1. John Mauldin's prediction for this decade for the US
Maybe mild but steady growth will be the new normal, punctuated by occasional weak quarters. A short recession here and there is possible but I suspect we’ll Muddle Through the next few years. I don't think the amplitude of GDP will be anywhere near as volatile as it was over the past decades. That would be a new kind of business cycle requiring adjustments in our thinking. Much of our planning assumes 3% growth will resume. While that could happen occasionally, I think we will be lucky to average 2% for the rest of this decade, and in general I think real GDP will stay closer to 1%. Not exactly robust. Think Europe. Hopefully we can avoid turning Japanese.
Mauldin highlights the important role that the Fed will have in determining financial market stability. The Fed members dot plot predictions for the end of 2024 points to 4.75% or three quarter points cuts. However, the futures market has priced in six cuts during the year. This dissonance will play out towards the second half of the year. Such rate cuts will happen only if the economy worsens and a recession strikes.
All this ironically means that, as far as the financial markets are concerned, good news is bad news on the inflation front. But bad news on the real economy is bad news for everyone in terms of the prospects going forward.
2. The soon to be completed 212 km Delhi-Dehradun access controlled six-lane expressway will reduce travel time by half to two-and-half hours. This is a very impressive achievement. In fact, in the years ahead, the latest round of highways construction will come to be regarded as one of the most transformative public investments made.
The FT has a good graphic on the sharp rise in investments in roads and railways
3. In the context of discussions about China and Cold War western commentators fret about how the western economies will struggle without Chinese imports in a variety of sectors, including critical minerals. The dependence is for real, but not insurmountable for a large bloc of advanced economies.
These debates overlook the extent of dependence of China on the world economy, which appears to be increasing given the country's renewed manufacturing push.
China’s manufactured goods surplus relative to global GDP is now around 2%, a level probably unseen since the US after World War II, according to Bloomberg Intelligence. It estimates that about 45% of China’s manufacturing output is being exported as the nation’s 1.4 billion people can’t buy enough goods like EVs, ships and household appliances to meet the increased supply... China’s new focus on “industrial upgrading” means pushing into sectors now dominated by the wealthiest nations... Evidence of China’s renewed focus on manufacturing is everywhere, from surging bank loans to the industrial sector to booming investment in industrial parks and increased exports of everything from cars and excavators to washing machines... China's clearest manufacturing success has been the "new three" products. The export value of electric cars, batteries and solar panels grew 42% on-year in the first three quarters of 2023, according to official statistics.
This level of dependence on the world economy poses a major risk to China. If the west does to China what China keeps doing (restricting imports, foreign investments, organising boycotts, favouring domestic producers etc), then for sure there will be costs in terms of higher inflation etc. But these costs will be small and manageable, compared to its devastating impact on the Chinese economy.
This is an interesting statistic about the greater multiplier associated with manufacturing compared with services sector.
Economic growth tends to slow as countries become more services-dominated because productivity improvements are harder to come by. Manufacturing also has more spillovers to other sectors. A 2017 study published by Singapore’s Ministry of Trade and Industry found every 100 new manufacturing jobs are associated with 27 new non-manufacturing jobs; by contrast, every 100 new service jobs are associated with only 3 additional manufacturing jobs. It also has the highest innovation potential, accounts for the bulk of economy-wide R&D spending and employs the majority of scientists and engineers.
4. The financial markets react with over-optimism when there's some good news, only to calibrate downwards gradually as reality sinks in. Sample the latest
Traders in swaps markets have moved to bet on five or six rather than six or seven quarter point rate cuts by the Federal Reserve over the course of the year. They are now pricing in a 75 per cent chance of the first cut in March, having fully priced in such a move at the end of last year. The less sanguine view on rate cuts comes as stronger than expected US jobs data this week weakened the case for the Fed to start cutting rates soon. Minutes from the Fed’s last policy meeting published on Wednesday painted a more hawkish picture than chair Jay Powell’s comments in the accompanying press conference...
Investors in Europe have followed the US in pushing bond prices lower as they have scaled back pricing for European Central Bank and Bank of England rate cuts this year. This view was boosted by data showing eurozone inflation rose to 2.9 per cent in December, reversing six months of consecutive falls, while upward revisions to business activity readings this week suggested the economy was stronger than previously thought. That added to questions over how soon the ECB will start cutting rates... Markets are betting that the ECB will deliver 1.46 percentage points of rate cuts this year, down from 1.64 at the start of the week, with the probability of the first cut in March falling to around a half. Investors have also had a rethink about the path forward for the BoE, pricing that UK interest rates will fall to 4 per cent by the end of the year, down from a bet of 3.5 per cent at the end of last year.
5. Yuhan Zhang writes that at the start of this year, 14 Chinese provinces have launched a series of substantial projects, pointing to a continuation of the investment-driven growth strategy but with some differences.
