Tea leaves continue to emerge that India’s secular growth drivers are firing up. In this regard, Apple recently opened its first flagship store on Jio World Drive in Mumbai, while Cisco highlighted plans for more than $1b in domestic production and exports from India.

The Fed’s year-long steep interest rate raises started to exhibit unintended consequences on the U.S. banking system in March leading to the receivership of three regional banks. It is noteworthy that bank stress tests put in place after the 2008 debacle did not involve any testing for the adverse impact of interest rate risk on banks’ assets.

India’s telcos have started to deploy 5G, bringing faster speeds and greater capacity to customers. In fact, reports from third-party data provider Ookla indicate that India’s mobile download speeds have nearly doubled over the last few months. That said, India places at just 67th amongst countries tracked, signaling significant runway ahead.

The early days of February were characterized by a couple of unexpected developments: first Fed Chair Powell, though resolute about a 2% inflation target, was less strident than in December about too-loose financial conditions, and more focused on Core Services ex-housing inflation. Second, the unexpectedly large payroll number and record low unemployment in January was achieved with little in the way of wage inflation. These two developments have led some to reduce the probability of a U.S. recession in 2023 and even sceptics such as former Treasury Secretary Larry Summers conceded the rising probability of a soft landing.

India’s IT expertise may benefit from rising demand for AI, where interest appears to have spiked post latest updates to OpenAI’s ChapGPT, while the metaverse may also prove to be a future growth driver.

Neither Russia nor Ukraine appears willing to back down from their demands as to what each needs before they can agree to negotiate for peace. Europe’s imposition of a price cap on Russian oil has, so far, no real consequence, but President Putin has threatened a response. Consequently, Europe remains at risk of high energy prices and a slowdown in economic activity.

India’s fuel consumption continued to climb in November, up versus the prior month and same period last year. Similarly, overall power consumption increased, with peak power met above levels experienced in the same month as the last few years. Demand likely benefited from India’s healthy fundamentals, demographics, and a step up in manufacturing opportunities.

The most recent CPI print, which followed yet another robust non-farm payrolls report, finally showed core MOM CPI slowing down to 0.3% vs. an expected 0.5% and a prior month 0.6%, triggering a strong risk-on rally, with the expectation that the end of the cycle of rising rates is at hand.

India has made solid progress adding utility-scale solar capacity this year as stable, affordable, and from a clean resource energy is critical to both national security and meeting the demands of what appears to be on the cusp of becoming the world’s largest population. Spotlighting a proof point, Modhera in Gujarat recently became India’s first solar-powered village, where homes are generating sufficient energy to not only unlock savings for the base, but also create excess supply that can be fed back into India’s electricity grid.

The Chinese economic outlook remains cloudy, with the real estate bubble bursting and continuing Covid-related “dynamic zero” shutdowns impacting demand. One example – smartphone sales in China have been quite weak for a few months. That said, most commodities are at prices below where they were at the start of the year. And supply chains are healing – indeed prices for Asia-bound containers are down substantially since the start of the year.

Two recent fiscal developments – The CHIPS act and the Inflation Reduction Act – flow directly from these phenomena: deglobalization, the planet’s climate challenges and the worldwide post-pandemic inflation fight. While the full impact of both bills will take time to show up in the U.S. economy, they confirm the trends that are in place.

The UN recently suggested that India may emerge as the most populous nation next year. We view the approaching milestone as shining a bright light on the tall task ahead for the government as it seeks the right balance between supporting pro-growth initiatives critical to job creation, where we highlight India’s employment rates in our view remain far too low, with potentially embarking on more hawkish measures required to navigate the macro storm.

