Investors Beware – 4

In past few days there has been heightened activity in stocks of the companies which are perceived to be beneficiaries of the “war” (trade or military) with China. My fellow small investors are lapping stocks making defence equipments, telecom equipments and missiles, as if there is going to be an attack on China tonight. The stock prices of many such stocks have risen by 10-25% this week. The stock price of a public sector power equipment manufacturer gained on the assumption that the government might ban Chinese competitors and the order book of this company may swell. Some pharma, chemical and agro chemical companies also witnessed action based on assumption of trade restrictions with China. The businesses dependent on imports from China witnessed selling pressure, while the businesses considered to be the alternative to the Chinese impost saw extra buying interest.
I would like to request my fellow investors to exercise some extra caution and restraint while jumping in buy the “beneficiaries” of the “war” with China. They must at least take note of the following points, before making any investment decision based on this impulse.
(a)   A war, small or prolonged, with China will have disastrous impact on both Indian and Chinese economy. By extension it will also impact the global economy. The war with China will not be limited to stones and iron rods, as the recent reported skirmishes have been. It will be fought on ground, in air, in the ocean and most importantly in the cyberspace. Pakistan for sure would like to engage Indian forces in the western and northern sectors to distract Indian forces in order to help its ally China. Moreover, given that China is finding itself cornered due the suspicions over its role in spread of COVID-19 across the world, and has been mustering allies who can support it on the global platforms, there are chances that the conflict may expand beyond Sino-India borders.
The point to note is that a war, even if it lasts less than a week, could have disastrous economic impact in terms of disruptions and costs (economic and human). Higher taxation, higher inflation and higher rates would be the most natural consequences. If the assumption is ‘war” then the investors would be better off buying USD with all their money rather than buying mid and small cap companies which may or may not survive a 5 day war.
(b)   Accept it or not, as of today China is an integral part of India’s economy. Millions of small businesses, traders, retailers, and footpath vendors depend overwhelmingly on the Chinese imports for their livelihood. Without a credible rehabilitation scheme for millions of these people dependent on trade with China, the “Boycott China” campaign in not going to be successful in any measure. If you want to fully assimilate what I am saying, take a round of you local market and see for yourself.
(c)    A large number of large businesses are dependent on the imports from China to carry out their manufacturing activities. They import critical raw materials, engineering products, plant & machinery and spare parts for their plant & machinery from China. Sourcing all these from alternative sources may either not be feasible or may be materially expensive.
(d)   A large number of large businesses have a big market for their final products in China. Finding alternative markets may be difficult for these businesses.
(e)    A significant number of global companies are looking to shift their operations from China. The governments of emerging markets like India are willing to go out of their way to attract these companies to their shores. Some of these companies may finally land up in India. This will be both threat and opportunity for Indian businesses. Some businesses may face enhanced competitive pressure from these global companies which relocate to India from China, while others may gain from becoming part of a larger global supply chain. Betting on who will gain and who will lose from this shift in global supply chain is a difficult task even for most of the sophisticated investors.
(f)    Chinese investors have invested, directly or indirectly, in a large number of Indian businesses. Many startups rely heavily on Chinese funds or technical support for their businesses. Many plants and infrastructure projects have been or are being built by Chinese companies. Their completion and maintenance could be severely impacted if the trade relations with China worsen due to war. The Indian promoters may lose heavily if this were to happen.
I am certainly not against the goals of self reliance and import substitution. But these things cannot be achieved over night and without tremendous pain. A long term strategy and willingness to bear the pain is what is needed to attain these goals. Rhetorical nationalism and mindless jingoism may lead to devastating consequences. In my view it will take 10-15years of meticulous planning, diplomacy and execution for us to meaningfully reduce “Made in China” from our day to day life. Doing a BTST (Buy Today Sell Tomorrow) trade on this theme can only bring losses. So at best it is avoidable.
Also note that the transition from a agro economy to industrial economy is a slow and excruciating process. Expecting quick results may lead to avoidable disappointment. Remember:
(a)   Most of the claimed “Demand” in India is still “Need”. The “capacity to pay” that is quintessential to “Demand” is still low.
(b)   The “Democracy” is both the strength and weakness of India in economic context. Unlike China, it is not an easy order here to override sustainability concerns and regional aspirations for faster economic growth. Socio-political consideration would continue to take precedence over pure economic concerns.
(c)    The “Demography” is a still a raw strength. Without substantial investment in “gender equality” and “skill development” this resource cannot be exploited fully.

Author: Midas Finserve

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