Hey there!
I wanted to write about this for a long time but just could not summarise this brilliant newsletter. Frankly I didn’t know what to omit. Finally, I was able to stitch together on the reasons why this 15-year-old $1.5 billion hedge fund decided to shut down and return the money to investors.
Besides, there is some interesting stuff about how India’s economic growth has coincided with a growing employment crisis and there is this piece that explores if the garment industry can come to rescue. Also, a no-holds-barred look at the Indian banking industry.
You might just find it too heavy a dose for your weekend. Nonetheless, do read and enjoy. Happy weekend!
Casualty of high frequency trading
It wasn’t performance – the fund beat most of the ‘smartest money’ out there. Why then did Nevsky Capital decide to cease managing the Nevsky Fund? Let’s find out. I am not too sure if I have done justice to the newsletter. Still a must read.
Data quality has deteriorated
- Broad data from China is simply not credible, which makes it increasingly difficult for us to forecast for a growing part of our portfolio. At a micro level, since GFC, corporates have responded to more scrutiny by disclosing less and not more
Equity markets are also less transparent
- The unintended consequences of regulations post GFC are increase in market share of ‘dumb’ indexes and ‘black box’ algorithmic funds resulting in falling volumes and rising individual stock volatility
- An initially badly executed order can now inadvertently create a price trend that, as algorithmic funds feats on it, can create a market event even if the initial order was a innocent mistake
- Index and algorithmic fund manoeuvrings also make it very hard to ascertain what the market’s ‘clean’ position is at any time. All of this pushes up the cost of capital
Asia is becoming an increasingly time zone
Gone are the days when one-time zone (of Asia/Europe/the US) could be neglected. This made us resume the brutal work hours we had stepped back in 2010, which is unsustainable now.
In summary, all the above factors now mean that it is more difficult than ever before for us to accurately forecast macroeconomic and corporate variables. This pushes us our cost of capital and increases the risk of us suffering substantial capital loss on individual positions. This is made what we enjoy the most – the thrill of analysing economic data releases and company accounts – no longer enjoyable. It is therefore time to accept that what we have done for 20 years has worked brilliantly but not anymore.
The final reason we have decided to cease managing the fund is our increasing concern with regard the health of the global economic cycle which make issues like poor disclosure, triumph of nationalism over logic, low market liquidity and high event risk only worse.
US investment outlook – The cost of capital is rising & US corporates are not prepared for this
US business cycle is at a mature stage and we believe the cycle is set for reversal – there is an unprecedented shrinkage in the proportion of working age adults who wish to participate in the labor force; the US unemployment rate has collapsed. Revenue weakness in US corporates is caused by a strong USD, weak commodity prices, Chinese competition in manufacturing, and similar disruption towards pricing taken by the ‘Unicorns’ within the service sector. To add to it, the laser like attention given to cost cutting post 2008 has left ‘no fat to cut’. Unfortunately, these concerns are not expected to dissipate in the future.
Margins have no margin of safety
Given the persistent financial engineering and cost sweating, profit margins are at record high levels, helped by low input prices and strong USD
Balance sheets are weak: Ultra-low interest rates have led to gearing up. In fact, gearing levels are already higher than the ‘crazy levels of 2007. Normally this kind of levering up happens after rate hikes. The FED is incredibly late in this cycle.
US equities are not priced for this kind of risk: With valuations at right of the top of the modern range, other than only thrice in history. This means that none of the above risks have been priced in equities. This is not an attractive prospect.
To conclude, the direction and pace of the global economy is determined by just two economies, US and China. Unfortunately, due to problems in both, the medium-term outlook is becoming increasingly uncertain. There is now a growing risk that the ongoing emerging bear market envelops developed markets as well. There is still scope for upside – Chinese policy making and the raw power of excess global liquidity. Unfortunately, these are almost impossible to predict with any confidence. To try and predict them, given the current equity valuations, is fraught with downside risk.
Jobless growth: Apparel exports to the Rescue?
India’s economic growth has coincided with a growing employment crisis. India adds 12 million people to its working population every year and will grow to become the largest source of labour pool soon. Also, there is a large supply of labour waiting to shift out of agriculture. However, workforce participation rate has fallen by 200-400 bps in last four years. Some of the constraints that prevent expansion of employment are: -
- Lack of skilled labour
- Absence of vocational training
- Minimum wages’ laws complexity with different wages across states, only permanent employees benefitted, and different laws set by different authorities etc.
