weekend reading links

1. A good summary of the agritech startup market in India with more than 500 startups which attracted $245 million in VC investments in 2019.

2. Startups in India raised $63 bn between 2016 and 2020, creating 27 unicorns, making India the third largest startup ecosystem. 

3. The annual Oxfam report on inequality is out and points to a 35% increase in the wealth of India's billionaires during the pandemic. 

4. Anshu Prakash on the equity market bubble,

The top 10 mega caps now account for 30 per cent of the S&P 500, it was 10 per cent in 2010. The 10 mega caps have appreciated 3.5x in the last six years, the S&P 490 (ex mega caps) has only grown 50 per cent in this time... The S&P 500 is somewhere between the 95th and 99th percentile on any valuation measure you can possibly think of. On market cap/GDP, at 140 per cent, this is a new high. On the famous Shiller CAPE (cyclically adjusted P/E) we are at the second highest reading ever, crossing the 1929 peak, only surpassed by the tech bubble levels of 1999-2000. However, when adjusted for interest rates, valuations are not in nosebleed territory... Any valuation model incorporating rates shows continued upside for equities relative to fixed income. Record low rates justify higher equity valuations, but how high?

On Tesla,

Tesla is now the sixth largest by market capitalisation in the world at about $800 billion, from $75 billion at the beginning of 2020. Its value is equal to 80 per cent of the entire US, European Union and Japan auto market capitalisation (ex Tesla). This for a company that sold 500,000 cars in 2020. If you look at the market capitalisation of auto Original Equipment Manufacturers (OEMs), three of the top five are now EV (electric vehicle) companies. With NIO and BYD being fourth and fifth largest after Tesla, Toyota and Volkswagen. In 2019, the traditional auto OEM’s had a market cap of $1 trillion and the entire EV universe (Tesla, battery companies and EV start-ups) had a valuation of $200 billion. Today, the auto OEMs still have a capitalisation of $1 trillion, while the EV universe is worth $1.5 trillion.

5. Sajjid Chinoy has a good article on the choices facing the government before Budget. And a very good one on the Budget itself, pointing to three paradigm shifts - focus on capital expenditure, construct infrastructure with public funds and then monetise them, and transparent and conservative fiscal accounting.

6. In light of the high seroprevalence rates in surveys across India, Vikram Patel raises the intriguing possibility that even before the vaccines, Indian populations may have been vaccinated by the virus itself.

7. Jason Zweig on fractional trading,

Being able to own dozens of stocks at a time with as little as $1 in each can be addicting, says New York University cultural anthropologist Natasha Schüll, author of the book “Addiction by Design: Machine Gambling in Las Vegas.” In what she calls nanomonetization, casinos and sports-betting platforms break a single event into myriad opportunities for speculation. Slot machines, which used to have three reels, now often offer the opportunity to bet on 20 lines or more at once. “That way you’re almost always winning on some lines even though you’re losing overall, which encourages you to play more often and play longer,” says Prof. Schüll. “The more time you spend on the device, the more likely you are to have a ‘slow bleed’ to zero.”

8. Even as popular commentary has already declared China a hi-tech power, Nina Xiang strikes a note of caution by pointing to China's large dependence on foreign technology imports. The summary is that while China is the factory of the world, it's still dependent on the west (and US in particular) for high technology products. 

China's reliance on foreign tech goes far beyond semiconductors. In the automotive sector, where China is now the world's largest auto market in terms of both production and sales, around 80% of the chips needed for car engines and gearboxes rely on imports. This is after China first opened up its auto sector to foreign joint ventures in 1978, requiring that foreign companies hold no larger than a 50% stake in any joint venture. That lasted until 2018, when Beijing began to phase out all foreign ownership restrictions by 2022. That four decades of tight restrictions on joint-ventures still had not enabled Chinese companies to master making car engines shows that the concept of forced technology transfer is more complicated than many think. Needless to say, around up to 98% of automotive chips made in China rely on imports...

When it comes to the medical sector, imports account for 80% of China's high-end medical devices segment. In aviation engines, China relies entirely on foreign-made chips for its regional airliner ARJ21 and the larger C919 aircraft, both of which use imported engines. In computer numerical controlled, or CNC, machine tools -- so critical for advanced manufacturing -- China relies on imports for 90% of its tech needs. China also imports around 80% of mid-to-high-end sensors, while Microsoft's Windows accounts for 88% of China's desktop operating system needs, with Apple's OS X system takes occupying a 5.4% market share. Android and iOS take nearly 100% of China's phone operating system market.

