We will talk about the Jackson Hole Symposium then, are you expecting any key commentary coming in from the Fed chair and how do you expect this to pan out for the American markets and the spillover for our markets then?
It is a strategy setting kind of a seminar. Last year if you remember the markets were quite optimistic going into Jackson Hole but the Fed chair’s speech was very hawkish and we had seen a major selloff post his speech because markets were very surprised by his hawkishness.
This time around markets are going in with a lot of pessimism built in because the US economic numbers are coming through very strong. If you look at the Atlanta Fed GDPNow number that is showing an unprecedented 5.8% prediction of growth for US in the quarter three, 5.8% for an economy of the size of US that is unheard of kind of numbers, only in the post COVID recovery you could probably have seen a number like that because of the base effect. So, a very strong US economy, pretty resilient US consumer and persistent inflation, these are the things he will talk about.
Market has more or less factored in that there is a slight probability of a November rate hike, September does not look likely. What could spoil the party is if he once more like last year says that 2% is our target and the market is complacent, we are higher for more, all those things we have heard but if he again reiterates that we do not think our job is done and I see further rate hikes that could roil the markets. So, an interesting week is coming up.
In Jackson Hole normally no rate action takes place. It is only policy formulations. They will discuss what are the learnings from the last three years and how right they were last time around and how do they look at the future. So, a very short speech. I think he will stick to script and he will more or less deliver a hawkish but a pause kind of a message. If he says we are going to raise more, that will really set the cat amongst the pigeons.
Just wanting to understand how you see the whole China situation playing out? Why I say so is because China’s economy has appeared to be slowing down. The central banks are cutting their rates when we are hearing a lot about inflation across the world. So, if China or the dragon when they are sneezing, can that be beneficial for Indian markets? How concerned should we be when we are seeing the China economy, the reports are not that positive?
I would be concerned because it is the second biggest economy and nearly 35% of this year’s growth in the world was going to come from Chinese growth and we have seen from JPMorgan to Nomura to Morgan, all are reducing their outlooks for Chinese GDP. The bigger issue is what has been shovelled under the carpet for so many years. The local government debt if you look at that, is about $13 trillion. The shadow bank AUMs are about $3 trillion. So, two of those companies have started defaulting. They have about $100 billion of assets under management which they have lent out. Nobody knows exactly how bad that situation would be. Just looking at the scale, $3 trillion is equal to the British economy.
$13 trillion is the third biggest economy in the world and that is outstanding at the local government level. So, a very highly leveraged country, 25% of GDP coming from real estate which has not been doing well for the last two years.
Somehow, the policymakers this time around do not seem to be as concerned or as resolute in actual action. The normal noise is being made but they are trying to manage the narrative rather than taking solid action unlike in 2008 and in 2015 when they came with big bang stimulus measures to contain the issue.
So, now the risk right now is contagion, that is how big the fallout from the shadow bank crisis and from the real estate developers going burst.
Evergrande filed for bankruptcy in the US courts, that is a known story for the last two years, $300 billion is their exposure. So, we are again throwing billions and trillions around without actually knowing how deep the rot is, that is the trouble with China.
Well $7 billion odd have come out of the Chinese equity market in the last one month, we have not got inordinate amounts of inflows. My thinking is that if there is a further selloff in China, there will be an emerging market selloff and people have made more money in India, we could get a heavier selloff rather than in the short-term money coming in very fast.
Yes, eventually when there is a reallocation like Morgan Stanley ranked us at number one amongst emerging markets, put an overweight, those benefits will come eventually.
But right now, it is a risk off based on the sheer scale of China and because of the opaque nature of the government machinery where we do not get data and we do not know exactly how deep the rot is.