- Labour laws increase compliance and reduce flexibility
Because of the above reasons, firms across industries have resorted to hiring contract workers to bring in flexibility to cost structure and enabling them to address occasional upsurges and downturns in demand. Another response by the firms has been to increase mechanisation, thereby increase capital intensity across industries.
The garmenting industry can be a ray of hope since it is very labour intensive and not amenable to mechanization beyond a point. India has fared much below its potential in creating jobs in garmenting. Textiles and apparels are already one of India’s largest employers and exporters. It is one of the few sectors where India has a positive trade balance. Apart from exports, there is a huge opportunity in the domestic market with domestic consumption at 4kg/capita much less than global average of 14kg/capita.
Garmenting has seen amongst the lowest fall in labour intensity of operations. But other parts of textile value chain like spinning, weaving etc. are getting rapidly mechanized. Rising wages and focus on higher value added industry has made China relatively uncompetitive over the last few years. However, India has not benefitted from the shift away from China despite having abundant raw materials and a huge labour force.
Garment exports have been poor because yarn forms 38% of textile exports which is unvalued-added cotton and capital intensive. Garmenting value addition is significant and almost entirely through labour content. Garmenting creates 80 jobs for Rs 10 million investment compared to 3-6 in the case of upstream investments.
The government has made some moves to help this sector like allowing fixed term employment, increase in maximum overtime allowed, tax breaks for job creation etc. This might be a beginning of a massive growth phase for this industry and would lead to job creation.
If the jobless growth continues then policy making could once again shift to populism if employment opportunities do not expand meaningfully. However, the current government seems steadfast in its commitment to stick to fiscal deficit reduction. Despite favourable policies and intent from the government, slow global economy and international trade has meant slow translation into investment and therefore jobs.
From a strategy angle, CPI is likely to stay around 4-5 per cent range over the next one year. However, with CPI-WPI gap narrowing, further margin expansion for consumer facing companies could be difficult. While medium term driven by GST would help, optimism seems over stretched especially for consumer discretionary, emergence of business outside the listed space is disrupting businesses of listed companies. These businesses are attracting massive amount of capital, talent and policy support at the expense of listed businesses.
All said, if the currently benign global liquidity and rate environment continues, India will likely be a major beneficiary of flows and falling cost of capital. This would cause massive capital raising by indebted companies, kick starting capex cycle, bigger boom in consumer lending and reflation in real estate prices. So, foreign debt flows should be watched closely.
Indian banking: In a time of change
Niche banks and financial technology providers mean banking is going to be much more personalized and structured. The huge untapped banking potential in the country will be harvested and usurious interest rates charged in the informal sector, would be brought at par with the rate structure in the formal sector. The key 12 trends that will shape the future of banking are -
Transition of business models from low volume, high value, high cost to high volume, low value, low cost: We are seeing strong pick up in Electronic clearing (ECS, NACH, IMPS, etc.) which is growing at 50 per cent a year. This will lead to a dramatic upsurge in accessibility and affordability, and the market force of customer acquisition and the social purpose of mass inclusion will consequently converge.
Credentials – from proprietary to open: Credentials are moving from ‘proprietary’ (card + PIN both managed by bank) to ‘public’ (Mobile phone + Aadhaar authentication), also soon the facility will be available for commercial as well!
Switching costs are going down: Technological improvement will lower the cost of onboarding a customer as well as transaction costs, which means deposits can be moved easily or switch loan with a click, further accelerating growth.
Customised lending rates considering individual pricing of risk: Lending parameters are expected to move to cash flows which lead to a better risk assessment, based on a complete picture of the business. This will also enable a transition from informal assets into the formal economy.
Business – From fee income to data: As data becomes the new currency, financial institutions will be willing to forego transaction fees to get rich digital information on their customers, accelerating move to a cashless economy as merchant payments will also become digital.
Merchant models – Ready for disruption: Smartphones will replace POS and card. Merchant on boarding will be self-service.
Cashless changes everything: The advent of the Unified Payment Interface will accelerate shift to cashless, implying there will be formalization of economy, tax collections will go up and customer ownership based on branches, ATMs, will be replaced by new assets - phone, platforms, data, algorithms, etc.
Interest rates will converge: Easier access to formal credit will eliminate the 'informal' systems leading to massive economic efficiencies and will converge lending across formal and informal sector.