Despite the significant sacrifice to economic growth that such a move would entail, the European Union has put a 2022 year-end deadline to deeply cut its dependence on Russian oil. That development, combined with President Putin’s view that he can afford to wait till the West’s patience with the war runs out, indicates that the Ukraine war has evolved into a test of wills and, ultimately, balance sheets. The war could therefore grind on for several more months, if not years. Undoubtedly, high oil prices will likely not abate soon and could rise further. This development likely also speeds up the development and deployment of renewable energy and electric vehicles. It is also clear that Western policymakers currently have little ability to influence and coax increased OPEC oil production. Moreover, given the Russian occupation of Ukraine’s key grain growing area and its control of the Black Sea, and noting Ukraine’s 10% share role of global grain supply, that also means that high food prices will see no near-term relief.

The emergence of a new capex cycle in several sectors appears likely to offer tailwinds to growth across India for years to come. For example, Sanjay Goel, EVP of APAC for American Tower Corporation, recently highlighted plans to expand its tower base in India and suggested “India will probably need half a million small cells and microcells over the next three years, and no one stakeholder group has the capability to provide all of this capacity.” The commentary suggests India’s cumulative investment in digital infrastructure, including data centers, fiber, and towers remains fairly early days, which is at odds with Digital India posturing, and the country’s desire to siphon off manufacturing business from China.

With all major economies confronted with worse-than-expected price rises, due to both supply-side and demand-side issues, the Fed announced in late April that it would act forcefully to quell inflation and keep raising rates, to dampen the demand side of our economy, till it got to the “neutral rate.” The “neutral rate” is a somewhat undefinable target, in our opinion, and depends on the concept of a “steady state” inflation level. This likely means that policy rates will move certainly to 2.5% but could move as high as 4.5% (or even higher) if inflation does not damp down. Many market participants have never experienced such high policy rates and are naturally anxious about the fallout. Moreover, Chairman Powell reminded us that the Fed can only influence demand and cannot control the supply part of the demand/supply balance (i.e. energy prices, supply chains).

The inaugural SemiconIndia 2022 conference kicked off in late April during which PM Modi pitched India as a prime destination for semiconductor investment, and importantly suggested the government’s role would transition from a “Not Gate” to an “And Gate”, where we note India is both talking the talk and walking the walk through $26B in Production Linked Incentives (PLI) schemes across 14 sectors as well as the signing of multiple MoU’s with ecosystem partners.

China continues to grapple with its Covid infections. While reported infection statistics appear miniscule compared to what the West experienced during the virus’s peak, their zero-Covid policy could lead to significant disruptions in global supply chains and have an attendant impact on goods inflation. Separately, we also note that Secretary Yellen recently asked China to not take advantage of the West’s sanctions on Russia and warned China that national security will be a consideration in the West’s approach to global trade relations.

India’s ruling party, BJP, scored victories in 4 out of 5 recently concluded assembly elections, which may encourage further reform, such as pursuit of public/private partnerships with clean energy and space initiatives, reduction of financial burdens on telcos, the exit of stakes in largely private markets, such as Air India, and boosting local manufacturing via production linked incentive (PLI) schemes, where early traction may inspire a fresh look from some with scars from the past.

The Russia-Ukraine war has changed the near-term calculus even further for the White House with the debate between energy security and climate resilience becoming even more important. It is unclear whether any element of the Build Back Better legislation will pass the Senate at the current time, but our hope is that the uncertain geopolitical backdrop will prove supportive of the America Competes Act, of which the Chips Act is a part, getting through Senate reconciliation and then enacted into law.

India’s Covid trends are encouraging as daily infections have dipped below 5K paving the way for further reopening progress. We cannot help but notice India’s Omicron wave crested below Delta as well as the level experienced in the US, which we think may reflect India’s solid vaccination progress and may bode well for relative positioning should new strains emerge, particularly with respect to China, where a Zero Covid policy may prove a less durable approach.

With 4th quarter earnings mostly in the rear-view mirror and the results have been overall encouraging, it appears the market’s focus is pivoting to the macro: Russia-Ukraine developments, oil prices (again, Russia!) and post-Covid-era prospects for the economy and of critical supply chains. Each of these macro developments holds clues to future inflation, the risks of a wage-cost spiral and ultimately, the risk of a recession.

