Geo (Politics) &

Energy Weaponization
Stagflation?
Elections 2024
Buenos Aires
Consensus??

All eyes on India

Modi 3.0?

Rate Impact
Recession/ Stagflation/
Goldilocks?

MACRO STRATEGY
CY 24 PLAYBOOK – FOR SURE IT WILL BE DIFFERENT!!

Head of Equities: Amit Khurana, CFA VP Research: Nishant Gupta

Tel: +91 22 40969745 Tel: +9122 40969635
E-mail: amit@dolatcapital.com E-mail: nishantg@dolatcapital.com
November 10, 2023
November 10, 2023 2
 MACRO STRATEGY
CY 24 PLAYBOOK – FOR SURE IT WILL BE DIFFERENT!!
So much has gone the unexpected way in CY23 and least expected as well.
Will CY24 be less of unexpected and more the expected? As investors we
always prefer that to be the case – predictability, certainty, comfort of
knowing the unknowable. But just as the nature has its own dynamics, so
do the markets. They preempt, react and discount at their own pace, whims
and fancies, and we the lesser mortals as investors have to adjust and align,
keeping our personal bias aside.

The leading factors as we step into CY24 are no way indicating an eventless
year. Rather the confluence of so many contrasting and conflicting factors
is only going to make the task of preparing for the uncertainty in outcomes
no less challenging.

Grouping these factors, we have identified four key trends that we believe
will significantly drive the narrative for CY24, influence the market
sentiments and define investor’s risk return metrics.

GEO (POLITICS) AND THE WEAPONIZATION OF ENERGY

We have witnessed an elevated noise on global stage. Following into the
episodes of dysfunctional US politics, Russia Ukraine war (current situation
in a stalemate), an assertive China leadership leading to a decisive drift away
towards other friends and suppliers, we now run the risk of the conflict
between Israel and Palestine turning into a wider regional conflict. History
is replete with innumerable instances that highlights that the extremities of
such events never reverses in a whiff, rather leads to severe implications.
Will CY24 be the year of reckoning these implications in terms of energy
weaponization, resulting in inflation staying higher for longer and Global
Central Banks (GCBs) adopting the stance of financial tightening for a
prolonged period? And will that in itself be a trigger for contraction /
stagflation?

CY24 IS THE YEAR OF ELECTIONS! AND BUENOS AIRES CONSENSUS?

It’s the calendar year of elections all over the world – Taiwan (Jan), Russia
(Mar), India (Apr-May), European Parliament (Jun) and US (Nov). The
elections would give the right to vote to ~2 billion people with collective
GDP of USD 40tn. Outcome of these elections will have a far reaching
consequences across trade, geopolitics and financial aspects as the
narrative is increasingly seen drifting in favor of political parties which have
a bent towards Buenos Aires Consensus*. It could result in continued
disruption in global trade and an acceleration towards a multi polar world.
Eventually, decision making is driven based on national interests rather than
collective. Policy making across GCBs could get more challenging especially
when inflation target is not met and there lies an imperative need to
support government measures. The effects could truly lead us to a path of
anti- disinflation.
*Buenos Aires consensus is opposite to Washington Consensus. The former promotes nationalist
goals, protectionist measures, de-globalization and expansionary fiscal measures.

November 10, 2023

 THE IMPACT OF RATES… RECESSION…STAGFLATION…GOLDILOCKS?
Tighter for longer policy rates, rising US fiscal deficit, QT, de-dollarization, unwinding
of carry trades by foreign investors shall continue to the drive macro factors that could
lead to a possible demand/supply imbalances in US treasury market, resulting in
higher longer term bond yields. However subtle shifts that indicate topping out of
rates and softening inflation will be a trigger for equities to perform. Nevertheless, we
also believe that investors should brace themselves for the impact of higher yields on
a) tightening of financial conditions, b) real economy, c) likely reversal of jobs markets
in the US, d) weakness in interest sensitive sectors and how much it hits consumer
sentiment, e) negative impact on risk assets like equities, rise in market volatility and
credit risk.

The performance for CY23 has absorbed a fair amount of the above and we believe
the investors are looking for the impact. If it is less than apprehended, we will be in a
goldilocks risk on. But if it is worse i.e. hard landing, then the multiples as well as
return expectations will have to reset.

ALL EYES ON INDIA

Given the global economic and geopolitical situation being as fluid, India’s political,
macro and financial landscape has held on well. The same has reflected well in its
outperformance vs other EMs / DMs. While it is at times highlighted as India’s
decoupling regime, we remain wary of touting such adjectives given the risks of higher
commodity prices and a global slowdown. And not to underestimate the importance
of the events that are lined up for the CY24.

On political front, the outcome of the general elections would hold a great
importance. Another majority mandate for BJP and Modi as a PM would be a
landmark victory and considered as a generational shift – Modi would be the longest
serving PM only after Jawaharlal Nehru. The mandate will be seen as cementing
India’s position on critical aspects of policy continuation, incentivize domestic
manufacturing. More important is that the investors will be relieved from
apprehensions of a lax fiscal regime. And this will probably be a strong enough
argument for India to keep trading at premium valuation vs. historical averages.
However, what is not yet priced in our view is if the mandate is not a majority and
rather turns out to be a BJP led coalition with / without Modi as the PM? Are markets
prepared to accept it? Is there a case of valuation de-rating or re-rating or no change?
Therefore, uncertainty around election outcome will keep Indian equities on
tenterhook and we see domestic market largely dictated by the performance of global
risk assets till the outcome of the event is known.

Over the last three years, India has largely seen a steady macroeconomic regime. It
started from the time of pandemic period because of prudent policy measures from
the government on both demand and supply side and stability has continued so far.
Core inflation has largely seen disinflationary trends this year albeit headline inflation
has moved higher primarily because of higher food prices which is now proving to be
transitory. MPC has held onto the policy rate since Feb’23 and it looks like liquidity
management would be a key tool to anchor inflation expectation while supporting
growth. Current sentiment indicators reflect resiliency on the side of the consumers
and corporates.

November 10, 2023 4

 As we move into the next year, sustained weakness in global growth, higher for longer
real rates in India, uncertainties around domestic election outcome, fall in household
net financial savings (from 7 pc of GDP pre pandemic to 5 pc in FY23) and possible
decline in farm incomes because of lower agriculture output could have an adverse
impact on investment activity, external demand, consumer sentiment and we could
see a temporary blip in growth momentum especially in the first half of 2024. It would
be interesting to see the role of the newly elected government especially in terms of
fiscal response. Can government spending act as a propeller to drive the growth
engine forward especially in the 2nd half of 2024?

From a bond market perspective next year has a huge significance. Post, India’s bond
inclusion in JP Morgan’s GBI EM Global index in June 2024, we could see an estimated
passive and active flows of ~USD 25bn and ~USD 10bn invested in the bond market
over a period of time. This is a significant development which reflects the confidence
of the global financial market w.r.t India’s growth prospects and stability around
macroeconomic policies. Structurally too, this would help to enhance liquidity in
India’s bond market, diversify bond ownership, help to finance India’s fiscal and
current account deficit and lower the overall cost of borrowing.

Domestic equity flows have been the key foundation for India to hold on to premium
valuations. We maintain that this trend is structural and unless there are adverse
political events that deteriorate return expectations, these flows will grow further.
Notably, the exposure of foreign investors has reduced as shown by their declining
holding and hence lowers the risk of a capital flight et al. For the records, the share of
MFs to overall flows of gross financial savings has tripled to 6.1 pc in 2023.
Continuation of these trends would help to neutralize the dependence on foreign
inflows and reduce volatility in Indian equities.

November 10, 2023 5

WHATS GOING ON IN THE HEART AND MIND…AND HOPES AND APPREHENSIONS!

WILL MODI GET AN UNPRECEDENTED THIRD TERM MAJORITY? AND WHAT IF

HE DOES NOT? HOW WILL MARKETS ALIGN TO THAT SCENARIO GIVEN HIS
01 IMAGE AS A STRONG DECISION MAKER? IS INDIA PREMIUM VALUATION AS
GOOD AS IT CAN GET OR CAN IT TURN INTO A NEW STRUCTURAL BASE
OPENING UP ANOTHER PHASE OF OUT PERFORMANCE FOR INDIA EQUITIES?