Jan Dhan - Aadhaar – Mobile: Three systems i.e. Jan Dhan (financial inclusion), Aadhar (National Identity card) and Mobile (known as J.A.M.), which are getting integrated with each other, are expected to allow a range of innovative services to be implemented in a paperless, instantaneous and cost-effective manner.
The emergence of the India stack: The entire banking system will soon be “paperless” through collective programs and tools including ‘India Stack’ (think-tank iSPIRT), ‘eKYC and esign feature of Aadhaar’, ‘digital locker system’ etc.
India will be data rich: The use of digital footprints will bring millions of consumers and small businesses (who are in the informal sector) to join the formal economy to avail of affordable and reliable credit. India will go from data poor to data rich nation in 5 Years!
Impact of these trends: Smartphones will not only make brick-and-mortar banking redundant. All the ancillary technologies needed for banking will also go out of fashion. Account information would become virtual, eliminating the need for disclosure of accounts, and transactions through mobile phones in a secured and real-time manner would become the norm.
On the savings side, alternative low-risk savings products will emerge, providing higher interest rates and liquidity. On the lending side, there will be emergence of alternate lenders (such as P2P lenders), which dramatically lowers costs. Lending is expected to grow 5x in next 10 years.
How painful a ‘hard’ Brexit would be?
Hardly do people compare the British pound to the Nigerian naira, Azerbaijani manat or Malawian kwacha. But on a measure of year-to-date change against the American dollar, sterling is near the bottom of the 154 currencies tracked by Bloomberg. To top the chart of worst-performing currencies against American dollar, is Suriname dollar.
You can also see currencies like the Nigerian naira, which is affected by falling oil prices and the vain attempt of the central bank to prop it up. However, the pound is down by 15% on a trade-weighted basis since the Brexit vote, and is plumbing the depths it reached in the 2008-09 financial crisis. So sterling isn't right at the bottom. But it's doing pretty badly.
For a country that is used to attracting swathes of investment from abroad because of its membership of the single market and stable political climate, the “hard” Brexit is a huge shift, which is turning Britain into a xenophobic, interventionist and unpredictable place, with calls to clamp down on foreign workers and foreign capital. Adversity will arise if foreign direct investment (FDI) dries up gradually as it will have precarious impact on its current-account deficit (a measure of what it borrows from abroad), which currently is equal to a gigantic 6% of GDP, leading to balance-of-payments crisis.
So the pound is falling. How bad is the drop? After all, British stock markets are on the up (in pound terms, at least). And Britain's government-bond prices are still very high (though in recent days they have fallen a little). Both of those phenomena suggest that money is flowing into British assets, not out of them. The rise in the stock market, may be mainly due to the actions of domestic investors. The FTSE pays lots of dollar-denominated dividends so is increasingly attractive to British investors as the pound falls and maybe, foreigners are selling cash holdings (instead of assets).
The combination of a slowing economy, rising inflation (estimated to jump from its current level of 0.6% to 3% by next year) and shaky confidence constrains fiscal and monetary policy. The Bank of England is unlikely to raise interest rates in response to the temporary spurt of inflation caused by sterling’s fall. Yet gone are expectations that the bank will soon reduce the base rate of interest from 0.25% to 0.1%; a cut would prompt still more foreign capital to leave the country.
The government may have a little room for manoeuvre. In its autumn statement, it is likely to change course from aggressive fiscal consolidation to mild expansion. But it, too, must be careful. Gilt yields have crept upwards as investors reassess the British economy, and could go a lot higher if the nasty rhetoric coming from ministers continues.
The most sensible course, then, would be to heed markets’ concerns. The overwhelming weight of evidence shows that leaving the customs union and single market would exact a heavy toll on Britain’s economy. Remaining within them would require political courage, but has clear economic benefits. It is not too late to change course.
READ MORE
Clean disruption - Why energy & transportation will be obsolete by 2030
Mid-1980’s AT&T asked Mckinsey & Co to estimate cell-phone demand in around year 2000, they predicted a 900,000 versus actual handsets of 109 mn…a huge mismatch ……AT&T landline was disrupted and missed a trillion-dollar opportunity
We will see more changes in energy and transportation in the next 5-10 years than we have seen in the past
Convergence of tech-new markets; destroy or radically transform existing industry
Key is to join the disruption…. expert will deny disruption…will give all kinds of explanations
2015: Key exponential technologies
1. Sensors / Internet of Things
2. 3D printing/3D Visualization
3. Machine learning / artificial intelligence/Robotics
4. Energy storage
5. Mobile internet & cloud
6. Big data / open data
7. Unmanned aerial vehicles/nano satellites
8. E-money/e-finance
Computing power has doubled every two years for the same dollar….exponential growth
1. Energy storage-
- A laptop has a lithium ion battery…cost decline of 14% in last 15 years…and that is only going to accelerate…projected cost of lion ion battery $/kWh in some years to be significantly lower led by huge investments in battery tech. by Tesla US$5 bn investments (6500 jobs).