At the moment, it appears that the Fed, captive to the consensus view that their actions have partly contributed to the current inflationary outlook, is now debating how quickly and how much the Fed Fund rates should be raised: 50 bp in March, 100 bp by July are some of the choices being bandied about in the market. Of course, were interest rates to go up too quickly, the risk of a recession increases. Goldman points out that its work indicates that over the past 15 tightening cycles, recession resulted only 60% of the time. Moreover, in those periods that ended in a recession, the median time period from the first tightening step to a recession was about 41 months. Consequently, it appears likely that the market fears about a recession in 2022 or even 2023 is likely too pessimistic. However, this cycle – with its very high inflation, could prove to be different; we have not had such high inflation in over 40 years.

With mid-term elections in November, the ruling party is caught on the backfoot on inflation and therefore lacks ability to pass the signature Build Back Better legislation, which could have helped growth. President Biden appears to have pivoted to foreign policy and other agenda items, while awaiting a cool-down of inflation later in the year. The CHIPS Act (part of America Competes Act), is a potential 2022 piece of legislation that can be helpful to companies held by the Fund, is yet to cross the finish line.

India’s vaccination effort continues to progress with 94% of the adult population having received at least one dose, and 68% fully vaccinated. Meanwhile, the country’s experience with Omicron appears to be trending in a positive direction, as daily infections continue to fall. Given latest developments, India appears well positioned to see reopening activity pick back up, which may offer a nice boost to fundamentals over the next several months.

We think India increasingly screens well as a viable alternative to China as the IMF forecasts the country to deliver stronger GDP growth this calendar year, while we view India’s demographics as offering a relatively better setup, as it skews young, with a growing middle class putting down roots in urban markets. Moreover, India’s regulatory backdrop continues to show signs of improvement, with fiscal policy still firmly leaning into growth, which we think could linger for longer, as inflation remains elevated yet manageable, and latest communication from the RBI suggests rate hikes may not be on the table till at least FQ1.

With the Federal Reserve under pressure due to inflation and individual Fed governors speculating about quantitative tightening, it clearly signals that the era of easy money is over for now. The market pendulum has begun swinging away from very-highly valued, loss-making entities toward more cash flow generating companies and also toward businesses that benefit from an inflationary environment. With increasing public discussion (finally!) that negative real yields are undesirable and as panic about highly disruptive political/virus-linked developments globally recedes, we hope that markets start to price capital more rationally

The troubling headline numbers coupled with the fact that 2022 is a political year serve to concentrate everyone’s mind with respect to the big elephant in the room – inflation. It is noteworthy to hear one Fed Governor after the next speak about whether 3 or 4 interest rate rises in 2022 are more appropriate, with some Governors also discussing initiating balance sheet shrinkage this year. Of course, the counterpoint to rising real rates is the cost of servicing the highly ballooned Federal debt. The other development that the Fed needs to deal with is the rise of cryptocurrencies, stablecoins and CBDCs and the potential impact on the U.S. financial sector as well as the US dollar’s role as a reserve currency and the benefits that accrue from that status.

India’s vaccination drive has delivered at least one dose to 91% of the adult population, with 64% fully vaccinated, which stacks up well to similar metrics of 32% and 27% in South Africa, where Omicron’s infection rate presented as a steep yet relatively short-lived spike, with hospitalization and fatality rates well below prior waves. Meanwhile, India has started booster availability via a priority list, and Dr Reddy’s is prepping a generic version of Merck’s antiviral pill. As such, we think India’s Omicron wave may prove less impactful than Delta, though some services activity may need a bit longer to edge back over pre-pandemic levels than otherwise would have been expected.

India appears to be entering a new capex cycle, a potentially strong tailwind for growth, which we attribute to the pandemic’s pull forward of eCommerce adoption and business digitalization, manufacturer pursuit of China diversification strategies, and the government’s pro-growth posture designed to spur private investment. To the latter point, look no further than Reliance’s recent filing pointing to $81B in pacts with Gujarat’s government targeting green initiatives, or recent efforts to ease burdens in the telecom sector.