WILL CY24 BE THE YEAR OF IMPACT OF RATE HIKES IN THE US? HOW WILL THE
02 CONSUMER AND BUSINESS SENTIMENT HOLD UP AS REFINANCING COMES UP?

ON THE FLIP SIDE HAVE THE US BOND YIELDS TOPPED OUT? AND WILL CY24 BE
STARTING A PERIOD OF STABILLITY? AND IF THEY HAVE, DOES IT INDICATE THE
03 WE ARE HEADING INTO RECESSION OR A SOFT LANDING? AND THAT LEADS US
TO A START OF A RATE CUT CYCLE IN H2CY24? DOES THE RECENT CRUDE OIL
PRICE AND GLOBAL DATA RAISE ODDS OF A GOLDILOCKS?

TRUMP WIN – HOW LIKELY AND WHAT IMPACT IT MAKES ON THE GLOBAL
GEOPOLITICS AND ECONOMICS? WILL A TRUMP 2.0 BE MORE EXPANSIONARY
04 THAN TRUMP 1.0 ON FISCAL, AND DOES THAT COMPOUND THE CHALLENGE
FOR THE US FED?

CY22 EUROPE, CY23 MIDDLE EAST, CY24 ASIA? OR HOPE THAT RUSSIA UKRAINE
05 GOES INTO A REAL STALEMATE? AND ISRAEL GAZA DOES NOT ESCALATE AND
EVENTUALLY GOES OFF THE FLASH NEWS.

CHINA LEADERSHIP – HOW COMPELLING IS THE DOMESTIC SITUATION TO

06 EITHER TRIGGER OR PREVENT ACTION ON TAIWAN. FOR CHINA WE CAN
ALWAYS SAY THAT WHAT SHOWS IS USUALLY NOT THE REALITY!

November 10, 2023 6

 Year of the Dragon

2024 is a year of the Wood Dragon,

starting from February 10th, 2024
(Chinese New Year) and ending on January
28th, 2025 (Chinese New Year's Eve).

The luckiest Chinese zodiac signs in 2024 are

Monkeys, Roosters, and Pigs. Then, with not
quite so much luck, come Oxes, Rabbits,
Goats, and Dogs. Dragons' fortunes will be
influenced by 'opposition to Tai Sui'.

The Dragon symbolizes power, nobleness,

honor, luck, and success in traditional
Chinese culture. The Dragon is a
supernatural being with no parallel for
talent and excellence.

November 10, 2023 7

 Key Events Calendar… CY24

Source: Wikipedia, samanyagyan.com

November 10, 2023 8

 GEO (POLITICS) AND THE WEAPONIZATION OF ENERGY
Russia Ukraine 2022, Middle East 2023; Asia 2024?
Rewind to five decades back when the world witnessed the outbreak of “Yom Kippur”
war – an armed conflict between Israel and coalition of Arab states led by Egypt and
Syria on the forefront. And in the shadow were the two nuclear powers of the era viz.,
the US and Russia (USSR that time). What followed had grave implications for the
world economy - oil embargo was imposed on the US by OPEC leading to sharp rise in
oil prices and inflation staying higher through the decade. Finally it culminated with
the US rates going to as high as 20% by early 80s and it took the Volcker era to unwind
the spiral.

Does the current landscape of geopolitics and macro-economic conditions raise the
risks of “Yom Kippur 2.0”. Rise in tensions between Israel and Hamas in Middle East
has all the attributes to become a much larger regional conflict where states like Iran,
Lebanon, Syria, Saudi Arabia get involved and global states like US, Russia actively
support their respective allies. We are not saying that a larger regional conflict will
definitely be there. But the mirroring developments do raise a risk in our view and
CY24 will for sure show up how they evolve. We fear the biggest implication of this
conflict is prospect of energy weaponization, resulting in inflation staying “higher for
longer” and central bank adopting the stance of financial tightening for a prolonged
period.

Irrespective, even before the Israel Hamas conflict flared up, oil was moving higher
after Saudi Arabia extended its voluntary crude oil production cut through the end of
this year and US crude oil inventories fell to the lowest since Dec 2022 (Exhibit 2). As
per EIA report in Oct 2023, the crude oil production (incl. liquid fuel) is estimated to
slowdown from an increase of 4.2 mbpd in 2022 to an increase of 1.3 mbpd in 2023.
Large part of the slowdown is led by production cuts from OPEC and Eurasian
countries to a tune of 1mbpd. In 2024, EIA expects incremental production to further
slowdown to 940k bpd as some part of the production cuts by Saudi Arabia could
continue and production in Mexico and other countries in Latin America may decrease
(Exhibit 3).

November 10, 2023 9

 US crude inventories (ex SPR) lowest level since Dec 2022
550,000
530,000
510,000
490,000
Fall in US crude 470,000
inventories and Saudi's 450,000
extension of voluntary 430,000
crude oil production cut 410,000
390,000
has led to higher oil price 370,000
(from $68 in May'23 to 350,000
$93 in Sept'23)

Apr-21

Dec-22

May-23
Mar-20

Dec-20
May-20

Mar-22

Aug-22

Mar-23
Jun-21

Jun-22

Oct-22
Jan-20

Nov-21
Jan-22

Sep-23
Jul-20
Sep-20

Feb-21

Sep-21

Jul-23
Weekly U.S. Ending Stocks excluding SPR of Crude Oil (Thousand Barrels)
Source: EIA, DART

Global crude oil (incl. liquid) production growth

5
World production of
4
crude oil (incl. liquid
fuel) is estimated to 3
slowdown from an 2
increase of 4.25mbpd in 1
2022 to an increase of 0
1.31mbpd and 0.94 (1)
mbpd in 2023 and 2024 (2)
respectively (as per EIA 2022 2023 2024
report, Oct 23).
World Production (in mbpd)
OPEC + Eurasia (in mbpd)
North America + Latin America + Other Non OPEC (in mbpd)
Source: EIA Oct 23, DART | Countries in North America are Canada, Mexico, US. Countries in Eurasia are Russia,
Azerbaijan, Kazakhstan, and Turkmenistan. Countries in Latin America are Argentina, Brazil, Columbia, etc.

Global crude oil inventory is expected to fall in the first half of 2024 as risks of supply
disruptions remains high which could lead to an upside in crude oil price in the coming
months. The extent of global growth slow down led by central bank tightening would
define the price moves in the 2nd half of next year. In its recent outlook, IMF has noted
slowing growth in China and US, two large consumers of crude oil. China’s real GDP
growth is estimated to moderate to 4.6 pc in 2024 (vs. 5.4 pc in 2023) and in US growth
is expected around 1.5 pc (vs. 2.1 pc in 2023).

Iran’s exports of crude oil (ex-condensates) has surged from nearly 1 mbpd at the start
of the year to over 1.5 mbpd in Sept’23 (Source – Bloomberg). Tightening of sanctions
against Iran could further create imbalances in global crude market and lead to higher
prices unless we see the gap getting plugged by OPEC tapping into their spare capacity
(current capacity is the highest in over a decade ex Covid period of 2020, Exhibit 4) or
US crude production moving higher.

