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India’s Diwali Spending Season Shows a Lingering Pandemic Divide

Goods catering to India’s wealthiest are doing well, while demand for entry-level appliances and products appears to be more sluggish

By SHEFALI ANAND
Fri, Oct 21, 2022 9:00amGrey Clock 4 min

India’s peak retail season, which culminates soon after the Diwali festival, is showing signs of robust shopping despite higher prices. But an uneven return to discretionary spending among India’s consumers could spell challenges ahead for the economy, companies and economists say.

This festival season, retail sales in India’s stores are expected to be around $18 billion, up 50% from the same period last year and nearly double those in the pre-pandemic year of 2019, according to the Confederation of All India Traders.

“After two years, the current Diwali festivity will be celebrated with no Covid restrictions, which is prompting the consumers to throng the commercial markets,” said Praveen Khandelwal, secretary general of the trade association. Prices of goods have gone up 10% to 15% since 2019, he added.

Yet this season’s spending shares a key feature of India’s overall recovery—goods catering to India’s tiny sliver of its very wealthiest are doing well, while demand for entry-level appliances and products appears to be more sluggish. India’s economy grew 13.5% from April to June, partly driven by robust growth in spending.

“Post Covid, we really see the divide between the rich and the poor expanding,” said Manish Raj Singhania, president of the Federation of Automobile Dealers Associations, an industry group. As an example, Mr. Singhania pointed to the gap between demand for luxury cars versus motorcycles and scooters, the first vehicle that many Indian families can afford.

Despite being more expensive than before the pandemic, waiting lists for premium cars such as those from BMW and Mercedes-Benz that cost more than 6 million rupees, equivalent to $73,000, are so long that buyers have to wait on average four months to get delivery, he said. “It’s that crazy,” Mr. Singhania said.

The delays are partly due to supply-chain issues, but also because demand has outstripped production. The number of luxury cars registered in India in the first nine months are up 28% compared with last year, according to the automobile dealers group, though they remain 12% below sales in the same period in 2019.

Meanwhile, at the other end of the income spectrum, there has been lacklustre growth in sales for two-wheelers, especially the cheapest variants costing around 60,000 rupees. In the first nine months of this year, sales of all two-wheelers were around 12.7% higher than the same period last year but 18% lower than in the same period in 2019, according to the automobile dealers group.

Narendra Kumar, a resident of a village in the northern Indian state of Uttar Pradesh, said he had saved up to buy a motorcycle two years ago. It would have been the first motorised vehicle in his home. But the Covid-19 lockdowns, followed by two years of reduced farm income—the mainstay of Mr. Kumar’s household—depleted his savings.

Now, buying the bike looks harder than ever to the 23-year-old. The bike’s price has risen by 60%, Mr. Kumar said, while his family’s earnings aren’t back to pre-pandemic levels.

“Whatever plans one had have gotten off track,” he said.

Income inequality has long been reflected in India’s consumption, with the Boston Consulting Group predicting in a 2020 report that the share of spending by the most affluent households—those earning one million rupees a year or more—would grow from 33% of household consumption in 2019 to about half in 2030. India relies on consumption for more than half of its economic growth.

Still, new entrants to the lower rungs of the middle class in the country of more than 1.3 billion people have also been a significant contributor to the economy, especially for certain product categories in a country where per capita income hovers around $2,200 a year.

“At some point, the destiny of the two are related,” said Pranjul Bhandari, chief India economist at HSBC Securities & Capital Markets (India) Pvt. If a big segment of the population is not doing well, it would limit the ability of companies’ to grow and earn profits, she said. “We’ll be punching below our weight,” Ms. Bhandari said.

India’s economy still appears to be a bright spot compared with countries that are bracing for a sharp slowdown, and possibly recession. It could expand by 6.8% in the financial year that ends in March 2023, estimates the International Monetary Fund.

That, however, marks a downgrade from the 7.4% growth the IMF had forecast in July. India isn’t immune to the global headwinds from Russia’s war in Ukraine, which have sent food and fuel prices up, and from interest rate increases in the U.S. India’s rupee has deteriorated to all-time lows against the U.S. dollar, making its import bill more expensive.

Inflation crossed 7% in September, and the central bank has raised interest rates four times this year.

Against this backdrop, lower middle-class consumers—especially in rural areas—are likely to pause before spending on goods that aren’t daily necessities.

Shilpi Jain, an analyst with Counterpoint Technology Market Research, said premium smartphones, those costing above 30,000 rupees ($360), have been doing well ahead of Diwali. In the first six months of this year, demand for the phones rose 26% compared with the same period a year ago. However, the demand for phones that cost less than 8,000 rupees, was 24% lower than the first six months of last year.

Because of shortages in imported components earlier this year, and an increase in their prices, mobile phone companies haven’t offered deals on low-end smartphones this Diwali, Ms. Jain said.

Meanwhile, for refrigerators, sales of smaller, single-door variants have declined by around 15% this year compared with pre-pandemic levels, whereas sales for larger, double-door refrigerators are up by around 30%, said Eric Braganza, president of the Consumer Electronics and Appliances Manufacturers Association.