The market’s current focus on inflation is appropriate and, in our opinion, partly driven by the ongoing decoupling of global supply chains (complicated by the pandemic) and the move toward a carbon-less energy future. Those seminal developments slow capital allocation by global corporations and the resulting potential duplication of, and delays incurred within, supply chains, leads to higher prices. However, we believe efficiencies will ultimately be wrung out of these developments, both from innovation and digitization. Moreover, the abatement of global deflationary forces which persisted for many years will ultimately result in a more balanced economy and in the appropriate pricing of risk.

While a much-reduced Build Back Better reconciliation bill passed the House last month, we believe it is more likely to clear the Senate, in a more muted form, sometime early next year. As President Biden stated, when the Senate is 50-50, every Senator is a President. However, the delay may indeed help calm the reality (or the appearance) of inflation-inducing stimulus and higher deficits in the US.

India’s vaccination effort continues to progress with 87% of the adult population having received at least one dose, and 54% fully vaccinated. While Omicron has been detected in a handful of states, cases have been mild, providing some air cover for a balanced approach towards reimplementing “slow the spread” measures. While we think conditions on the ground may remain fluid, we take some comfort in Bill Gates recent prediction that the “acute phase of the pandemic will come to a close some time in 2022.”

While political pressure and limited precedence may serve to boost the odds of a more aggressive approach, we think a gradual and very well telegraphed path to normalization would be viewed favorably by markets. We highlight RBI Governor Shaktikanta Das expects to continue with an accommodative stance for some rates “as long as necessary to revive and sustain growth”, while we view the RBI’s GDP growth and inflation targets for India as compelling relative to most peers.

The Indian Telecom companies raised prepaid plan prices by 20-25%, the bulk of which we think should drop to the bottom line. While we see more room for industry repair, we believe the sector may start to transition focus towards laying the groundwork for launching 5G, where we are encouraged by early indications that the Telecom Regulatory Authority of India (TRAI) may seek a better balance between auction proceeds and coverage goals relative to prior years.

It appears that the Fed leadership was perhaps too optimistic in stating that inflation would be transitory (i.e., Larry Summers was right – the fiscal stimulus was perhaps excessive). The Fed, earlier this month, signaled that it will begin tapering later this month and expects to be complete by mid-2022. The Fed is caught in a quandary of its own making – trigger inflation by staying too long in a monetary easing phase or risk reduced growth (and potential market weakness) if interest rates rise too quickly. In our opinion, the risk remains that highly accommodative monetary policy, especially with Covid-linked disrupted supply chains and rising energy costs, could mean both higher growth as well as higher inflation, both at higher levels and longer time periods.

It appears that a much-reduced ($1.75?) trillion reconciliation bill will pass the House this week, to face scrutiny by key Senators who are focused on whether its expenditure could further exacerbate inflation – with all of the rhetoric playing out in the public domain. President Biden also seems caught in a quandary – while COP26, which his Administration supports, puts the blame for climate change squarely at the feet of fossil fuels, those very same fuels are rising exorbitantly in price, potentially fueling inflation. The President is made to look inconsistent by asking OPEC+ to pump more oil to reduce fuel prices, when coal and oil are blamed for the existential threat to the planet.

Perhaps the most interesting development of late was Facebook’s formal launch of its Metaverse strategy, which we broadly view as the next iteration of the Internet, with new forms of integration between the physical and virtual worlds. We think India is very well positioned to capitalize on the opportunity, as look no further than the country’s recent high profile tech IPO’s as evidence of a base untethered by legacy constructs and ready to embrace digital worlds.  Not to be overlooked, the need to build out the Metaverse across sectors may provide another leg of growth for India’s IT leaders.