November 10, 2023 10

 OPEC spare capacity highest in over a decade (ex of Covid year 2020)
9
8
7
6
5
4
3
2
1
0

Apr-14

Apr-21
Mar-10

Mar-17
Dec-11

Nov-14

Dec-18
Aug-09

May-11
Oct-10

Aug-16

May-18
Oct-17

Aug-23
Jan-09

Jul-12

Jun-15

Jun-22
Jan-16

Nov-21

Jan-23
Feb-13
Sep-13

Jul-19
Feb-20
Sep-20
Iran’s export of crude oil
(ex condensates) has
OPEC Surplus Crude Oil Production Capacity (in mbpd)
surged from ~1 mbpd at
the start of the year to Source: Bloomberg, DART
over ~1.5 mbpd in
Sept’23. Tightening of Important to note here is US production is estimated to rise from 11.9 mbpd in 2022
sanctions against Iran to 12.9 mbpd in 2023 and 13.1 mbpd in 2024 (as per EIA). US has seen a consistent
for its involvement in rise in crude oil exports since the start of this year - 6 months average exports has
Middle East conflict ranged between 3.8 to 4 mbpd (Exhibit 5-6).
could create imbalances
and lead to higher oil US crude oil production expected to increase to 13.1 mbpd in 2024
prices. 13.5 13.1
12.9
Can the gap get 13.0
plugged by OPEC 12.5
tapping into their spare 11.9
12.0
capacity or US crude
production moving 11.5 11.3 11.3
higher?
11.0
10.5
10.0
2020 2021 2022 2023 2024
US Crude oil production (in mbpd)
Source: EIA Oct 23, DART | 2023 and 2024 are estimates

Rise in US crude oil exports since the start of this year

4.2

3.8

3.4

3.0

2.6
Apr-23
Apr-22

Jun-22
Jan-22

Mar-22

May-22

Nov-22

Dec-22
Aug-22

Mar-23

May-23
Oct-22

Jun-23
Jan-23
Feb-22

Jul-22

Sep-22

Feb-23

Jul-23

Average 6 months - U.S. Exports of Crude Oil (in mbpd)

Source: EIA, DART
November 10, 2023 11
 Also, broad base easing of US sanctions on Venezuela could sentimentally be positive
for the oil market, but there lies an uncertainty around quantum and timing. By
historical standards, the current oil production at 750k bpd is far below 2.4 mbpd
production seen prior to sanctions imposed in 2017 and it would take time for the idle
production to hit the global supplies. Moreover the sanctions have been eased for
next 6 months and they could easily get reversed.

Regional escalation of the war may also lead to disruption of Strait of Hormuz. It is
one of the key transit point for ~20 pc oil production and ~35 pc of world’s liquefied
natural gas. Not only would the shipping rates go through the roof but the demand-
supply led price imbalances would be significant for some of the commodities. For
instance - Qatar being the largest exporter of LNG, their supply would come under
significant risk to global markets and especially to Europe.

Last year, during the Russia Ukraine conflict, Europe had diversified their gas imports
away from Russia. Share of Russia’s imports significantly came down from 23 pc in
2021 to 15 pc in 2022, and share of US, Algeria and Qatar combined went up from
14.5 pc to 24.7 pc (Exhibit 7). Natural gas is a very important energy source for
European economies. Europe’s dependency on natural gas has risen over time and
the commodity is mostly used for heating purposes, electricity production and is also
a key input into production processes in some industries like chemicals (Exhibit 8-9).

EU imports of natural gas

30%

25%

20%

15%

10%

5%

0%
Norway Russia United Algeria Qatar United Tunisia Ukraine Nigeria Turkey
States Kingdom
EU Imports of Natural Gas in 2021 EU Imports of Natural Gas in 2022
Source: Eurostat, DART

Importance of gas has increased in EU Gas plays a large role in heat and electricity

Source: Eurostat | Y axis shows % share of each energy source Source: Eurostat & IMF staff calculations | y axis shows share of energy
source in heat and electricity production

November 10, 2023 12

 After a sharp rise in gas and power prices in middle of 2022, we saw the prices come
down in the second half of the year. Factors like favorable winter conditions,
slowdown in industrial demand and energy saving measures from household to
businesses led to a decline in consumption of natural gas (around 13 pc YoY).

As we head towards another winter period, geopolitics and Europe’s weather

condition would once again become a focal point for investors. If natural gas flows
from Middle East gets disrupted, it would be important to see if the imbalances gets
neutralized by higher US exports of natural gas. In 2022, share of US natural gas
exports to Europe more than doubled, from 4.3 pc in 2021 to 9.8 pc in 2022.

Natural gas inventories in US currently remains above the 5 year average (Exhibit 10)
as supply continues to be resilient amidst rise in consumption and exports (6 months
average exports increased from ~572 bcf in Jan’22 to ~620 bcf in Jul’23). But an
unfavorable weather pattern i.e. colder than normal temperature could lead to an
increased heating demand and larger inventory drawdowns.

US Natural gas stock compared with 5 year avg, min and max
4,400
US Natural gas
4,000
inventories currently
3,600
remains above the 5
3,200
year average as 2,800
supply continues to 2,400
be resilient amidst 2,000
rise in consumption 1,600
and exports. 1,200
800
Apr-22

Apr-23
Jan-22

Mar-22

Dec-22

Dec-23
May-22

Aug-22

Mar-23

May-23

Aug-23
Jun-22

Oct-22
Nov-22

Jan-23
Feb-23

Jun-23

Oct-23
Nov-23
Feb-22

Jul-22

Sep-22

Jul-23

Sep-23
Stock (in bcf) 5 year Average (in bcf) 5 year Max (in bcf) 5 year Min (in bcf)
Source: EIA, DART

Can geopolitics lead to the odds for a stagflation in CY24?

Unfavorable weather conditions combined with tightening in the gas market on
global side could be highly inflationary. At times when European economies are
reeling through the bouts of economic weakness, a “stagflationary” environment
would make policy making much more complicated for the ECB and lead to
enhanced market volatility. Such a scenario, while not our base case, will present
new challenges for the GCBs. Although the FED’s preferred measure is core inflation
which strips out food and energy, but FED officials would stay vary of the fact that
rising energy prices could lead to higher core prices with a certain lag effect, thereby
limiting the possibility of a pivot from current policy stance (Exhibit 11 and 12). The
risk of rates staying tighter for longer and its impact on the overall financial
condition and whether it translates into a recessionary condition as we move into
2024 remains a key monitorable.

November 10, 2023 13

 Rebound in natural gas prices trigger higher US energy services inflation?
What to watch out 200% 25%
150% 20%
1) Can unfavorable weather
conditions (i.e. colder 100% 15%
winters) combined with 50% 10%
tightening in the gas
market on global side lead 0% 5%
to “stagflationary” -50% 0%
environment, which could
-100% -5%
make policy making much
Apr-19

Apr-23
Jan-23
Apr-20

Apr-21

Apr-22
Oct-19

Oct-20

Oct-21

Oct-22

Oct-23
Jan-19

Jul-19

Jan-20

Jan-21

Jan-22
Jul-20

Jul-21

Jul-22

Jul-23
more complicated for the
ECB and lead to enhanced
market volatility. Natural gas Futures Price YoY - 1 month lead CPI Energy Services YoY - RHS
Source: Bloomberg, DART
2) Can higher energy prices
lead to higher core prices
with a certain lag effect, Rebound in oil prices trigger higher US Core CPI with a certain lag effect?
limiting possibility of a pivot 300% 7%
from current policy stance? 250% 6%
Higher rates could 200% 5%
translate into a
150% 4%
recessionary condition in US
100% 3%
and could have a significant
50% 2%
impact on the political
0% 1%
ecosystem in 2024.
-50% 0%
-100% -1%
Mar-22
May-20
Mar-19
May-19

Nov-19

Mar-20

Mar-21
May-21

May-22

Mar-23
May-23
Jan-19

Jan-20

Nov-20
Jan-21

Nov-21
Jan-22

Sep-22
Nov-22
Jan-23

Nov-23
Jul-19
Sep-19

Jul-20
Sep-20

Jul-21
Sep-21

Jul-22

Jul-23
Sep-23
Oil Price YoY - 2 month lead US Core CPI YoY - RHS
Source: Bloomberg, DART

November 10, 2023 14

 CY24 IS THE YEAR OF ELECTIONS! AND BUENOS AIRES
CONSENSUS?
CY24 is the year of high profile elections. The elections would cover more than 2
billion people and GDP of over USD 40tn and the results truly have the capability to
change how geopolitical and economic landscape shapes up in years to come.

We start the year with Taiwan’s presidential election, followed by Russia / Ukraine
presidential election in Mar24. India would have its general election in April and May
24 followed by the European Union (Jun 24). And finally the election that will be
closely tracked across the political and financial capitals of the world – the US
presidential elections in Nov (Exhibit 13).

Although these elections are heterogeneous in nature in terms of voters ideologies,

competitive intensity and macro-economic landscape, but one underlying theme
which we believe could emerge from these elections (based on various poll results) is
the promotion of “Buenos Aires Consensus which is opposite of Washington
Consensus”.