- Double battery production and reduce battery costs by 30-50%.....putting the supply chain in one place …Nevada….the cost cut could be higher than stated above due to tech. innovation (Tesla home/commercial battery demand ahead of the market…received US$800 mn orders in one month)
2. The Electric Vehicle (EV)-
- Electric motor is 3-5x more energy efficient than internal combustion engine (17-21% efficiency)
- EVs are 10X cheaper to charge/fuel
- Maintenance- gasoline car has 2000+ moving parts versus 18 moving parts for Tesla…..Tesla is offering infinite mile warranty
Tesla is targeting US$30000 EVs by 2020 (the median cost of a car in US) that will run 200 miles in one charge ….by 2020 it will not make sense to buy a gasoline car….by 2022 cost to come down to US$20000; by 2025 all new vehicles will be electric!!
3. The autonomous cars-
- Tesla self-driving capable of driving 90% of the time on its own now
- What is the cost curve of computing power? To process sensor inputs?
- Year 2000-1 tera flops was US$46 mn…2.3 tera flops was US$59 only…….build for self driving car technology
- Cars hugely inefficient- parked 96% of the time…4% asset utilization is a disruption waiting to happen
Uber is working on self-driving car... will make the concept of car ownership obsolete
READ MORE
(Ritesh Jain is the CIO of Tata Asset Management. Views expressed in this weekly column are personal in nature and do not represent those of Tata AMC or ETMarkets.com. It should not be construed as an investment advice. Any action taken by the reader or recipient on the basis of the information contained herein is reader's/recipient's responsibility alone.)
I wanted to write about this for a long time but just could not summarise this brilliant newsletter. Frankly I didn’t know what to omit. Finally, I was able to stitch together on the reasons why this 15-year-old $1.5 billion hedge fund decided to shut down and return the money to investors.
Besides, there is some interesting stuff about how India’s economic growth has coincided with a growing employment crisis and there is this piece that explores if the garment industry can come to rescue. Also, a no-holds-barred look at the Indian banking industry.
You might just find it too heavy a dose for your weekend. Nonetheless, do read and enjoy. Happy weekend!
Casualty of high frequency trading
It wasn’t performance – the fund beat most of the ‘smartest money’ out there. Why then did Nevsky Capital decide to cease managing the Nevsky Fund? Let’s find out. I am not too sure if I have done justice to the newsletter. Still a must read.
Data quality has deteriorated
- Broad data from China is simply not credible, which makes it increasingly difficult for us to forecast for a growing part of our portfolio. At a micro level, since GFC, corporates have responded to more scrutiny by disclosing less and not more
Equity markets are also less transparent
- The unintended consequences of regulations post GFC are increase in market share of ‘dumb’ indexes and ‘black box’ algorithmic funds resulting in falling volumes and rising individual stock volatility
- An initially badly executed order can now inadvertently create a price trend that, as algorithmic funds feats on it, can create a market event even if the initial order was a innocent mistake
- Index and algorithmic fund manoeuvrings also make it very hard to ascertain what the market’s ‘clean’ position is at any time. All of this pushes up the cost of capital
Asia is becoming an increasingly time zone
Gone are the days when one-time zone (of Asia/Europe/the US) could be neglected. This made us resume the brutal work hours we had stepped back in 2010, which is unsustainable now.
In summary, all the above factors now mean that it is more difficult than ever before for us to accurately forecast macroeconomic and corporate variables. This pushes us our cost of capital and increases the risk of us suffering substantial capital loss on individual positions. This is made what we enjoy the most – the thrill of analysing economic data releases and company accounts – no longer enjoyable. It is therefore time to accept that what we have done for 20 years has worked brilliantly but not anymore.
The final reason we have decided to cease managing the fund is our increasing concern with regard the health of the global economic cycle which make issues like poor disclosure, triumph of nationalism over logic, low market liquidity and high event risk only worse.