But this year’s local investment programme, in contrast to previous initiatives, shows a notable shift in objectives. First, the 2024 projects have a distinctly scientific flavour, focusing on new-generation information technology, biopharmaceuticals, artificial intelligence and low-carbon energies. This suggests an ambition to ascend the value chain and develop new growth engines. Second, there is an emphasis on investing in public welfare. Third, there is a noticeable decrease in real estate investment projects. And last, there is an increased emphasis on private investment. In the realm of public welfare, local investments are primarily targeting affordable housing, education, hospitals and environmental projects...But high-tech projects generally have longer cycles, lower input-output ratios and non-guaranteed returns. Prolonged investment on a massive scale also creates significant overcapacity in sectors such as solar energy, which diminishes productivity improvements. Escalating private investment brings difficulties, too: where will the investment funds for private companies come from? Liquidity is a big problem for many such companies in China and Chinese banks are traditionally hesitant to lend to private enterprises. Worse yet, many major projects are going to be funded by local government bonds. The new special local bonds for 2024 are expected to reach about Rmb4tn ($560bn). But in the context of reduced tax revenues, declining land concession fees and already high local debt levels in China, increasing special bond issuance by the local governments to support major project investments is unsustainable.
6. Some facts about India's mutual fund industry
The mutual-fund industry crossed the symbolic mark of Rs 50 trillion assets under management (AUM) in December 2023, driven by a strong rally across the equity markets, alongside robust inflows via the systematic investment plan (SIP) route. AUM rose by a whopping 25 per cent with over Rs 1.62 trillion of net inflows into active equity schemes. SIP-linked inflows have hit over Rs 10 trillion over the years. The bulk of the equity MF investment comes from retail investors. The Association of Mutual Funds in India estimates some 42 million individual investors own around 90 per cent of equity mutual fund units... The Reserve Bank of India data for FY23 indicates household savings invested in financial assets (net of household debt) amount to only 5.1 per cent of gross domestic product. Mutual-fund assets (including debt funds) comprise just 13 per cent of those financial savings while direct equity investments amount to another 1.6 per cent.
7. Andy Mukherjee has a very good oped on the story of Byjus. This is important
All Raveendran needed was a little bit of philanthropic capital and a tight group of dedicated educators and technologists. The free education program it runs in some of India’s poorest districts in partnership with a government agency may help with the scars of school closures during the pandemic. To make a more durable difference, Byju’s could have come up with affordably priced courses that didn’t need a sales machine — or clever financial engineering — to push them nationwide. Would Byju’s have had a less glamorous but more stable run as a nonprofit like Khan Academy? Raveendran was in too much of a hurry to find out. The founder and his VC backers chose blistering growth over social relevance. The learning app became a trap.
8. The English Premier League leads in the match day revenue stakes among European football clubs.
Already, crying deepfake is a tactic deployed by legal teams in defence of their clients… In the political sphere, candidates now have the “ability to dismiss a damaging piece of audio or video,” says Bret Schafer, a propaganda expert at the Alliance for Securing Democracy, part of the German Marshall Fund think-tank. The concept, known as the “liar’s dividend”, was first outlined in a 2018 academic paper arguing that “deepfakes make it easier for liars to avoid accountability for things that are in fact true.” Research also shows that the very existence of deepfakes deepens mistrust in everything online, even if it is real. In politics, “there’s an autocratic advantage to attacking the idea that there’s such a thing as objective truth,” Schafer says. “You can get people to the point of, ‘Voting doesn’t matter. Everybody’s lying to us. This is all being staged. We can’t control any outcomes here.’ That leads to a significant decline and civic engagement.”
10. 2023 was the hottest year on record by some distance.
Acquiring GIP, which has about $106bn in assets under management, would make BlackRock the world’s second-largest manager of private infrastructure assets, and bolster the leadership of its alternatives business. GIP’s prime assets include Sydney and London Gatwick airports, the Port of Melbourne and the Suez water group, extensive green energy holdings and a stake in a big shale oil pipeline. BlackRock has agreed to pay $3bn in cash and 12mn of its own shares to GIP’s six founders, including chair Adebayo Ogunlesi. Of the shares, 7mn will be handed over at closing, with 5mn more due in five years. The GIP principals intend to distribute some of the proceeds to their 400 employees. The group would collectively become BlackRock’s second-largest shareholder. Larry Fink, BlackRock’s founder, has been openly hunting for a transformational deal along the lines of the 2009 purchase of BGI from Barclays that gave BlackRock a dominant position in passive investing and helped make it the world’s largest money manager.
The deal is likely to have implications
The deal’s impact will be felt across the private capital sector, forcing other prominent independently-owned firms to consider whether they too need a partner or the extra financial muscle of a public stock listing. Private equity groups including CVC Capital Partners and General Atlantic have prepared plans to go public in what dealmakers predict will be a second wave of listings following the crisis-era floats of Blackstone, Apollo, KKR and Carlyle. By bringing in public shareholders or combining with larger organisations, the private equity groups hope to expand in areas like debt, or infrastructure investment that are seen as beneficiaries of higher interest rates and beyond corporate buyouts, which have slowed as financing costs have surged.
GIP is the third largest infrastructure PE fund after Macquarie and Brookfield, and its acquisition will give BlackRock more than $150 bn in infrastructure assets.
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