In broader context, Washington Consensus is less populist and is a set of rules based
on prudent fiscal policy, lower taxes but wider tax base, trade liberalization and
privatization of state corporations. Government’s play a less active role as they
believe market forces would align themselves and solve economic issues. On the other
hand, Buenos Aires Consensus promotes nationalist goals, protectionist measures,
de-globalization, and expansionary fiscal measures.

In Taiwan, if Democratic Progressive Party (DPP), considered a part of Taiwan

nationalism, wins the elections, it could accelerate confrontation with China sooner
than later because of their anti-China narrative. Russia’s elections is more likely to see
the continuation of the current political regime and its nationalist policies and it also
looks unlikely that the current conflict with Ukraine would end soon. Continued
strengthening of ties with China and other OPEC economies would provide an edge to
weaken western economies both on commodity and geopolitical grounds.

November 10, 2023 15

 Election 2024 - Are we heading towards the Buenos Aires consensus being established at global level?

Independent

Regional

Source: DART | Buenos Aires consensus is opposite to Washington Consensus. The former promotes nationalist goals, protectionist measures, de-globalization and expansionary fiscal measures.
Note: represents the leading political parties

November 10, 2023 16

 US elections – Trump vs Biden, and what if Trump does win?
Next year could well be a faceoff between Trump and Biden. That could trigger a shift
by the Biden admin from current narrative of “price controls” to “job for all” just
before elections for political considerations and especially if the Fed ends up
overtightening and signs of recession and unemployment risks are visible. For all the
high or low or fair probabilities of Trump winning, it will undoubtedly stir up the global
economic and geopolitical landscape. For one, Trump is the least worried of the
leaders on fiscal policy – his track record shows up so much of fiscal profligacy. How
will the US Fed / bond markets react to this? And how will he go about Russia Ukraine
conflict? All critical questions that we believe will have profound implications for all.

In the meanwhile, the Biden administration would focus to manage policies keeping
in mind two aspects. One on diplomatic side in order to keep its global relations to
maintain the US supremacy. And the other to manage domestic economy and
continue implementing its policies like Chips Act and the Inflation Reduction Act.

So if we do have a Trump / Modi / Putin / Zelensky getting elected and Xi already

having established his grip, CY24 seems to present the perfect recipe for a raising
stakes on the global geopolitical front. And as we define it as Buenos Aires
consensus, it can have multiple repercussions across trade, geopolitics and financial
aspects. It could result in continued dislocations for global trade as the
multiplication of tariffs, trade barriers threaten economic exchanges between
countries. And the evolving of a multi polar world could accelerate. Decision making
would be driven based on national interests rather than collective. Policy making
across central banks could get more challenging especially when inflation target is
not met and there lies an imperative need to support government measures. The
effects could truly lead us to a path of anti-disinflation.

November 10, 2023 17

 THE IMPACT OF RATES… RECESSION… STAGFLATION…
GOLDILOCKS?

The recent moves in 10 year UST has brought a lot of attention on how various
elements of nominal 10 year yield behaves. Nominal yield is composed of inflation
breakeven i.e. investors future inflation expectation and real yields which reflects
economic outlook, future path of interest rate and fiscal position.

Inflation expectation has largely remained anchored between 2.1 to 2.5 pc since the
start of this year. But the real yields has seen a juggernaut move higher – from the
lows of 1.1 pc in Mar’23 to a high of 2.5 pc in Oct’23 (Exhibit 14).

Moves in US 10 year real yield has caught investor’s attention

2.6
2.4
2.2
Real yields has seen a
2.0
juggernaut move higher –
1.8
from the lows of 1.1 pc in
Mar’23 to a high of 2.5 pc 1.6
in Oct’23. 1.4
1.2
1.0
Apr-23
Apr-23
May-23
May-23
Dec-22

Oct-23
Jan-23
Jan-23

Mar-23
Mar-23

Aug-23
Aug-23
Feb-23
Feb-23

Jun-23
Jun-23
Jul-23
Jul-23
Jul-23

Sep-23
Sep-23
5-Year, 5-Year Forward Inflation Expectation Rate 10 year real yield
Source: St Louis Fed, DART

Tighter for longer rates and uncertainty around US fiscal deficit has led
to rise in real yields
Current resilience of US economy reflects an exceptionalism vs. the other advanced
economies and that is well acknowledged by the FED officials. Early this year in
June’23 we had seen FED officials raise their fed fund rate to 5.6 pc in 2023 and 4.6 pc
in 2024 and 3.4 pc in 2025. In Sept’23, although the FED officials did not change the
policy rate for 2023 but they revised their expectation higher for 2024 and 2025 to
5.1 pc and 3.9 pc respectively. “Tighter for longer” policy rates in order to slow the
economic conditions is one of the key factors for real yields to rise this year.

Uncertainty around rising fiscal deficit in US has also played its part to drive the yields
higher. In FY2023, US fiscal deficit has risen by 23 pc to USD 1.69tn (largely led by drop
in revenue) and we have also seen a rise of interest on public debt by 22.5 pc for the
year (Exhibit 15 and 16). Even the share of the interest as % of receipts has moved
higher from 14 pc in 2021 to 20 pc in 2023.

November 10, 2023 18

 In FY23, US Fiscal deficit has risen by 23 pc to USD 1.7 tn
8,000

6,000

4,000

2,000

(2,000)
FY22 FY23
Expectation of a rising
deficit combined with Gross Receipts Amount in bn USD Gross Outlay Amount in bn USD
nearly 33 pc of maturity Deficit Amount in bn USD
of marketable securities
Source: US Treasury, DART | Fiscal year defined as Oct to Sept
in 1 year or less period,
would lead to a deluge Rise of interest on public debt by 22.5 pc in FY23
of supply of bonds and
bills issuances thereby 900
driving the risk premium
800
for holders, especially in
a time when demand
700
side in US treasury
market gets constrained.
600

500

400
FY21 FY22 FY23
Total interest on the public debt in bn USD
Source: US Treasury, DART | Fiscal year defined as Oct to Sept

Expectation of a rising deficit next year (FY24 fiscal deficit estimated at USD 1.88tn,
Source – US treasury and Office of Management and Budget) combined with nearly
33 pc of maturity of marketable securities in 1 year or less period (Exhibit 17), would
lead to a deluge of supply of bonds and bills issuances thereby driving the risk
premium for holders, especially in a time when demand side gets constrained.

Nearly 33 pc maturity of US marketable securities in one year or less

100
10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10
90 5 6 6 6 6 6 6 6 6 6 7 7 7 7 7 7 7 7 7 7 7
80
18 17 18 18 18 18 18 18 18 18 18 18 17 17 17 17 17 16 16 16 15
70
60
50 38 37 37 37 37 38 37 37 37 37 37 36 36 36 36 36 37 36 35 35 35
40
30
20
10 29 29 29 30 28 28 29 29 28 28 29 29 29 30 30 30 29 31 31 32 33
0
May-22

May-23
Apr-22

Apr-23
Dec-22
Jan-22

Mar-22

Nov-22
Aug-22

Jan-23

Mar-23

Aug-23
Jun-22

Oct-22

Jun-23
Jul-22

Jul-23
Feb-22

Sep-22

Feb-23

Sep-23

One year or less 1-5 Years 5-10 Years 10-20 Years 20 years and Over
Source: US Treasury, DART | The values are shown in %

November 10, 2023 19

 Headwinds around demand side for US treasury
On the demand side for US Treasuries, factors like quantitative tightening, de-
dollarization trends and unwinding of carry trades by foreign investors can act as
headwinds. If big buyers like FED and foreign holders like China, Japan are missing
then there is a likelihood possibility of a demand/supply imbalances leading to
higher bond yields.

For over a year now, US FED has been doing Quantitative tightening (QT) - a process
to shrink FED’s balance sheet (current rate of USD 75bn per month) to drain bank
reserves to levels which are not excessive. With bank reserves at around USD 3.2tn
i.e. nearly 12 pc of US GDP, expectation is that QT would continue till the time the
share of reserves to US GDP drops to around 8-9 pc.