US investment outlook – The cost of capital is rising & US corporates are not prepared for this
US business cycle is at a mature stage and we believe the cycle is set for reversal – there is an unprecedented shrinkage in the proportion of working age adults who wish to participate in the labor force; the US unemployment rate has collapsed. Revenue weakness in US corporates is caused by a strong USD, weak commodity prices, Chinese competition in manufacturing, and similar disruption towards pricing taken by the ‘Unicorns’ within the service sector. To add to it, the laser like attention given to cost cutting post 2008 has left ‘no fat to cut’. Unfortunately, these concerns are not expected to dissipate in the future.
Margins have no margin of safety
Given the persistent financial engineering and cost sweating, profit margins are at record high levels, helped by low input prices and strong USD
Balance sheets are weak: Ultra-low interest rates have led to gearing up. In fact, gearing levels are already higher than the ‘crazy levels of 2007. Normally this kind of levering up happens after rate hikes. The FED is incredibly late in this cycle.
US equities are not priced for this kind of risk: With valuations at right of the top of the modern range, other than only thrice in history. This means that none of the above risks have been priced in equities. This is not an attractive prospect.
To conclude, the direction and pace of the global economy is determined by just two economies, US and China. Unfortunately, due to problems in both, the medium-term outlook is becoming increasingly uncertain. There is now a growing risk that the ongoing emerging bear market envelops developed markets as well. There is still scope for upside – Chinese policy making and the raw power of excess global liquidity. Unfortunately, these are almost impossible to predict with any confidence. To try and predict them, given the current equity valuations, is fraught with downside risk.
Jobless growth: Apparel exports to the Rescue?
India’s economic growth has coincided with a growing employment crisis. India adds 12 million people to its working population every year and will grow to become the largest source of labour pool soon. Also, there is a large supply of labour waiting to shift out of agriculture. However, workforce participation rate has fallen by 200-400 bps in last four years. Some of the constraints that prevent expansion of employment are: -
- Lack of skilled labour
- Absence of vocational training
- Minimum wages’ laws complexity with different wages across states, only permanent employees benefitted, and different laws set by different authorities etc.
- Labour laws increase compliance and reduce flexibility
Because of the above reasons, firms across industries have resorted to hiring contract workers to bring in flexibility to cost structure and enabling them to address occasional upsurges and downturns in demand. Another response by the firms has been to increase mechanisation, thereby increase capital intensity across industries.
The garmenting industry can be a ray of hope since it is very labour intensive and not amenable to mechanization beyond a point. India has fared much below its potential in creating jobs in garmenting. Textiles and apparels are already one of India’s largest employers and exporters. It is one of the few sectors where India has a positive trade balance. Apart from exports, there is a huge opportunity in the domestic market with domestic consumption at 4kg/capita much less than global average of 14kg/capita.
Garmenting has seen amongst the lowest fall in labour intensity of operations. But other parts of textile value chain like spinning, weaving etc. are getting rapidly mechanized. Rising wages and focus on higher value added industry has made China relatively uncompetitive over the last few years. However, India has not benefitted from the shift away from China despite having abundant raw materials and a huge labour force.
Garment exports have been poor because yarn forms 38% of textile exports which is unvalued-added cotton and capital intensive. Garmenting value addition is significant and almost entirely through labour content. Garmenting creates 80 jobs for Rs 10 million investment compared to 3-6 in the case of upstream investments.
The government has made some moves to help this sector like allowing fixed term employment, increase in maximum overtime allowed, tax breaks for job creation etc. This might be a beginning of a massive growth phase for this industry and would lead to job creation.
If the jobless growth continues then policy making could once again shift to populism if employment opportunities do not expand meaningfully. However, the current government seems steadfast in its commitment to stick to fiscal deficit reduction. Despite favourable policies and intent from the government, slow global economy and international trade has meant slow translation into investment and therefore jobs.
From a strategy angle, CPI is likely to stay around 4-5 per cent range over the next one year. However, with CPI-WPI gap narrowing, further margin expansion for consumer facing companies could be difficult. While medium term driven by GST would help, optimism seems over stretched especially for consumer discretionary, emergence of business outside the listed space is disrupting businesses of listed companies. These businesses are attracting massive amount of capital, talent and policy support at the expense of listed businesses.
