Energy Poverty and Energy Security
“Forecasting the future of any variable is difficult, forecasting the interacting futures of many changing variables is more difficult and estimating how other expert investors will interpret such complex changes is extraordinarily difficult.” ~ Charles Ellis
In our last month’s commentary we’d opined that the FM had budgeted a higher borrowing calendar and also the revised estimates of deficit for the current FY were higher than the actual. This is despite higher realised revenues than earlier budgeted. We thought that the FM had provisioned for an exigency like that of another wave of the pandemic but the current geopolitical dynamics highlight the foresight. Or were there any beans spilled during a very brief visit by the Russian president in Dec ‘21. Don’t want to create a racket here.
The Ukraine-Russia war has pushed all cards off the deck and we’re now staring at a prolonged strain on the world economy. With both the countries of the crisis contribute significant proportions of commodities to the world, the heat was felt and would remain for a while this way. The sharpest spike in the commodity prices in recorded history will have a longer implications, aggravated further by the fragmented supply chains. The conflict and the various sanctions deepen this disruption and we could add more print to the imported inflation.
The non-oil trade deal by India with UAE would expand markets even as it strengthens the relationship, ushering us into better energy security. The rupee-rouble deal is a respite for both the countries as the dependence on the USD is reduced esp. in the high-value defence deals, also accelerates the declining trend of the USD in world trade. Europe’s energy dependence on Russia has only exacerbated the situation to act while the US’s reluctance of direct involvement has not helped the cause of Ukraine.
The world wouldn’t be same again as this crisis has already seen amendments being done by nations across the world. Switzerland at last has taken a side after over TWO centuries. Germany for the first time in the post-war history, has increased the defence spending by over $100 bn beyond the target of NATO’s 2% of GDP. So, are the other Eastern European countries like Poland, Romania and Serbia which have declared their upgradation on defence spending. During the UN general assembly resolution to condemn the Russian invasion, the rest of BRICS have conspicuously abstained.
Sanctioning Russia has multiple repercussions as its difficult to easily and readily replace their dependence in the global trade. The green shoots of global recovery now seems to be in a jeopardy so as the central bank policy normalisation. The already delayed rate tweaks could hurt if the can is kicked further down sighting the uncertainty. A few quarters back we did mention about shrinkflation and stagflation - we experienced the former then, now seems the turn of the latter. The whole green energy revolution is in question with the rising interest rates and increasing commodity prices (raw material).
What’s in it for you:
Equity: SENSEX has witnessed one of the largest single day fall (points-wise) in it’s history on 24th Feb ‘22. The current correction has moderated the overall valuations but still are not cheap. The direct impact from the war is negligible as we’re insignificant trading partner to both the countries. But, the next-order effects of the conflict would resonate domestic bourses as FIIs continue to pull and the situation is still evolving. Further clarity beyond the conflict arrives from the Fed actions and its road map into the year.
As we stated earlier, we continue to remain defensive while taking potshots at value, manufacturing and infra. The govt.’s budget has set tone for this and external macros are at a comfortable position despite the oil roil. Hybrid and asset allocation would occupy a material position. Staggered investment into equity would be an antidote to this volatility.
Debt: The conflict has raised chorus on the growth over inflation debate and possible softening of stance by the central bank policy. With crude on course to all time highs, we’re well past our comfort zone and the inflationary injection is real for India.
RBI’s measure would be keenly watched and likely begins with parity on the repo/reverse rates. While the short end of the curve is better suited for the risk averse investors, the medium term of the yield curve holds better opportunities even as the long-end of the curve continues to witness volatility.
Crypto: Cryptos have hogged the spotlight over the neutrality with the raging conflict as some exchanges began to curtail Russians even as funds are raised for Ukrainians. Meanwhile, Myanmar’s exiled democratic govt has launched a global fundraising to look after it’s supporters and challenge the military which seized the power last Feb. Last month also saw a phishing attack on OpenSea leading to a loss of $1.7mn for the investors. Co-founders of BitMEX have pleaded guilty and agreed to pay $10mn fine each for violating AML guidelines. FBI has launched a virtual asset exploration unit to find / recover illicit funds in digital wallets in a bid to deal cyber crime and ransomware attacks.