Narrative around de-dollarization has been hitting the mainstream since the time of
GFC, but trends especially in last few years suggest some dent to USD hegemony has
crept up. Our analysis on the share of USD to total global FX reserves, suggests that
the share has dropped from 65 pc in Q2 2015 to 58 pc in Q2 2023 (Exhibit 18). During
the same time, global allocated reserves have moved up from USD 7.3tn to USD 11tn
and other major currencies like Euro has maintained its share and likes of JPY, CNY
and GBP have grown their share.

De-Dollarization – slow motion play out, will geopolitics now accelerate

the trend further?
68%
Share of USD to total
global FX reserves has 66%
dropped from 65 pc in
Q2 2015 to 58 pc in Q2 64%
2023.
62%

60%

58%
Q2 2018

Q4 2021
Q2 2015

Q4 2015

Q2 2016

Q4 2016

Q2 2017

Q4 2017

Q4 2018

Q2 2019

Q4 2019

Q2 2020

Q4 2020

Q2 2021

Q2 2022

Q4 2022

USD share of World FX Reserves Q2 2023

Source: IMF, DART

In the year 2022, when US and Europe had imposed sanctions on Russia for Ukraine
conflict, we saw Russia move away from USD and EUR and instead adopt the Chinese
renminbi as one of main currencies for its trade and FX reserves (Exhibit 19 and 20).

November 10, 2023 20

 Share of renminbi in Russia’s export increased eightfold
Other ¥ Rmb € $
%
100

80

60

40

20

In the year 2022, when 0

US and Europe had Jan 2022 Feb Mar Apr May Jun July Aug Sep Oct Nov Dec
imposed sanctions on Source: FT, DART
Russia for Ukraine
conflict, we saw Russia
move away from USD Russia’s renminbi reserves rise significantly in run-up to Ukraine war
and EUR and instead Euro Gold Dollar Renminbi Pound Other
adopt the Chinese
renminbi as one of main
currencies for its trade
and FX reserves. 2021

2022

0 20 40 60 80 100

Source: FT, DART | Russian reserves on Jan 1st in %

China’s ongoing tension with US and Chinese communist party’s determination to

establish China as a global power can’t go unnoticed. Apart from launching its own
payment system - “Cross Border Interbank Payment System” in 2015 to
internationalize CNY use, the country is currently testing its digital currency project
before it gets rolled out globally, strengthening ties with Russia post Ukraine conflict
and other GCC countries to promote non-dollar trades through petroyuan.

China has been reducing its foreign holding in US treasuries gradually in the last 4
years – down from USD 1.1tn in 2019 to USD 820bn as on July’23 (Exhibit 21). The
reduction in treasury holding is visible even during periods where FX intervention was
limited as CNY appreciated vs USD. On the other hand we have seen gold reserves
remain steady and witness a sharp increase in 2nd half of 2022 (Exhibit 22).

November 10, 2023 21

 China has reduced its foreign holding in US treasuries
1,150 7.4
China has reduced its 1,100 7.2
foreign holding in US 1,050
7.0
treasuries gradually in the 1,000
last 4 years – down from 6.8
950
USD 1.1tn in 2019 to USD
6.6
820bn as on July’23. The 900
reduction is visible even 850 6.4
during periods where FX 800 6.2
intervention was limited. Apr-19

Apr-20

Apr-21

Apr-22

Apr-23
Jan-20

Oct-20

Oct-22
Oct-19

Oct-21
Jan-19

Jan-21

Jan-22

Jan-23

Jul-23
Jul-19

Jul-20

Jul-21

Jul-22
China Foreign Holding of UST (in bn USD) USDCNY - RHS
Source: PBOC, US Treasury, Bloomberg, DART

China’s gold reserves has witnessed a sharp jump in second half of 2022
72 3,450
On the other hand, we
have seen China’s gold 70 3,400
reserves remain steady 68 3,350
and witness a sharp 3,300
66
increase in 2nd half of 3,250
64
2022. 3,200
62 3,150
60 3,100
58 3,050
Oct-20

Oct-22
Apr-20

Apr-21

Apr-22

Apr-23
Oct-21
Jan-20

Jan-21

Jan-22

Jan-23
Jul-20

Jul-21

Jul-22

Jul-23
China Gold reserves (in million Troy Ounce) Total Reserves (in billion USD) - RHS
Source: PBOC, Bloomberg, DART

Considering, Japanese investors are the largest foreign holders of US treasury

securities, it becomes imperative to track BOJ policy measures. Large holding of US
Treasuries across Japanese investors is attributed to the fact of a deflationary
conditions prevailing in Japanese economy which allowed BOJ to maintain ultra-low
interest rates to stimulate economy. Prospects of inflation staying higher this year vs.
the BOJ estimates and rise in bond yields in Japan has market participants speculating
about another tweak in Yield curve control (YCC) policy going forward. This could have
an impending impact in terms of unwinding of carry trades away from USTs thereby
leading to higher US bond yields.

(Exhibit 23) analyzes the difference between US 10 year yield hedged vs. Japan 10
year yield and positioning for USTs among Japanese investors. In the last 10 years, as
long as hedged 10 year USTs yields remains positive and trends higher vs. Japan 10
year yield we have seen an increase in foreign holding in USTs.

November 10, 2023 22

 Relationship between US and Japan 10 year bond yields
4.0 1.0
In the last 10 years, 3.0 0.8
as long as hedged 2.0 0.6
10 year USTs yields
1.0 0.4
remains positive
and trends higher 0.0 0.2
vs. Japan 10 year -1.0 0.0
yield, we have seen -2.0 -0.2
an increase in -3.0 -0.4
Japan’s foreign

Dec-19
Jun-20
Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

Dec-20

Dec-21

Dec-22
Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Jun-21

Jun-22

Jun-23
holding in USTs.

US 10 year yield hedged Japan 10 year yield - RHS

Source: Bloomberg, DART

Factors like YCC tweak in Dec’22, Jul’23 and Oct’23 has led to a rise in longer term
bond yields in Japan and ongoing rate hikes in US since Mar’22, has led to an increase
in cost of hedging and overall decline in US 10 year yield hedged, thereby making it
unfavorable for Japanese investors to hold US Treasuries (Exhibit 24).

How far will the carry trades unwind away from USTs because of tweak
YCC tweak in Dec’22, in BOJ policy and rate hikes in US?
Jul’23 and Oct'23 has
1,400
led to a rise in longer
term bond yields in 1,300
Japan and ongoing 1,200
rate hikes in US since
Mar’22, has led to an 1,100
increase in cost of 1,000
hedging and overall
900
decline in US 10 year
yield hedged? 800
Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

Dec-19

Dec-20

Dec-21

Dec-22
Jun-18
Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-19

Jun-20

Jun-21

Jun-22

Jun-23
US Treasuries Securities foreign holders Japan (in USD bn)
Source: Bloomberg, US Treasury, DART

What to watch out

Factors like quantitative tightening, de-

dollarization trends and unwinding of carry trades
by foreign investors can act as headwinds on the
demand side for US Treasuries. If big buyers like
FED and foreign holders like China, Japan are
missing then there is a possibility of a
demand/supply imbalances leading to higher US bond
yields. Supply pressure largely led by rising fiscal
deficit.

November 10, 2023 23

 Recent moves in US bond market especially the extent to which we have seen bear
steepening (longer end of the yield curve increasing at a faster rate than shorter end
of the curve) presents a worrisome signs for overall economy and financial markets.

Tighter financial conditions – acknowledged by FOMC in Nov’23 meet

Higher rates tightens financial conditions (Exhibit 25) which adversely impacts
economic activity and is negative for rate sensitive sectors like services and housing
(Exhibit 26-29). In a way it solves for the purpose of US FED (without hiking policy
rates) that is to slow the economic engine in order to get inflation down to targeted
levels.

