁
Pharma is unwell: The pandemic created fortunes for the Indian Pharma sector. But shares of majority of the pharma companies in India have delivered negative returns in 2022. Non-covid biz is starting to recover but cost pressures from China and competition from the US generic market still persist. Even $$ appreciation could not provide much breather to the export backed industry.
Auto and consumer sectors back on track: Shares of auto and FMCG companies are coming out of a slump. Be it an effort to avoid crowded public transports or just as a consequence of revenge spending, the consumption demand has increased exponentially. Festival demand effect is although yet to be felt!
IT stocks bleed: IT which was once the darling of investors has not been left in lurch. Nifty IT index has fallen by 25%+. Internal factors like high employee turnover, and demand concerns from the US has neutralised the gains from a weak rupee.
What Tavaga Tribe has been upto last week
Team Tavaga had an absolutely exhilarating experience at the Global Fintech Fest in Mumbai last week. The energy and the interest levels were simply unmatched. The highest point for us was when our Tavaga CEO Nitin Mathur presented to SEBI Chairperson Smt. Madhabi Puri Buch
Disclaimer: This write-up is solely for educational purposes. This in no way should be construed as a buy/sell recommendation. Please consult your investment advisor before investing.
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