Apple noted India business doubled in F21 and Flipkart sold 2x the number of premium smartphones during its Big Billion Days Sales versus ‘20. Moreover, 1 in 5 was 5G capable, despite 5G service still in beta in just a handful of locations. While we had previously envisioned 5G as presenting a Field of Dreams – “If you build it, he will come” scenario, the backdrop appears even stronger, as the base may have already arrived.

With the fight against global warming a growing priority around the globe and across sectors, we were pleased to see PM Modi highlight aggressive targets for India at COP26, which include the country sourcing 50% of energy needs from renewables by 2030 and a net zero goal by 2070. We believe progress towards these goals will require effective collaboration between public and private participants.

In Chairman Gary Gensler, the markets finally may have someone at the SEC who is willing to confront (or at least attempt to tame) some of the excesses that the markets have thrown at conjured up, following the environment of the 2018-2020 period. While most of this is due to the super-low interest rates and the role of Central Banks, we believe that this sort of restraint is very good for the long-term health of markets.

At Jackson Hole, Chairman Powell clearly (to us, anyway) stated that he expects taper to begin before year-end, assuming no unforeseen developments. The market yawned on this news: it appears that this taper is so well telegraphed that it will not be anywhere like the last one, in terms of market impact. However, recent weak employment and low CPI data may give the Chairman some breathing room to implement the taper, which had been constrained due to an earlier threat of unbridled inflation.

The question that markets are likely debating is the impact of the approx. 3.5 trillion reconciliation bill on corporate and personal income taxes. One broker’s view is that the potential rise in corporate taxes could curtail corporate earnings growth into ‘22 by a few percent of growth, but earnings will still grow in the mid-single digit area in 2022, setting up for further appreciation.

We remain impressed by the resilience of India’s wireless sector during the pandemic, where data demand continues to climb. That said, we also believe the sector would benefit from regulatory reform, as India’s Department of Telecommunication’s appears to face a Matrix-like “red-pill/blue-pill” decision, as constraining capital leads to slow speeds, spotty coverage, and a sizeable base stuck on feature phones, while a more supportive approach might punch the country’s ticket into the 5G era.

We also think India continues to screen well as a “growth at a reasonable price” (GARP) play versus global peers, particularly as 1QF22 earnings have boosted hopes for a solid FY22 with 30%+ projected NIFTY earnings growth, on the back of a strong 15% earnings growth in FY21. Moreover, we think India’s rising tech IPO scene brings a Silicon Valley-like buzz to the market and appears to be in a better place than the BATs, where we see risk that China’s “common prosperity” push may prove an existential threat to innovation and growth.

India’s equity markets demonstrated strength in August, which has carried into the early days of September. This strength likely reflects investor focus on improving fundamentals as pandemic pressures ease as well as the continuation of easy money conditions around the globe, with inflation still largely viewed as transitory, as capital appears to be surging to supply chain bottlenecks, painting a picture of when not if pain points are solved, and prices ultimately start to cool off.

While US Taper Talk could whip up some consternation, we think normalization is likely to prove very gradual and well signaled, which should support US markets, and by extension India, where elevated FX reserves, may also help, despite some shorter dated components in the maturity profile. We also perceive some FOMO in FII land, as India looks to be coming of age, as GDP may exceed $3T in another year or so, and double-digit growth could persist, given very compelling demographics, while additional reforms may also be on the horizon.

These developments serve to reinforce our view of India’s digital infrastructure as a strategic investment opportunity, where we felt FQ1 results in the wireless space showcased resilient trends that should strengthen as the economy recovers. While we expect data demand and progress tiering the base to benefit industry repair, we continue to think it behooves the government to weigh supportive measures to accelerate the trend, as India’s future growth appears increasingly tied to a base that has leapfrogged into a digital economy.

After all, look no further than Neeraj Chopra, India’s first Olympic gold medalist in Javelin, awarded in Tokyo, who indicates he first learned his craft watching YouTube videos, and has seen sporting success rewarded with endorsement deals, such as ExxonMobil and Gillette.

The FQ1 earnings season has entered late stage and we view results as broadly better than feared with green shoots pointing to improving conditions on the ground.