Some companies are already deploying resources to meet demand from higher-end consumers. The Indian unit of appliance-maker Whirlpool Corp. said in September that it had started manufacturing premium, front-loading washing machines at its factory in south India.

“The kinds of consumers who are buying mid- and premium are actually splurging much more,” Whirlpool Managing Director Vishal Bhola told an Indian business news channel.

Entry-level consumers include the hundreds of thousands of workers who went back to their villages after a nationwide lockdown was imposed in March 2020, leaving them without earnings for a long stretch. India’s economy didn’t fully reopen in 2021 either, as the country grappled with the deadly Delta variant of the coronavirus.

Some labourers remained in their villages even as cities reopened, making do with lower incomes.

Mr. Kumar, the 23-year-old who had to put off his motorcycle purchase, graduated from college in 2020. But because of the lockdowns, he couldn’t travel to a large city to seek work. Eventually, he enrolled in a master’s degree in horticulture, which used up his savings, he said.

Meanwhile, erratic weather conditions reduced produce at his family’s small farm during the past two years. He is worried that unseasonal rains this month could hurt this year’s harvest of rice as well. The upshot: Diwali festivities at his home will be curtailed, with fewer firecrackers and other treats, Mr. Kumar said.

“How will we burst crackers when the pocket is completely empty?” he said.

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Where Are Stocks, Bonds and Crypto Headed Next? Five Investors Look Into Crystal Ball

Equities are often seen as expensive after promising start to 2023

By CAITLIN MCCABE
Mon, Jan 30, 2023 7 min

A new trading year kicked off just weeks ago. Already it bears little resemblance to the carnage of 2022.

After languishing throughout last year, growth stocks have zoomed higher. Tesla Inc. and Nvidia Corp., for example, have jumped more than 30%. The outlook for bonds is brightening after a historic rout. Even bitcoin has rallied, despite ongoing effects from the collapse of the crypto exchange FTX.

The rebound has been driven by renewed optimism about the global economic outlook. Investors have embraced signs that inflation has peaked in the U.S. and abroad. Many are hoping that next week the Federal Reserve will slow its pace of interest-rate increases yet again. China’s lifting of Covid-19 restrictions pleasantly surprised many traders who have welcomed the move as a sign that more growth is ahead.

Still, risks loom large. Many investors aren’t convinced that the rebound is sustainable. Some are worried about stretched stock valuations, or whether corporate earnings will face more pain down the road. Others are fretting that markets aren’t fully pricing in the possibility of a recession, or what might happen if the Fed continues to fight inflation longer than currently anticipated.

We asked five investors to share how they are positioning for that uncertainty and where they think markets could be headed next. Here is what they said:

‘Animal spirits’ could return

Cliff Asness, founder of AQR Capital Management, acknowledges that he wasn’t expecting the run in speculative stocks and digital currencies that has swept markets to kick off 2023.

Bitcoin prices have jumped around 40%. Some of the stocks that are the most heavily bet against on Wall Street are sitting on double-digit gains. Carvana Co. has soared nearly 64%, while MicroStrategy Inc. has surged more than 80%. Cathie Wood‘s ARK Innovation ETF has gained about 29%.

If the past few years have taught Mr. Asness anything, it is to be prepared for such run-ups to last much longer than expected. His lesson from the euphoria regarding risky trades in 2020 and 2021? Don’t count out the chance that the frenzy will return again, he said.

“It could be that there are still these crazy animal spirits out there,” Mr. Asness said.

Still, he said that hasn’t changed his conviction that cheaper stocks in the market, known as value stocks, are bound to keep soaring past their peers. There might be short spurts of outperformance for more-expensive slices of the market, as seen in January. But over the long term, he is sticking to his bet that value stocks will beat growth stocks. He is expecting a volatile, but profitable, stretch for the trade.

“I love the value trade,” Mr. Asness said. “We sing about it to our clients.”

—Gunjan Banerji

Keeping dollar’s moves in focus

For Richard Benson, co-chief investment officer of Millennium Global Investments Ltd., no single trade was more important last year than the blistering rise of the U.S. dollar.

Once a relatively placid area of markets following the 2008 financial crisis, currencies have found renewed focus from Wall Street and Main Street. Last year the dollar’s unrelenting rise dented multinational companies’ profits, exacerbated inflation for countries that import American goods and repeatedly surprised some traders who believed the greenback couldn’t keep rallying so fast.

The factors that spurred the dollar’s rise are now contributing to its fall. Ebbing inflation and expectations of slower interest-rate increases from the Fed have sent the dollar down 1.7% this year, as measured by the WSJ Dollar Index.

Mr. Benson is betting more pain for the dollar is ahead and sees the greenback weakening between 3% and 5% over the next three to six months.

“When the biggest central bank in the world is on the move, look at everything through their lens and don’t get distracted,” said Mr. Benson of the London-based currency fund manager, regarding the Fed.

This year Mr. Benson expects the dollar’s fall to ripple similarly far and wide across global economies and markets.