All said, if the currently benign global liquidity and rate environment continues, India will likely be a major beneficiary of flows and falling cost of capital. This would cause massive capital raising by indebted companies, kick starting capex cycle, bigger boom in consumer lending and reflation in real estate prices. So, foreign debt flows should be watched closely.
Indian banking: In a time of change
Niche banks and financial technology providers mean banking is going to be much more personalized and structured. The huge untapped banking potential in the country will be harvested and usurious interest rates charged in the informal sector, would be brought at par with the rate structure in the formal sector. The key 12 trends that will shape the future of banking are -
Transition of business models from low volume, high value, high cost to high volume, low value, low cost: We are seeing strong pick up in Electronic clearing (ECS, NACH, IMPS, etc.) which is growing at 50 per cent a year. This will lead to a dramatic upsurge in accessibility and affordability, and the market force of customer acquisition and the social purpose of mass inclusion will consequently converge.
Credentials – from proprietary to open: Credentials are moving from ‘proprietary’ (card + PIN both managed by bank) to ‘public’ (Mobile phone + Aadhaar authentication), also soon the facility will be available for commercial as well!
Switching costs are going down: Technological improvement will lower the cost of onboarding a customer as well as transaction costs, which means deposits can be moved easily or switch loan with a click, further accelerating growth.
Customised lending rates considering individual pricing of risk: Lending parameters are expected to move to cash flows which lead to a better risk assessment, based on a complete picture of the business. This will also enable a transition from informal assets into the formal economy.
Business – From fee income to data: As data becomes the new currency, financial institutions will be willing to forego transaction fees to get rich digital information on their customers, accelerating move to a cashless economy as merchant payments will also become digital.
Merchant models – Ready for disruption: Smartphones will replace POS and card. Merchant on boarding will be self-service.
Cashless changes everything: The advent of the Unified Payment Interface will accelerate shift to cashless, implying there will be formalization of economy, tax collections will go up and customer ownership based on branches, ATMs, will be replaced by new assets - phone, platforms, data, algorithms, etc.
Interest rates will converge: Easier access to formal credit will eliminate the 'informal' systems leading to massive economic efficiencies and will converge lending across formal and informal sector.
Jan Dhan - Aadhaar – Mobile: Three systems i.e. Jan Dhan (financial inclusion), Aadhar (National Identity card) and Mobile (known as J.A.M.), which are getting integrated with each other, are expected to allow a range of innovative services to be implemented in a paperless, instantaneous and cost-effective manner.
The emergence of the India stack: The entire banking system will soon be “paperless” through collective programs and tools including ‘India Stack’ (think-tank iSPIRT), ‘eKYC and esign feature of Aadhaar’, ‘digital locker system’ etc.
India will be data rich: The use of digital footprints will bring millions of consumers and small businesses (who are in the informal sector) to join the formal economy to avail of affordable and reliable credit. India will go from data poor to data rich nation in 5 Years!
Impact of these trends: Smartphones will not only make brick-and-mortar banking redundant. All the ancillary technologies needed for banking will also go out of fashion. Account information would become virtual, eliminating the need for disclosure of accounts, and transactions through mobile phones in a secured and real-time manner would become the norm.
On the savings side, alternative low-risk savings products will emerge, providing higher interest rates and liquidity. On the lending side, there will be emergence of alternate lenders (such as P2P lenders), which dramatically lowers costs. Lending is expected to grow 5x in next 10 years.
How painful a ‘hard’ Brexit would be?
Hardly do people compare the British pound to the Nigerian naira, Azerbaijani manat or Malawian kwacha. But on a measure of year-to-date change against the American dollar, sterling is near the bottom of the 154 currencies tracked by Bloomberg. To top the chart of worst-performing currencies against American dollar, is Suriname dollar.
You can also see currencies like the Nigerian naira, which is affected by falling oil prices and the vain attempt of the central bank to prop it up. However, the pound is down by 15% on a trade-weighted basis since the Brexit vote, and is plumbing the depths it reached in the 2008-09 financial crisis. So sterling isn't right at the bottom. But it's doing pretty badly.
For a country that is used to attracting swathes of investment from abroad because of its membership of the single market and stable political climate, the “hard” Brexit is a huge shift, which is turning Britain into a xenophobic, interventionist and unpredictable place, with calls to clamp down on foreign workers and foreign capital. Adversity will arise if foreign direct investment (FDI) dries up gradually as it will have precarious impact on its current-account deficit (a measure of what it borrows from abroad), which currently is equal to a gigantic 6% of GDP, leading to balance-of-payments crisis.