Financial condition index moving towards tightening zone

0.5

0.3

0.1

-0.1

-0.3

-0.5
Feb-23

Sep-23
Dec-22

Apr-23

May-23

Jun-23
Jan-23

Mar-23

Aug-23
Jul-23
Bloomberg Financial Condition Index
Source: Bloomberg, DART
Tightening of financial
conditions adversely
impacts economic
Unemployment rises when financial conditions tighten
activity and is negative
for rate sensitive 2 16
sectors like services 0 14
and housing. 12
(2)
10
In a way it solves for (4) 8
the purpose of US FED
6
(without hiking policy (6)
4
rates) that is to slow (8)
the economic engine in 2
order to get inflation (10) 0
Dec-04

Dec-11

Dec-18
Jun-08

Jun-15

Jun-22
Oct-03

Apr-07

Apr-14

Apr-21
Oct-10

Oct-17
Aug-09

Aug-16

Aug-23
Feb-06

Feb-13

Feb-20

down to targeted
levels.
Bloomberg Financial Condition Index Unemployment Rate - RHS
Source: Bloomberg, DART

November 10, 2023 24

 Rise in unemployment dampens consumer demand which reflects in
weaker services PMI
16 70
14 65
12 60
10
55
8
50
6
4 45
2 40
0 35

Jun-22
Dec-04

Dec-11

Dec-18
Apr-07

Apr-14

Apr-21
Oct-03

Jun-08

Oct-10

Jun-15

Oct-17
Aug-09

Aug-16

Aug-23
Feb-06

Feb-13

Feb-20
Unemployment Rate US Services PMI - RHS
Source: Bloomberg, DART

Higher bond yields have made borrowing more expensive for US consumers. The
onset of the pain could be explained when we look at the prevailing mortgage and
credit card interest rates. The 30-yr mortgage rates have moved up sharply from 6.19
pc in Jan’23 and 6.5 pc in May’23 to 7.7 pc in Oct’23. Higher mortgage rates have a
bearing on housing market as we can see the latest print on mortgage applications
has dropped to decadal lows (Exhibit 28).

Mortgage applications are at decadal lows

30 year mortgage rates 2,000 10
have moved up sharply 1,800 9
from 6.2 pc in Jan’23 and 1,600 8
6.5 pc in May’23 to 7.7 pc 1,400 7
1,200 6
in Oct’23. Higher
1,000 5
mortgage rates have a 800 4
bearing on housing market 600 3
as we can see the latest 400 2
print on mortgage 200 1
applications has dropped 0 0
Apr-02

Apr-19
Jun-99
Mar-95

Nov-00

Dec-07
Oct-93

Aug-96

May-09

Mar-12
Oct-10

Aug-13

Jun-16
Jan-98

Jan-15

Nov-17
Sep-03
Feb-05
Jul-06

Sep-20
Feb-22
Jul-23

to decadal lows.

MBA US Market Index Association Basic SA MBA US FRM 30-Year Contract Rate - RHS
Source: Bloomberg, DART

Buoyancy in new home sales because of persistent shortage of resale inventory is

halted for now, as we are seeing a drop in new home sales application monthly and 3
month rolling average basis (Exhibit 29). The demand from “would be” buyers is
impacted from higher rates.

November 10, 2023 25

 Buoyancy in new home sales seems to have halted because of higher
rates
1,000,000 950,000
900,000
900,000
The demand from 850,000
“would be” buyers 800,000 800,000
seems to be 700,000 750,000
adversely impacted 700,000
from higher rates. 600,000
650,000
500,000 600,000

Apr-23
Apr-22

Dec-22
Dec-21

Aug-22

Aug-23
Jun-22

Oct-22

Jun-23
Feb-22

Feb-23
Builder Application Survey New Home Sales
Builder Application Survey New Home Sales - 3m rolling average (RHS)
Source: Bloomberg, DART

Discretionary spends by the consumers have stayed strong as they continue to draw
down their savings pool and/or increase their borrowing in spite of interest rates
inching higher (Exhibit 30-32). Eventually this would result in higher delinquency and
net charge offs and slowdown in discretionary spends thereby impacting the overall
economy (Exhibit 33).

Higher credit card borrowing to smoothen out the consumption

18%
13%
8%
3%
-2%
-7%
-12%
-17%
Q4 2004

Q4 2007

Q4 2010

Q4 2013
Q1 2004

Q3 2004
Q2 2005
Q1 2005
Q4 2005
Q3 2006
Q2 2006
Q1 2007

Q3 2007
Q2 2008
Q1 2008
Q4 2008
Q3 2009
Q2 2009
Q1 2010

Q3 2010
Q2 2011
Q1 2011
Q4 2011
Q3 2012
Q2 2012
Q1 2013
Credit Card Balance (on YoY basis)
Source: NY FED, DART

US consumption also supported by drawdown in savings pool

Discretionary spends 35
by the consumers have 30
stayed strong as 25
consumers continue to
20
draw down their
15
savings pool and
increase their credit 10
card borrowing in spite 5
of interest rates 0
Mar-22
Jan-00
Mar-01
May-02

Mar-08
May-09

Mar-15
May-16

May-23
Nov-05
Jan-07

Sep-11
Nov-12
Jan-14

Nov-19
Jan-21
Jul-03
Sep-04

Jul-10

Jul-17
Sep-18

inching higher.

Personal Savings Rate (in %)

Source: ST Louis FED, DART

November 10, 2023 26

 Borrowing by US consumers in a time when credit card interest rate are
rising
24
23
22
21
20
19
18
17
16
15

Oct-20

Oct-21

Oct-22
Feb-20

Feb-23
Apr-20

Feb-21

Apr-21

Feb-22

Apr-22

Apr-23
Dec-20

Dec-21

Dec-22
Jun-20

Aug-20

Jun-21

Aug-21

Jun-22

Aug-22

Jun-23

Aug-23
Interest Rate on Credit Card, accounts accessed interest* (in %)

Source: Bloomberg, DART | * The rate for accounts assessed interest is the annualized ratio of total finance
charges at all reporting banks to the total average daily balances against which the finance charges were
assessed (excludes accounts for which no finance charges were assessed).

Delinquency vs charge offs

Delinquency levels have 4.0
surpassed pre pandemic
period. Charge offs are 3.5
rising but still remain
3.0
below the pre pandemic
level. Looks like even if 2.5
consumers are delaying
2.0
payments, the debt is
getting cleared. 1.5
Can charge offs rise from
here? 1.0
Jan-19

Mar-19

Mar-20

Mar-21

Mar-22

Mar-23
May-19

Nov-19

May-20

May-21

May-22
Jan-20

Sep-20

Nov-20

Jan-21

Jul-21

Nov-21

Jan-22

Nov-22

Jan-23
Jul-19

Sep-19

Jul-20

Sep-21

Jul-22

Sep-22
Charge-Off Rate on Credit Card Loans (in %) Delinquency Rate on Credit Card Loans (in %)

Source: Bloomberg, DART | Charge offs are net of recoveries.

Risk assets like equities also gets impacted because of higher long term rates as cost
of capital metric used in valuing companies increases thereby making the valuation
look optically expensive (Exhibit 34). Additionally in case earnings yield (inverse of
price to earning) for a company or index trades at par with bond yields, there is a
likelihood possibility of flows moving into fixed income assets from equities.

Tightening of financial conditions, weak consumer sentiment and equities less

favored vs. fixed income could lead to rise in market volatility. Although, the current
implied volatility is trading at lower level relative to historical standards, but we
expect US VIX to rise as and when some of the above mentioned factors come into
play.

