Dear Investor,
I take this opportunity to wish you all a very Happy and Healthy Festive Season on behalf of the Ace Lansdowne Team.
In the last 5 years, many new trends have emerged. However, a couple of these are powerful to influence the economic direction in a big way. They are (A) The Increased Deglobalization and (B) The rise of a new breed of investors, who are young, smart, restless, and most importantly inexperienced. Let me elaborate this.
A. Increased Deglobalization:
The worsening tensions and rhetoric between the USA and China are making it harder for the two largest economies to cooperate even on issues that are in their own national interest. Their choice to engage in “strategic competition” will negatively impact the world order and the strains are increasingly compelling other countries to choose sides, re-dividing the world at a time when collective success depends more than ever on collaborative actions. Also, the ongoing war between Russia and Ukraine made this diversion more significant.
Is globalization dying or slowing or mutating?
It will be naive to say its a dead end for globalization, it is important to remember that the theory of comparative advantage hasn’t gone away. It remains both cost-effective and efficient for firms to source their supply chains from across the globe. Digitalization is driving that process even faster in the globalization of services. These compelling reasons for the huge investment in global supply chains will continue to drive firm behaviour. If large countries like the USA, Brazil, and India want to convert themselves into manufacturing hubs to reduce dependency on China and others, I strongly believe the movement of goods will slow down a big way over the next 5-10 years. In fact, post-GFC the world trade in goods is at a declining pace albeit at a lower rate but in the case of services we have seen consistent rise in ratio. Global trade of services as % of GDP has moved from 6-7% in the early nineties to over 12% now and consistently seen healthy growth. The US accountants can employ pretty much anybody to tally their accounts also online credit card sales support, copy editing, lawyers, and IT off-shoring are likely to remain strong and it will be much dependent on labour arbitrage due to the population of countries. At the same time challenges around sourcing chips or medicines or P.P.E. kits during covid time made the world awake of self-sufficiencies around critical areas of manufacturing, take the example of India’s big strive into a policy of PLI ( Production Linked Incentive ). It has just changed the whole road map of mobile and electronics manufacturing and it is likely to spread across many segments such as textiles, semiconductor chips, and chemicals.
A comprehensive concept of national interest, defined in broader terms than economic efficiency is to include pressing social and environmental challenges confronting both rich and poor countries. In parallel, the management of global flows will require new and augmented multilateral structures that brings together disparate ministries, poorer / vulnerable countries, and key private sectors. This will certainly make globalization and it’s management more complex, but it is far better than trying to erect barriers in a vain attempt to stop irresistible, and potentially very beneficial, global forces.
We are surely seeing much-needed sunrise of made locally, which will lead to big manufacturing activities in countries like India, Mexico, Brazil, Vietnam, and many more. The bottom line is that globalization will have to evolve with a more tailormade focus. I strongly feel more digital globalisation is here to stay vs trade relationship.
B. Rapid rise of young Investors and Traders:
In the last few years, especially during Covid, there has been a massive change in the mindset of the younger generation with respect to their career aspirations, income generation, and preference for investment avenues. The sharp run-up in stock markets post-Covid lows has attracted Gen-Z (aged 25 and below) to stock markets in pursuit of quick money and easier returns.
According to a Jefferies report, ~4.8% of Indian household assets are invested in equities as of FY22, compared to 2.7% during the covid-period (FY20). Also, the number of Demat accounts has risen from 41 million in FY20 to cross 100 million by Aug-2022, mainly from new gen investors.
The youth is focused on creating financial assets rather than physical assets which will eventually shape the economy. This expansion was essential but it’s coming just too fast. Quick money is preceding the minds of youth over studies and career planning. Young students thinking of market cap ahead of their own market value is ironic.
According to CMIE, employment in manufacturing, construction, and mining sectors which accounted for 30% percent of all employment in 2016-17 has declined to ~21% in 2020-21. While the slowdown in the economy in the past few years, the pandemic, and automation in these sectors are the main reasons, a higher focus on financial markets by the youth will lead to slower recovery in these core sectors of the economy. And if it’s not controlled or disciplined with the regulatory eye, it can ultimately lead to a bubble and excesses situation in long run. Financial markets have never been easy and can backfire if one is not disciplined in their approach. It takes a lot of patience, time, investment, and wisdom which comes from tracking the markets for several years.
The real capital formation which increases overall economic output will be impacted by excessive financialization.
Historically, periods of excessive financialization have often coincided with periods of national economic setbacks, the Netherlands in the late 18th century, Britain in the late 19th and early 20th centuries, and recent US zombies and Crypto bubbles. The focus of the super-rich on “making money out of money” rather than making real goods and services has led to wealth inequality, and overall national economic decline.
While it is great to have a rising trend in the financialization of assets, there needs to be a fine balance between the creation of physical assets (which are the foundations of an economy) and financial assets to create an economy with a sustainable growth path which is well augmented with a diverse talent mix across streams of business rather than only in financial markets.
Overall, this is a great trend if channelled in the right manner.
As I conclude, excerpts from our December 2021 communication we had with you. A lot of things we had a hunch about are playing out.
"We expect 2022 will be a more volatile year for equities. It is likely that the U.S. and the Europe will struggle with persistently increasing inflation, while growth may start to moderate in the second quarter as the economies enter late-cycle expansion. I sense a hawkish tone from central banks in the first half, as their playbook will change from transitory inflation to curbing inflation. Inflation will be more structural in wage growth, food prices, energy costs, and housing prices. That said, tighter monetary policies may be offset by a record number of fiscal stimuli, such as the infrastructure bill in the U.S. amid slower growth globally and inflationary pressures.”
These are interesting times, though a little vague and volatile. We continue to work with our experience-based insights, striving to strengthen our collaboration with you.
Happy Reading !!!