The Taiwan Strait simmers, oil boils, earnings rise

Each week, Niraj Shah studies how top business leaders and market makers are navigating the rapidly changing financial landscape.

This week was as much about earnings as it was about geopolitics and commodities. As earnings season rolls around the world, it was a busy week in India on the spending front, and boy did companies deliver! Meanwhile, OPEC did not deliver the production bump that some quarters expected. During the week, the previously understated visit to Asia by US House Speaker Nancy Pelosi brought a fair amount of news flow. Note that markets did not react dramatically to rising tensions between the US and China, this resilience may not be a bad thing. Foreign investors continued to buy India after a reversal in July, with the Reserve Bank bringing borrowing costs back to pre-pandemic levels and pledging to do “whatever it takes” to bring inflation back to target, reiterating a hawkish stance that sent bond yields and rupee higher.

July was not June. Could August be July?

If June was a steady decline, July was the opposite, with markets rising with reasonably low volatility. FIIs turned net buyers in July as they bought stocks worth over Rs 5,000 crore, after pulling out more than Rs 50,000 crore last month. There were some other telltale signs. The average daily traded value in the last week of July was Rs 57,000 crore, an increase of 8% from the previous week. The weekly delivery volume was 43%, much higher than recent averages, and the share of non-institutional delivery volumes increased to 19%, which was 14% at the beginning of the month.

August also took off, with markets rewarding anything that looked like a good quarter, a sign of positive sentiment. Stocks from Games to Paints to Consumers for ITC Ltd. and Zomato Ltd. were all positively affected by the numbers. Is this a final turnaround since India is doing much better than a bunch of other major Asian or emerging market economies? Certainly could be. A skeptic would argue that the game with crude oil is not over and remains a wild card. And that the number of downgrades has been far higher than the number of upgrades. But so far the winning camp is the bullish one.

Saudi Arabia, OPEC’s de facto leader, had so far refused to pump additional oil as requested by the White House. But after President Joe Biden’s trip to the kingdom in July, and the famous fistfight between the leaders of the two countries, it was thought possible that Saudi Arabia would pressure other members for a further supply boost. The belief was that if OPEC+ had announced a new deal that involved significantly higher production rather than just a token increase, oil prices would likely have come under pressure as a major move was not widely anticipated. This was a minor change in production, but puncturing the oil soft is the fear of a slowdown in demand due to slowing growth. As a result, oil prices are on the move and the commodity has corrected over 24% since the start of June. Meanwhile, in India, Russia has undercut oil prices from its OPEC+ ally Saudi Arabia as competition to supply India increases. I am sure the Indian Finance Minister is not complaining. The effect also shows in the prices of other commodities, and even Elon Musk says that inflation is past its peak as component costs are lower.

Indians go out, eat out and stay out. This is evident from not one, but a lot of results in the first quarter. Consider this: In its third consecutive quarter of profitable growth, Westlife, which published results last week, saw revenue grow 107.6% year-on-year with same-store sales growth of 97%. Yes, you read that right! Devyani International was not too far behind with a SSG of 63.6% for Q1FY23. Players like Varun Beverages, which holds the PepsiCo franchise in India, joined the leaderboard with over 100% increase in revenue and profit. EIH’s performance in Q1FY23 was strong as occupancy increased to 72% from 56% in Q4FY22, driven by an increase in business travel and strong leisure demand. Lemon Tree reflected the same in its numbers and ITC’s hotel business saw average room rates 10% above pre-pandemic levels with 70% occupancy. This is not all. Multiplex leaders like PVR and Inox have shown that people are flocking to cinemas in a big way. Despite average fares being at an all-time high of Rs 229, footfall was 6% higher than the pre-pandemic base. Out into the safest Ind.

Nancy Pelosi’s visit to Taiwan was an important milestone in her political career. First, she staked her reputation not to back down as a decades-long strong critic of China’s human rights record. With the US midterm elections approaching and the Democratic Party falling in the polls, she is at high risk of losing the speakership. Someone watching Chinese President Xi Jinping’s increasingly authoritarian tilt, for Pelosi this could be now or never — regardless of the fallout. There appeared to be some fallout, with China ratcheting up tensions with missiles fired over Taiwan and some bilateral meetings being canceled over statements. This has the potential to become an adverse event and be a sore point in the coming days, but as the week ended, risk assets did not show much of an impact.

More ‘Windfall’ Action?

The sword of some major government decision still hangs on business. If steel companies have seen taxes on exports and oil companies in India and Britain have seen windfalls, there may be more to come elsewhere in the world. UN Secretary-General Antonio Guterres was critical of Big Oil, saying it is “immoral for oil and gas companies to make record profits on this energy crisis” spawned by Vladimir Putin’s war. He encouraged nations to impose profits taxes. 2022 continues to be an eventful year.

Niraj Shah is the Markets Editor at BQ Prime.

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