Good Morning Toasters!

In today’s issue of the Morning Toast, we discuss

• Russia – Ukraine invasion, and possible collateral damage
• MPC’s Feb’22 meeting has some interesting takeaways
• News around the world
• An educational concept to keep you learning every day 🙂

Market Watch

Nifty: 16,658.40 | +410.45 (+2.53%)
FII Net Sold: INR 4,470.70 crore

Sensex: 55,858.52 | +1,328.61 (+2.44%)
DII Net Bought: INR 4,318.24 crore

World News

Russia – Ukraine invasion, and possible collateral damage; what’s up and what do you need to know?

Background

• 1991: Ukraine gained independence from Russia when the Soviet Union fell, but Russia never fully pulled back its influence, including the heavy influx of ethnic Russians, deployment / take-over of nuclear warheads
• Late January: Russia stationed 100k troops near its border with Ukraine, fuelling invasion fears
• Monday: OG KGB operative, and the President of the Russian Federation, Vlad officially recognised the independence of two separatist regions in Ukraine and ordered Russian troops to enter
• Yesterday: Uncle Joe said he viewed Russia’s move into Ukraine as the beginning of an invasion, and announced the first wave of new US sanctions to cut off Russia from Western financing; earlier, the EU banned the sale of Russian government bonds

Oil, Energy & Commodities

• Oil prices breached USD 100 / bbl, with Brent at present trading at USD 104 / bbl over concerns relating to supply disruptions from Russia amidst increased Western sanctions
• Uncle Joe announced sanctions against the company building the USD 11 Billion Nord Stream 2 gas pipeline which spans from Russia to Germany, after Germany halted its opening
• Western Leaders are expected to use the pipeline as leverage against the Russian government, with oil exports accounting for ~30% of Russia’s economy
• This will likely result in a negotiating tit-for-tat, with Russia expected to limit gas supplies to the EU, with the country at present supplying core energy to ~1/3rd of the population (damn!)

Damn! And India specific?

• Higher oil and gas prices bodes well for upstream companies, including the likes of ONGC, Oil India, Reliance Industries, with every USD 10 / bbl increase in prices, likely to result in a ~15% increase in EPS (rough estimates)
• However, independent of network effects, some major players have operations and / or are in agreements with Russian state cos –
  • GAIL has a 2.5mmtpa LNG contract with Gazprom which is 9-11% of its transmission marketing volumes, although gas does come from Gazprom’s global assets, which may not always be linked to Russian territory
  • ONGC & Oil India have certain Russian exposures, with high volumes dependency, albeit with limited impact (according to analysts) on dividend income flow and valuation

Indices, Stocks and everything in between

• Indices and stocks have ye-yoed since the start of this conflict, down and up in equal measures; history although suggests a different picture, amidst all this uncertainty
• Dow Jones, which is a monitor for most global indices, has performed consistently –
  • 9/11 Attack: down by 16%, the index was up 25% / 30% in 3 / 6 Months
  • Iraq – Kuwait War : down by 13.3%, the index was up 2.3% / 16.3% in 3 / 6 months
  • Korean War:  down by 12%, the index was up 15% / 19% in 3 / 6 months
• Nifty in comparison, during past conflicts (with / without Indian involvement) has an average downside of ~17%, with gains of 23% / 34% in 3 / 6 months
• The above analysis is quite simplistic in nature, but provides with a general consensus on what to expect during such terms; some external factors to consider are high levels of inflation (in US) and recovering from Covid-19 (demand / supply challenges)

In conclusion

• Western companies / and the world economy in general was relatively less affected by Russia’s annexation of Crimean Peninsula in 2014, although with Russia the world’s #2 exporter of natural gas and #3 exporter of oil, a breakdown in relations will have far beating consequences
• In addition, with global inflation nearing peak-record levels, and limited confidence on growth certainty, food prices are likely to remain under pressure; Russia & Ukraine produce high % of the world’s wheat & corn

Around the World 🌎

Some good news, some not so good; here’s what happened around the globe!