Likewise credit risk which is currently suppressed would rise in line with US VIX
based on historical relationship between the two metrics (Exhibit 35). Additionally,
sustained weakness in rate sensitive sectors, rise in delinquency levels and charge
offs in consumer loans, and most importantly rise in cost of borrowing at the time
of fresh application for loans or roll over of existing loans (before maturity) would
lead to high distress levels for companies (Exhibit 36-37).
November 10, 2023 27
 Equities may get impacted Rise in rates could lead to a possibility of flows moving from equities into
because of higher long term fixed income assets
rates as cost of capital 10
metric used in valuing 8
companies increases thereby 6
making the valuation look
4
optically expensive.
2
Additionally, if earnings
yield (inverse of price to 0
earning) for a company or (2)
index trades at par with (4)

Oct-15
Feb-03

Sep-04

Feb-22
Apr-06

May-17

Sep-23
Dec-99

Dec-18
Jul-01

Jan-11

Aug-12

Mar-14
Jun-09
Nov-07

Jul-20
bond yields, there lies a
possibility of flows moving
from equities into fixed
income assets. Earnings Yield Minus Bond Yield Average
Source: Bloomberg, DART | Earnings yield calculated on the basis of 1 year forward PE for SP500

Watch to watch out Weakness in real economy may lead to rise in VIX and Option adjusted
spread (OAS)
Tightening of financial
70 7
conditions, weak consumer
sentiment and equities less 60 6
favored vs. fixed income could 50 5
lead to rise in market 40 4
volatility. Likewise, credit risk 30 3
which is currently suppressed
20 2
would rise in line with US VIX
based on historical 10 1
relationship between the two 0 0
Aug-08

Aug-13
Aug-03
Aug-04
Aug-05
Aug-06
Aug-07

Aug-09
Aug-10
Aug-11
Aug-12

Sep-18
Jul-02

Sep-14
Sep-15
Sep-16
Sep-17

Sep-19
Sep-20
Sep-21
Sep-22
Sep-23
metrics.

Sustained weakness in rate

US VIX Bloomberg US Agg Corporate Avg OAS - RHS
sensitive sectors, rise in
delinquency levels and charge Source: Bloomberg, DART
offs in consumer loans, and
most importantly rise in cost US bankruptcy filings by year
of borrowing at the time of
900
fresh application for loans or
800
roll over of existing loans
170

would lead to high distress 700

600
518 121

levels for companies.

657

485 149

464 122

457 133
440 136
428 130

500
392 126
383 142

377 143

516
339 132

400
321 85

263 109

300
200
100
0
2011

2015

2019

2023
2010

2012

2013

2014

2016

2017

2018

2020

2021

2022

Year-to-date through September Rest of the year

Source: S&P Global Market Intelligence, DART | Includes S&P Global Market Intelligence covered US companies |
Bankruptcy coverage limited to public or private companies with debt where either assets or liabilities at the time
of bankruptcy filing are equal to USD 2 mn or private companies where either assets or liabilities at the time of
bankruptcy filing are greater than or equal to USD 10 mn.

November 10, 2023 28

 2023 bankruptcy filing by primary sector
Consumer discretionary 64
Healthcare 63
Since 2010, corporate Industrials 60
bankruptcies in US Financials 31
have picked up very Consumer Staples 17
sharply this year and is Energy 16
the highest in last 12 Information Technolgy 12
years (excluding Communication Services 10
pandemic period of Materials 8
2020). Real estate 7
Utilities 4

0 10 20 30 40 50 60
Source: Source: S&P Global Market Intelligence, DART | Includes S&P Global Market Intelligence covered US
companies | Bankruptcy coverage limited to public or private companies with debt where either assets or
liabilities at the time of bankruptcy filing are equal to USD 2 mn or private companies where either assets or
liabilities at the time of bankruptcy filing are greater than or equal to USD 10 mn | Primary sector not available
for 224 bankruptcies filed in 2023.

November 10, 2023 29

 ALL EYES ON INDIA
Given the global economic and geopolitical situation being as fluid, India’s political,
macro and financial landscape has held on well. The same has reflected well in its
outperformance vs other EMs / DMs. While it is at times highlighted as India’s
decoupling regime, we remain wary of touting such adjectives given the risks of
higher commodity prices and a global slowdown. And not to underestimate the
importance of the events that are lined up for the CY24.

India gets set for general elections

The underlying consensus in our interactions with investors is a third term for Modi
Govt. Our view is that he is a frontrunner by a wide margin. Victory for Modi led BJP,
will be seen as cementing India’s position on critical aspects of policy continuation,
incentivize domestic manufacturing. More important is that the investors will be
relieved from apprehensions of a lax fiscal regime. And this will probably be a strong
enough argument for India to keep trading at premium valuation vs. historical
averages (Exhibit 38). However, what is not yet priced in our view is if the mandate is
not a majority and rather turns out to be a BJP led coalition with / without Modi as
the PM? Are markets prepared to accept it? Is there a case of valuation de-rating or
re-rating or no change? Therefore, uncertainty around election outcome will keep
Indian equities on tenterhook and we see domestic market largely dictated by the
performance of global risk assets till the outcome of the event is known.

Will Modi 3.0 make the premium turn into an average indicating
structural shift in India’s valuation ranges?
UPA 1/2 Modi 1/2
25

20

15

10

5
Mar-07
Dec-07

Mar-10
Dec-10

Mar-13
Dec-13

Mar-16
Dec-16

Mar-19
Dec-19

Mar-22
Dec-22
Jun-06

Jun-09

Jun-12

Jun-15

Jun-18

Jun-21
Sep-05

Sep-08

Sep-11

Sep-14

Sep-17

Sep-20

Sep-23

1 year forward P/E - Nifty 50 Average 1 year forward P/E

Source: Bloomberg, DART

For the records, if there is indeed a third consecutive majority mandate for Modi as a
PM, it would be a landmark victory and considered “a generational shift” for Indian
politics. Modi would stand at the cusp of surpassing India Gandhi’s tenure of 11 years
(1965 to 1977) and become the longest serving PM only after Jawaharlal Nehru - the
first PM of India whose tenure lasted for more than 16 years (from 1947 to 1964).

November 10, 2023 30

 India Macros – Holding well, led by responsible RBI and focused fiscal –
But how far can it extend?
It would be interesting to
Over the last three years, India has largely seen a steady macroeconomic regime. It
see the role of the newly
started from the time of pandemic period because of prudent policy measures from
elected government
the government on both demand and supply side and stability has continued so far.
especially in terms of
fiscal response. Can
Core inflation has largely seen disinflationary trends this year albeit headline inflation
government spending act has moved higher primarily because of higher food prices which is now proving to be
as a propeller to drive the transitory (Exhibit 39). MPC has held onto the policy rate since Feb’23 and it looks like
growth engine forward liquidity management would be a key tool to anchor inflation expectation while
especially in the 2nd half supporting growth. Current sentiment indicators reflect resiliency on the side of the
of 2024 consumers and corporates (Exhibit 41-42).

Inflation softening seen across core and headline CPI - ex F&B

8.0%
7.5%
7.0%
6.5%
India has managed 6.0%
inflation better, leading 5.5%
to outperformance vs 5.0%
EMs 4.5%
4.0%
3.5%
3.0%
Mar-20

Mar-21

Mar-22

Mar-23
May-20

May-21

May-22

May-23
Jan-20

Nov-20
Jan-21

Nov-21
Jan-22

Nov-22
Jan-23
Jul-20
Sep-20

Jul-21
Sep-21

Jul-22
Sep-22

Jul-23
Sep-23
India Core CPI YoY India CPI ex Food and Beverages YoY
Source: IndiaDataHub, DART

Worldwide Market (Index)

Index Close Price YTD %
NASDAQ COMPOSITE INDEX (USA) 13,650 30.4
S&P 500 INDEX (USA) 4,383 14.1
IBEX 35 INDEX 9,941 12.8
Euro Stoxx 50 Pr 4,474 10.1
DAX INDEX 16,308 9.3
CAC 40 INDEX 7,532 8.6
NIKKEI 225 213 7.0
Nifty (India) 234 6.7
TOPIX INDEX (TOKYO) 15 5.8
DOW JONES (USA) 34,112 2.9
FTSE 100 INDEX 9,098 0.9
MSCI AC ASIA PACIFIC 157 0.6
MSCI EM 958 0.2
HANG SENG INDEX 2,248 (11.3)
CSI 300 INDEX 496 (11.6)
Source: Bloomberg (Dec 30th 2022 to 08th Nov 2023), DART| Returns shown in % USD terms

November 10, 2023 31

 India Consumer sentiment remains steady….
140
130

Inflation softening, rise in 120

MSP, continued 110
government spending
100
between now and elections
and festive season should 90
help to sustain the 80
sentiment.

Mar-20

Mar-23
Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Mar-21

Mar-22
Sep-13
Sep-12

Sep-14

Sep-15

Sep-16

Sep-17

Sep-18

Sep-19

Sep-20

Sep-21

Sep-22

Sep-23
RBI Consumer Confidence Survey: Future Situation Index
Source: IndiaDataHub, DART

….and so does the business sentiment - Can the sentiments reverse?