While the road ahead may prove bumpy, given elevated commodity costs, supply constraints in several sectors, and logistical challenges, as domestic air travel is picking back up, yet many schools and business remain virtual, we think it is reasonable to expect demand trends to continue climbing as the vaccination drive progresses, which should benefit corporate earnings through the course of the year.
Importantly, we think a post-pandemic India likely looks more than a little different than its prior self, as the country’s 4G base now stands at 757MM, up 103MM since the pandemic began, many of which have adopted a number of new habits, some in seemingly trial by fire fashion, that may prove difficult to shake, such as eCommerce, mobile payments, and home delivery, which we suspect played a role in Zomato’s IPO, Swiggy’s $1.25B Softbank led round, and seemingly healthy interest in PayTM’s expected public offering.

Equity markets have perked up in the first half of August, which we suspect reflects a mix of vaccination progress, incremental government support, and a belief that inflation headwinds may prove manageable. We highlight the recent July CPI release, which showed moderation Y/Y relative to June, as fitting the narrative, while an unremarkable monsoon season should also help the cause.
Foreign interest has likely also contributed to recent market strength, as after a dip in July, FII Inflows are once again rising this month, breaching $7B year to date, and we suspect India’s markets continue to screen well as a growth at a reasonable price (GARP) play, where recent developments, such as favorable revisions to retrospective taxation rules, suggest an improving regulatory backdrop, which we view a key differentiator to China.

While the July non-farm payrolls number signaled a strengthening economy, the immediate market reaction was muted given the uncertainties about the timing, size and impact of the Fed’s expected taper. Additionally, other developments, including China’s tech crackdown, the global spread of the Delta variant of Covid-19 and recent developments in Afghanistan likely also remain concerns for the market’s path, going forward. On the positive side, the passing of the bipartisan infrastructure bill in the Senate signals that the long era of fractious politics in the US may have entered a short, workable truce period.

There has been a significant change in the trajectory of tech platform companies in China in recent months, starting with the regulatory blocking of the Ant (Alipay) IPO. Since that momentous event, there has been a crackdown on Didi, (post its US IPO), on Chinese education companies as well as on Tencent. We expect these actions as potentially having a chilling effect on semiconductor demand for some time and potentially even impacting the regulatory direction of the West toward their platform companies. While the Fund has no direct exposure to mainland Chinese tech sector or even to other mainland Chinese stocks, the Chinese economy clearly represents a meaningful source of demand for US-linked semiconductor output. Indeed, recently, some tech publications have warned about a slowdown in PC-linked demand for semiconductors, leading to a recent selloff in Samsung and Micron. We do not think this regulatory sea change toward tech companies in China has fully played out and has a long runway. However, we also believe that this development will not meaningfully slow down these erstwhile “cyclical” semiconductor companies such as Samsung and Micron transitioning into secularly growing, high margin businesses.

The significant spread of the Delta variant in the southern and Southeastern states of the US has been unexpected and has chilled expectations of a larger GDP rebound in 2021. The good news is that vaccination rates are picking up in these states as more people “get the memo” about the vaccines’ safety and efficacy. Globally however, even previously “immune” countries are reporting challenges, resulting in a continuous stream of reports about travel restrictions, port closures and city lockdowns. While this will undoubtedly slow global travel, commerce and continue to impact supply chains, it appears that the world (and markets) is better prepared and willing to look through these disruptions.

Climate Change: The other big gorilla in the room, we note that several important climate-related developments have occurred in recent days. Europe’s ambitious legislative blueprint for achieving 55% reduction of GHG emissions by 2030 (from 1990 levels) has been unveiled. One big element in it is the border adjustment tax, which even the US is evaluating: this tax could indirectly force other economies which trade with the EU to comply to EU standards. Almost simultaneously, China, the world’s top GHG emitter, stated that it will start the trading of its national emissions trading scheme later this month, and, while initially covering power plants, this market will soon extend to other Chinese industries.