India, Interest rates, and seeking value

When annoyed, my dad is famous in our family for saying “I don’t need any of this, I will go retire to the Himalayas!” I used to think that was crazy, but as I get older, not gonna lie, sounds pretty sweet…

To the western eye, India looks wild. There are quite literally people everywhere, so many colors, the smells, and of course the extremely low cost of living. Growing up we would go back to the motherland fairly regularly. There I have a cousin who is exactly my age. Whenever I would see him he would tell me “I’m going to do just like your dad and come to America!” 30 years later, he’s still Mumbai.

And why should he leave? The chart below tells the story of a nation on a meteoric rise, quickly surpassing China, threatening to dominate the global economy - if it can get its act together.

Now its population is exploding with young, wealthy people. India has been reforming their financial industry for the last ten years which has seen them enact tax laws that encourage businesses activity, cracked down on corruption, recapitalized and consolidated their national banking system, and allowed for more foreign direct investment. All that coupled with their investment in technology infrastructure, and it is no wonder that India’s GDP is now outpacing ours and the US is in danger of falling behind. So how do us in the western world get a piece of this amazing growth?

There are ETFs, like the Nifty 50 (NFTY) that’s objectively done well this year. There is also the opportunity invest with an international broker or directly if you’re really throwing caution to the wind.

But this is actually one area where India could improve: providing more ways for foreign direct investment. Until then, we’ll be watching this story closely as India is almost certainly the globe’s next growth story.

Speaking of stories, what’s going on this week? Glad you asked:

We consumers have been the energizer bunny of this economy. Last week we got a CPI and PPI print that were both cooler than expected, which drove gains into the end of the week. Unpacking the CPI data, ‘Core CPI’ excludes food and energy costs, because of how much those prices fluctuate, which - to me - makes that metric somewhat academic since people cannot live without food and energy, so the prices of those things are very relevant. If we look at just shelter and energy costs I think we get a better sense of what the average American is facing. While yes, the pace of price increases is slowing, the prices are still very high! That’s the disconnect between the market and the economy: the market cares that the pace of change is decreasing; regular people care about the actual price of goods.

Housing and energy are two great examples, the lines on this chart need to start sloping eastbound and down for any of this ‘rosy’ economic data to matter in the real world. This week, i’m watching housing and gas prices for a clues on whether us as consumers will remain strong or if we’re in for a shock.

Seeking Value. On this fathers day, as we think about Dads, I think about mine and how he likes to ask me “How much you think this shirt cost?” and the scoffs at any price you offer as he, of course, paid far less. Unlike those shirts, as we can see from the chart below, value stocks have been sleepy, but appear to be rubbing their eyes and asking what’s for breakfast. Indeed, last week gave these names hope in the form of potential rate cuts from the federal reserve. In modern finance, the thinking is that when rates lower, those smaller firms - value stocks - will be able to borrow again and accelerate their growth. Conversely, Papa Huang’s Mysterious Chip Emporium (aka NVDIA), may have trouble finding more ways to grow as their customer base thins.

Preparing for lower rates, how do we find value stocks? One method I use is the CANSLIM framework popularized by Wiliam O’Neil. Here’s a site that might help with finding some of these names, but sites like these are a dime a dozen, so try different ones out. The basic premise is that we are looking for stocks that are mispriced: that is the price of the stock does not fairly represent the value the company delivers - it’s like finding a Rembrandt at a garage sale!

Some of your may recall that SVB failed last year because it was caught holding way too many long duration bonds; to oversimplify, duration is bond speak for ‘risk’ - while it is related to maturity, its actually a measure of volatility.

The rate a bond pays and the price of the bond itself are inversely related. When rates go up, bond prices fall; when they go down, the price of bonds rises. Bond traders want to buy low and sell high in terms of price; so they want to buy high rates and sell when rates fall. If they sell bonds when rates fall, what will they buy?

This article argues that it is time to move our focus to a different part of the yield curve so that we can use not just equity, but also fixed income. The chart below isn’t as complex as the real world, but gives us a general picture of the relationship between rates and the market. When rates are low, the market loves it; but as see rates climb, the equities market becomes fussy. Something to watch as we continue to expect a rate cut this year.