• Elon Musk and his brother Kimbal are under The Securities and Exchange Commission’s watchlist after allegations of insider trading on the latter were put. Kimbal sold $108 million worth of Tesla shares last year just one day before OG Musk tweeted asking whether he should unload 10% of his stake in the electric-car maker and pledging to abide by the vote’s results – a move that caused shares to fall massively. Enforcement action looks unlikely but cannot be ruled out altogether
• Coinbase Global Inc. reported a quadrupled fourth quarter income of $840 million ($3.32 per diluted share) with a net revenue of $2.5 billion beating analyst estimates of $1.94 per share by a mile. The fourth quarter was undoubtedly extremely volatile with $BTC gaining almost 58% in Nov to a record $68,991 – it however fell 33% from there finishing at $46,208. Despite the volatility a huge surge in interest was seen with user base rising to 11.4 million in the fourth quarter from 2.8 million a year earlier
• L Catterton, a Private Equity group is planning an IPO with the aim of taking advantage of surging investor interest in private equity. A valuation of > $3 bn seems to be the decision with banks like Goldman Sachs Group Inc. and Morgan Stanley leading the offering. L Catterton has both a flagship fund as well as on dedicated to growth stocks and is backed by LVMH Moët Hennessy Louis Vuitton SE billionaire chairman Bernard Arnault

Economy News

MPC’s Feb’22 meeting has some interesting takeaways – here’s everything you need to know!

• All members were unanimous in their decision to keep interest rates unchanged while they differed slightly on the medium term policy response to the divergent global rate scenario
• The weak growth narrative was highlighted (growth has lost momentum, continues to remain sub-par etc.) and a demand for policy support was made
• Inflation too was not a topic of disagreement with most seeing it peak and moderate ahead

Inflation vs Growth story doesn’t seem to end? We hear you!

• Increasing commodity price shocks due to geopolitics and the dragging supply chain disruption has led to persistent supply side inflation
• However a moderating inflation trajectory led to some asking to support growth while also taking into consideration changing global dynamics
• Tepid private consumption, low consumer sentiment and declining discretionary household expenditure reflect incomplete and uneven growth –  monetary policy complementarity and favorable financial conditions are thus non-negotiable

Any other major points?

• Prof. Goyal noted that in India, percolation of producer prices is lower on retail as food inflation dominates the inflation scenario and that the output sacrifice required to tame supply-driven inflation can be very high if supply is elastic (as is the case)
• This was supported by Dr. Patra who also stressed that using monetary policy to ease supply-side inflation will only destroy nascent demand
• Though our inflation dynamics are different from the west, he seemed critical of their supposed rear-view mirror outlook on inflation, which would hurt growth
• In conclusion, it seems that the Central Bank is likely to go slow on policy transition given that they have flexibility in hand (India’s current real rates look reasonable vs. EMs) i.e a shallow normalisation is in the books!

What else caught our eye?👀

Airtel interested in Vodafone’s business

• Bharti will be buying Vodafone’s 4.7% equity stake in infrastructure company Indus Towers Ltd. on the condition that it is for infusion in Vodafone Idea and clearing tower company’s dues
• The company in picture deploys, owns and manages telecom towers and communication structures for various mobile operators making it one of the largest tower infrastructure providers in the country with presence in all 22 telecom circles
• It also saw a 16% rise in consolidated profit in the quarter ending Dec’21 with a revenue of ₹6,927 crore and consolidated profit at ₹1,570.8 crore

New-age stocks here to stay

• Inspite of tumbling major points, new-age stocks like Zomato, Paytm and Nykaa will be included in the Nifty Next 50 index from March 31,  2022
• The minimum listing history has been changed to one calendar month from three earlier paving the way for these stocks which got listed after Oct’21
• Six stocks – Nykaa, Indian Oil Corporation (IOC), MindTree Ltd, Paytm, SRF Ltd and Zomato Ltd will replace Apollo Hospitals Enterprise, Aurobindo Pharma HPCL, IGL, Jindal Steel & Power and Yes Bank from the Nifty Next 50 index

Educational Topic of the day

Capital Preservation

Capital preservation is an investment strategy that promotes saving, i.e., preserving capital and avoiding loss of value. The strategy adopts a conservative approach towards investing specifically in “safe” short-term instruments such as savings accounts, FDIC-insured checking accounts and Treasury bills, and certificates of deposits (CDs).