9. NAR on rising shipping rates that threaten global trade recovery,

The spot rate for shipping from Shanghai to the U.S. West Coast jumped to $4,000 per 40-foot container, according to the Shanghai Shipping Exchange -- 2.4 times the year-earlier figure. Rates from Shanghai to Europe quadrupled to $4,400 per 20-foot container. Spot prices for shipments to Southeast Asia, South America and South Africa rose three- to sixfold to the highest levels in data going back to 2009.

10. When Covid 19 history is written, the clear divergent trends in western and developing countries will be highlighted. While no one knows the real reason, it is clear that despite the infectiousness being as high, the mortality rates in countries like India have been much lower than would have been expected. 

11. FT reports that central banks of Sweden, Israel and Chile have announced currency sales on the foreign exchange markets in the face of falling dollar. It raises the stirrings of potential currency wars in the months ahead and retaliation by the US. In any case, given the ballooning US deficits, declining dollar and mounting upward pressure on currencies of other countries is likely to be a structural trend in the years ahead.

12. NAR report points to a distinct shift in Apple's manufacturing strategy, with diversification away from China becoming increasingly evident.

“Apple and many other tech companies all want out-of-China production capacities, and that has not slowed even though the US has a new president,” one supply chain manager said. “And they are studying not only peripheral products. Apple, for example, aims to build capacity in new locations — mostly south-east Asia nations — for multiple core products, such as iPhones, iPads, MacBooks, AirPods and others. It was hard to imagine that two years ago, but now, nothing is impossible to shift.”

13. Buy Local is the flavour of the season everywhere. Rana Faroohar has an article defending Buy American.

The lower cost of imported goods has not offset the fact that the rising price of other things that define the middle class — education, healthcare and housing — have eaten away at any income growth enjoyed by most households over the past two decades. That, rather than models of Ricardian trade economics — which arguably don’t account for the complexity of Chinese state capitalism or financialised global markets — is the lived reality of swing voters. This US administration has to keep its eyes on both. US Treasury secretary Janet Yellen, although extremely data driven, has set a terrific tone on that front. In a “day one” message to her staff, she pledged to move beyond textbook economics and stay focused on the “humanity beneath the data”.

After decades of castigating developing countries for indulging in protectionism, commentators in the west are now actively rooting for their countries to pursue exactly the same policies. How things change when the shoe is on the other feet!

Another feature of the commentary in the post-Trump world has been the sudden respectability of many of things that his administration initiated. 

One good thing the Trump administration did was to acknowledge publicly what many people have thought privately for some time — that current trade patterns and agreements aren’t equipped to deal with the messy economic and political realities of the world today... Mr Biden’s “Buy American” plan isn’t some silver bullet solution to the economic woes of this new world. But it is a politically smart nod to the fact that we are in one.

14. Shyam Saran has a nice forewarning piece on China's imminent integration with the global financial markets. 

China’s financial sector is already worth $44 trillion and growing. Chinese banks handle $41 trillion in assets. The four largest banks in the world are Chinese. China’s bond market is the second largest in the world after the US, and is currently worth $14 trillion. It has been estimated that assets under wealth management projects are currently $7.4 trillion and expected to double by 2022. In terms of market capitalisation, the Shanghai and Hong Kong stock exchanges are just below $5 trillion each, while Shenzhen is at $3.5 trillion. While these market capitalisation figures are well below the New York Stock Exchange’s market capitalisation of $29 trillion, they are expanding rapidly. Access to this financial market by foreign entities has hitherto been restricted and strictly regulated. The recent reforms are offering big opportunities in this sector and attracting keen interest from US, European and Japanese firms. 

Consider the opportunity. Foreign banking constitutes only 2 per cent of Chinese banking assets, while in the OECD countries it is about 10 per cent. Even a 5 per cent share would be in the region of $2.2 trillion. Similarly, foreign share of China’s bond market is only 2 per cent but under the new rules may go up to $400 billion annually. This does not include income that may be earned from wealth management instruments, ratings business and customer advisory services. Foreign insurers earn only 2 per cent of the premium income generated in China under the earlier restrictive rules, while in the OECD the figure is nearly 20 per cent.

Beijing has opened its doors with several measures in recent months to liberalise and integrate its financial markets. The interest from western financial institutions have been unprecedented.

Wall Street is already the primary lobby group for China in Washington, displacing the Main Street MNCs. And given Wall Street's lobbying power, it does not bode well.