150

140

130

120

110

100
Mar-13

Mar-21
Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Mar-20

Mar-22

Mar-23
Sep-17
Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-18

Sep-19

Sep-20

Sep-21

Sep-22

Sep-23
RBI Industrial Survey: Overall Business Expectations Index
Source: IndiaDataHub, DART

Our base case is anchored
towards rate cut in H2CY24
providing fillip to earnings
for FY25/26
Shift to rate easing? Odds are not great as of now but still there
As we move forward, some of the key factors (outlined in previous sections of this
note) like impact of geopolitics on commodity prices, extent of global growth
slowdown and fiscal measures would define the extent of disinflation stance of MPC
members. Also, prospects of rabi sowing and impact on food grain production would
be closely watched out for. If the average inflation for 2024-25 falls in line with the
Monetary Policy Report of Oct’23 estimate of 4.5 pc, then the inflation adjusted policy
rate (i.e. real rate) at 200 bps would be higher than the natural rate (projected around
100 bps by RBI staff) and we see a fair probability of 75-100 bps rate cut in H2CY24.

Can we witness a blip in growth momentum in H1CY24?

Sustained weakness in global growth (Exhibit 43-44), higher for longer real rates,
uncertainties around domestic election outcome, volatility in financial markets, fall in
household net financial savings (from 7 pc of GDP pre pandemic to
5 pc in FY23) and possible decline in farm incomes because of lower agriculture output
could have an adverse impact on investment activity, external demand, consumer
sentiment and we could see a temporary blip in growth momentum especially in the
first half of 2024. It would be interesting to see the role of the newly elected
government especially in terms of fiscal response.
November 10, 2023 32
 Can government spending act as a propeller to drive the growth engine forward
especially in the 2nd half of 2024? (Exhibit 45)

World trade volume fell at their fastest annual pace since Aug’20
30%
25%
20%
15%
10%
World trade volume has 5%
weakened on the back of 0%
high inflation and rate -5%
-10%
hikes by global central -15%
banks. -20%
-25%

Mar-13

May-17
May-07
Mar-08

May-12

Mar-18

May-22
Mar-23
Nov-04

Jan-09
Nov-09

Jan-14
Nov-14

Jan-19
Nov-19

Jul-21
Sep-05
Jul-06

Sep-10
Jul-11

Sep-15
Jul-16

Sep-20
World Trade Volume YoY
Source: Bloomberg, DART

Share of Exports to GDP in India has steadily moved higher

24%
In lieu of weakness 23%
in global trade, 22%
India’s exports can
21%
witness a
slowdown and its 20%
contribution to GDP 19%
could taper off.
18%
17%
16%
Mar-19 Mar-20 Mar-21 Mar-22 Mar-23
Share of exports to GDP
Source: IndiaDataHub, DART

State and Centre capex has nearly doubled in last 3 years

Can government 14,000 14,000
spending play a role of a 12,000 Total capex has 12,000
propeller? moved up by ~2x
10,000 10,000
In a backdrop where we 8,000 8,000
see increased global 47% growth YoY
uncertainty and business 6,000 6,000
and consumer sentiment 4,000 4,000
get adversely impacted,
2,000 2,000
government spending
would play an important 0 0
role to drive the growth FY18 FY19 FY20 FY21 FY22 FY23 FYTD 23 FYTD 24
engine forward. State Capex (in bn) Centre Capex (in bn) Total Capex (in bn, RHS)
Source: IndiaDataHub, DART

November 10, 2023 33


Bond inflows will shift
lower the cost of funding
for government / private
borrowing
Monthly SIPs touched a
record high of $ 2bn per
month will CY24 set
another benchmark?
And help to neutralize the
effect and reduce volatility
in Indian equities.
Stable government, reform
implementation and aspects
of financialization has led to
increased participation from
domestic investors (ex of
Covid period FY21).
November 10, 2023
Structural shifts to play out
From a bond market perspective, next year has a huge significance. Post, India’s bond
inclusion in JP Morgan’s GBI EM Global index in June 2024, we could see an estimated
passive and active flows of ~USD 25bn and ~USD 10bn respectively invested in the
bond market over a period of time. This is a significant development which reflects
the confidence of the global financial market w.r.t India’s growth prospects and
stability around macroeconomic policies. Structurally too, this would help to enhance
liquidity in India’s bond market, diversify bond ownership, help to finance India’s fiscal
and current account deficit and lower the overall cost of borrowing. Inclusion in one
global index, also enhances the possibility to be considered for inclusion by some of
the other index providers like FTSE, et al and lead to further inflows. We believe, from
medium to long term perspective, these developments would go a long way to lower
risk premium on India’s bonds which bodes well from equity valuation perspective.
Financialization keeps its pace on
Apart from prospects of stable to low interest rates, Indian equities would also get
benefited from aspects of financialization of assets and increased domestic
participation in Mutual funds. Traditionally, households in India invest their savings in
physical assets like gold, real estate – long term average share of physical savings to
total gross household saving is nearly 60 pc (2006-2020). But factors like political
stability, implementation of economic reforms, evolution of technology has led to
greater confidence among households and we have seen the share of financial savings
rise to 50 pc in 2021 vs long term average of 40 pc (2006-2020) and the share of MF
to overall flows of gross financial savings (on yearly basis) rise to 6.1 pc in 2023 from
2.1 pc in 2021 (Exhibit 47). In terms of participation too, we are seeing it to be broad
based as is evident from the increase in no. of folios in equity MFs and no. of SIP
accounts opened (Exhibit 48-49).
FPI vs DII flows
320,000
220,000
120,000
20,000
(80,000)
(180,000)
Mar-18
Mar-21
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-19
Mar-20
Mar-22
Mar-23
Total Net purchases from FPI in secondary market in equity (INR cr)
Total net purchases from DII in secondary market in equity (INR cr)
Source: IndiaDataHub, DART | Flows calculated on FY basis
34
 Share of MF to overall flows of gross financial savings (on yearly basis)
Since 2021, we have
7%
seen a drop in share of
total deposits to overall 6%
flows of gross financial
savings. On the other 5%
hand, share for MFs 4%
have increased from 2.1
pc in 2021 to 6.1 pc in 3%
2023.
2%

We believe these nos. 1%

would be closely Mar-21 Mar-22 Mar-23
monitored as
Flow into MFs as % of total flows in household financial savings
continuation of the
trends in MF flows Source: IndiaDataHub, DART
would help to tie down
the volatility in Indian
equities. Increase in no. of folios in equity MFs reflects broader participation from
domestic investors
110
100
90
80
70
60
50
40
Apr-21

Jan-22
Apr-19

Apr-20

Apr-22

Apr-23
Jul-19

Oct-19

Oct-20

Oct-21

Oct-22
Jan-20

Jan-21

Jan-23
Jul-20

Jul-21

Jul-22

Jul-23
Number of Folios in Equity MF (in mn)
Source: IndiaDataHub, DART

In last 5 years, average no. of SIP accounts opened has trended higher
What to watch out
40
Outcome from general 35
elections, government policy
30
continuation, possibility of re-
rating of market valuation, 25
odds of rate cuts by MPC, 20
sustenance of growth 15
momentum in CY24,
tailwinds from inflows from 10
bond inclusion in global index 5
and increased participation in
Apr-20
Apr-19

Apr-21

Apr-22

Apr-23
Oct-19

Oct-20

Oct-21

Oct-22
Jan-20

Jan-21

Jan-22

Jul-22

Jan-23
Jul-19

Jul-20

Jul-21

Jul-23

MFs.
Number of SIP accounts opened (in lac) Yearly Average
Source: IndiaDataHub, DART

November 10, 2023 35

 DART RATING MATRIX
Total Return Expectation (12 Months)
Buy > 20%
Accumulate 10 to 20%
Reduce 0 to 10%
Sell < 0%

DART Team
Purvag Shah Managing Director purvag@dolatcapital.com +9122 4096 9747

Amit Khurana, CFA Head of Equities amit@dolatcapital.com +9122 4096 9745

CONTACT DETAILS
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