De-Dollarisation and De-Globalisation

De-Dollarisation and De-Globalisation
Arth-Samvaad - Apr '22 - Monthly Market Commentary

“Economics is the science of choice (the same seems true of geopolitics, although there’s even less science regarding that realm). Few options in these fields offer only positives and no negatives. Most entail trade-offs.” ~ Howard Marks.

It’s been a month since the Russian ‘special military operation’ in Ukraine began and there seems to be no respite. The west led by the US had embarked on a sanction-spree to restrict the Russians and thus avoiding a direct troop confrontation. The weaponisation of financial system against Russia by nullifying their US dollar reserves along with the cancellation of SWIFT system is quite unprecedented. There were instances earlier on these lines but what we’re witnessing is against another UNSC member-nation.

These are certainly very harsh measures and could cripple the Russian economy irrespective of the outcome of the current war. Russia didn’t lie low ever since and there has been a constant action on their front to avert the damage caused by these sanctions. It began to woo by offering part of its large real assets of crude oil and other minerals at steep discounts to the prevailing rates. The world reeling under severe supply chain issues and steep prices find it difficult to resist such offerings.

Freezing of central bank assets is certainly a new template. What’s troubling nations more, taken sides or otherwise, is the possibility of ending in similar situation if they find themselves out of favour by the west. Moreover, the currency reserves are an insurance for countries and if they could become invalid overnight then it’s a serious case of concern. The Saudis deal to trade with China in Yuan and Ruble-Rupee trade between India and Russia are a sign to get off from the stranglehold of dollar. Attempts to renew ties with Venezuela to restore oil supplies also raises the moral ambiguity of the US.

Questions are being raised over the dollar based financial system and the urgent need to diversify if not to find a replacement. This isn’t the first time dollar dominance was under peril but the current responses are challenging the status-quo but with no alternative in sight. On trying to be self-reliant and to gain immunity against these changes, the world is moving more towards further isolationism. Welcome to the VUCA (Volatile, Uncertain, Complex & Ambiguous) World where we’ve a de-swift, de-dollar and de-global system.

With in this chaos, India sits in a distinct position of neutrality. It remains a major trading partner to the west while simultaneously courting Russia. Most countries were cautious in their criticism towards India and continue to respect its democratic sovereignty. The recent announcement of trade deal with Australia is the highlight and there are few more FTA in the pipeline including with the EU. Another glimmer of hope is the food security that India currently has and the met department’s normal monsoon is a soothing voice to hear.

What’s in it for you:

Equity: The equity markets experienced intermittent volatility due to the news flows on the global front. Overall they seem to discount many factors like the regional elections, ongoing war and the US Fed rate hikes. Now the focus shifts onto the earnings season and probably stare at more downgrades due to the rising input costs. The mixed macro situation oozes a bit of confidence on the economy to absorb some of the external shocks.

Staggered exposures to manufacturing, financials, value and defensives could help not only provide a fillip to growth in the medium to long-term but also shield the short term volatility. Reiterating the criticality of asset allocation in the portfolio to generate outsized success.

Debt: The Fed rate hike after a long while with a quarter of a percentage is just the beginning. The market expectation on the further interest rates is aggressive but the yield curve representations portray a different story. Both the 5-30 yr and 2-10 yr part of the yield curve inverted, respectively first time since 2006 and 2019 reinforcing the rate hikes could cause recession in the near future.

With the govt'.’s aggressive borrowing program coming into effect this year, it’ll be keenly watched how RBI would respond the emerging conflicts of growth vs inflation. The IPO of LIC in the last FY was postponed due to unfavourable market conditions, now becomes an important cog to shore up finances. Though, we managed the fuel conundrum better than most countries, a continued stretch would eventually reflect in the imprint, near future. Try avoiding being on the wrong side, hence opt for staggered investment in debt with liquid/ultra short and overnight to the rescue now.

Crypto: The biggest crypto heist to date happened when about $600mn was stolen by hackers from a blockchain network connected to the popular online game Axie Infinity. The bridge nodes (supporting network) were compromised by exploiting their vulnerability in this attack.