So the pound is falling. How bad is the drop? After all, British stock markets are on the up (in pound terms, at least). And Britain's government-bond prices are still very high (though in recent days they have fallen a little). Both of those phenomena suggest that money is flowing into British assets, not out of them. The rise in the stock market, may be mainly due to the actions of domestic investors. The FTSE pays lots of dollar-denominated dividends so is increasingly attractive to British investors as the pound falls and maybe, foreigners are selling cash holdings (instead of assets).
The combination of a slowing economy, rising inflation (estimated to jump from its current level of 0.6% to 3% by next year) and shaky confidence constrains fiscal and monetary policy. The Bank of England is unlikely to raise interest rates in response to the temporary spurt of inflation caused by sterling’s fall. Yet gone are expectations that the bank will soon reduce the base rate of interest from 0.25% to 0.1%; a cut would prompt still more foreign capital to leave the country.
The government may have a little room for manoeuvre. In its autumn statement, it is likely to change course from aggressive fiscal consolidation to mild expansion. But it, too, must be careful. Gilt yields have crept upwards as investors reassess the British economy, and could go a lot higher if the nasty rhetoric coming from ministers continues.
The most sensible course, then, would be to heed markets’ concerns. The overwhelming weight of evidence shows that leaving the customs union and single market would exact a heavy toll on Britain’s economy. Remaining within them would require political courage, but has clear economic benefits. It is not too late to change course.
READ MORE
Clean disruption - Why energy & transportation will be obsolete by 2030
Mid-1980’s AT&T asked Mckinsey & Co to estimate cell-phone demand in around year 2000, they predicted a 900,000 versus actual handsets of 109 mn…a huge mismatch ……AT&T landline was disrupted and missed a trillion-dollar opportunity
We will see more changes in energy and transportation in the next 5-10 years than we have seen in the past
Convergence of tech-new markets; destroy or radically transform existing industry
Key is to join the disruption…. expert will deny disruption…will give all kinds of explanations
2015: Key exponential technologies
1. Sensors / Internet of Things
2. 3D printing/3D Visualization
3. Machine learning / artificial intelligence/Robotics
4. Energy storage
5. Mobile internet & cloud
6. Big data / open data
7. Unmanned aerial vehicles/nano satellites
8. E-money/e-finance
Computing power has doubled every two years for the same dollar….exponential growth
1. Energy storage-
- A laptop has a lithium ion battery…cost decline of 14% in last 15 years…and that is only going to accelerate…projected cost of lion ion battery $/kWh in some years to be significantly lower led by huge investments in battery tech. by Tesla US$5 bn investments (6500 jobs).
- Double battery production and reduce battery costs by 30-50%.....putting the supply chain in one place …Nevada….the cost cut could be higher than stated above due to tech. innovation (Tesla home/commercial battery demand ahead of the market…received US$800 mn orders in one month)
2. The Electric Vehicle (EV)-
- Electric motor is 3-5x more energy efficient than internal combustion engine (17-21% efficiency)
- EVs are 10X cheaper to charge/fuel
- Maintenance- gasoline car has 2000+ moving parts versus 18 moving parts for Tesla…..Tesla is offering infinite mile warranty
Tesla is targeting US$30000 EVs by 2020 (the median cost of a car in US) that will run 200 miles in one charge ….by 2020 it will not make sense to buy a gasoline car….by 2022 cost to come down to US$20000; by 2025 all new vehicles will be electric!!
3. The autonomous cars-
- Tesla self-driving capable of driving 90% of the time on its own now
- What is the cost curve of computing power? To process sensor inputs?
- Year 2000-1 tera flops was US$46 mn…2.3 tera flops was US$59 only…….build for self driving car technology
- Cars hugely inefficient- parked 96% of the time…4% asset utilization is a disruption waiting to happen
Uber is working on self-driving car... will make the concept of car ownership obsolete
READ MORE
(Ritesh Jain is the CIO of Tata Asset Management. Views expressed in this weekly column are personal in nature and do not represent those of Tata AMC or ETMarkets.com. It should not be construed as an investment advice. Any action taken by the reader or recipient on the basis of the information contained herein is reader's/recipient's responsibility alone.)
(What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)
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...moreDownload The Economic Times News App to get Daily Market Updates & Live Business News.
Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.
Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price
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