“I don’t see many people complaining about a weaker dollar” over the next few months, he said. “If the dollar is falling, that economic setup should also mean that tech stocks should do quite well.”

Mr. Benson said he expects the dollar’s fall to brighten the outlook for some emerging- market assets, and he is betting on China’s offshore yuan as the country’s economy reopens. He sees the euro strengthening versus the dollar if the eurozone’s economy continues to fare better than expected.

—Caitlin McCabe

Stocks still appear overvalued

Even after the S&P 500 fell 15% from its record high reached in January 2022, U.S. stocks still look expensive, said Rupal Bhansali, chief investment officer of Ariel Investments, who oversees $6.7 billion in assets.

Of course, the market doesn’t appear as frothy as it did for much of 2020 and 2021, but she said she expects a steeper correction in prices ahead.

The broad stock-market gauge recently traded at 17.9 times its projected earnings over the next 12 months, according to FactSet. That is below the high of around 24 hit in late 2020, but above the historical average over the past 20 years of 15.7, FactSet data show.

“The old habit was buy the dip,” Ms. Bhansali said. “The new habit should be sell the rip.”

One reason Ms. Bhansali said the selloff might not be over yet? The market is still underestimating the Fed.

Investors repeatedly mispriced how fast the Fed would move in 2022, wrongly expecting the central bank to ease up on its rate increases. They were caught off guard by Fed Chair Jerome Powell‘s aggressive messages on interest rates. It stoked steep selloffs in the stock market, leading to the most turbulent year since the 2008 financial crisis. Now investors are making the same mistake again, Ms. Bhansali said.

Current stock valuations don’t reflect the big shift coming in central-bank policy, which she thinks will have to be more aggressive than many expect. Though broader measures of inflation have been falling, some slices, such as services inflation, have proved stickier. Ms. Bhansali is positioning for such areas as healthcare, which she thinks would be more insulated from a recession than the rest of the market, to outperform.

“The Fed is determined to win the war since they lost the battle,” Ms. Bhansali said.

—Gunjan Banerji

A better year for bonds seen

Gone are the days when tumbling bond yields left investors with few alternatives to stocks. Finally, bonds are back, according to Niall O’Sullivan of Neuberger Berman, an investment manager overseeing about $427 billion in client assets at the end of 2022.

After a turbulent year for the fixed-income market in 2022, bonds have kicked off the new year on a more promising note. The Bloomberg U.S. Aggregate Bond Index—composed largely of U.S. Treasurys, highly rated corporate bonds and mortgage-backed securities—climbed 3% so far this year on a total return basis through Thursday’s close. That is the index’s best start to a year since it began in 1989, according to Dow Jones Market Data.

Mr. O’Sullivan, the chief investment officer of multi asset strategies for Europe, the Middle East and Africa at Neuberger Berman, said the single biggest conversation he is currently having with clients is how to increase fixed-income exposure.

“Strategically, the facts have changed. When you look at fixed income as an asset class…they’re now all providing yield, and possibly even more importantly, actual cash coupons of a meaningful size,” he said. “That is a very different world to the one we’ve been in for quite a long time.”

Mr. O’Sullivan said it is important to reconsider how much of an advantage stocks now hold over bonds, given what he believes are looming risks for the stock market. He predicts that inflation will be harder to wrangle than investors currently anticipate and that the Fed will hold its peak interest rate steady for longer than is currently expected. Even more worrying, he said, it will be harder for companies to continue passing on price increases to consumers, which means earnings could see bigger hits in the future.

“That is why we are wary on the equity side,” he said.

Among the products that Mr. O’Sullivan said he favours in the fixed-income space are higher-quality and shorter-term bonds. Still, he added, it is important for investors to find portfolio diversity outside bonds this year. For that, he said he views commodities as attractive, specifically metals such as copper, which could continue to benefit from China’s reopening.

—Caitlin McCabe

 

Find the fear, and find the value

Ramona Persaud, a portfolio manager at Fidelity Investments, said she can still identify bargains in a pricey market by looking in less-sanguine places. Find the fear, and find the value, she said.

“When fear really rises, you can buy some very well-run businesses,” she said.

Take Taiwan’s semiconductor companies. Concern over global trade and tensions with China have weighed on the shares of chip makers based on the island. But those fears have led many investors to overlook the competitive advantages those companies hold over rivals, she said.

“That is a good setup,” said Ms. Persaud, who considers herself a conservative value investor and manages more than $20 billion across several U.S. and Canadian funds.

The S&P 500 is trading above fair value, she said, which means “there just isn’t widespread opportunity,” and investors might be underestimating some of the risks that lie in waiting.

“That tells me the market is optimistic,” said Ms. Persaud. “That would be OK if the risks were not exogenous.”

Those challenges, whether rising interest rates and Fed policy or Russia’s war in Ukraine and concern over energy-security concerns in Europe, are complicated, and in many cases, interrelated.

It isn’t all bad news, she said. China ended its zero-Covid restrictions. A milder winter in Europe has blunted the effects of the war in Ukraine on energy prices and helped the continent sidestep recession, and inflation is slowing.

“These are reasons the market is so happy,” she said.

—Justin Baer

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