Stock markets have turned very volatile. News out of India is encouraging, for instance, an 18 per cent rise in sales in Q2 (July-September) for 1,700 non-financial firms, and a whopping 41 per cent rise in PAT.
The National Company Law Tribunal (NCLT) has resolved and helped recover ₹80,000 crore of corporate dues to banks, under the new bankruptcy law, in 2018. This figure can cross ₹1 lakh crore in 2019. The figure can be higher if more judges and infrastructure are added to fast-track cases. Some 10,000 cases are pending.
Retail investors continue pouring in money via mutual funds. FIIs have also been net buyers in December.
The factors investors must look at are global, including:
1. Energy security
2. Technology leadership, including military
Energy security: Thanks to discoveries of shale oil, the US is now the world’s largest oil producer and has turned from a large importer of crude to an exporter of oil and gas. The price of a barrel of Brent crude has fallen to $50, which is excellent news for a large importer such as India, but, simultaneously, indicates lower demand for crude oil, which forebodes ill for global economic growth.
The US Geological Society (USGS) has released a report of a 46 billion barrel reserve of technically recoverable tight oil in the west Delaware region of Texas. The key word is ‘technically recoverable’. Is it viable to extract this reserve? As these columns have pointed out, the industry produces negative free cash flow, which means that it needs to borrow money for the capex required to stay in business. It is estimated that 3,18,000 wells would need to be dug to extract this, at a cost of $3 trillion and this investment would be viable at a crude price of $150.
So, will the shale industry continue to produce, even as it generates negative free cash flow, is the analysis investors need to make.
OPEC, together with Russia, is trying to cut output in order to raise prices. And if the shale industry cannot raise cash to drill more wells, prices will rise.
Technology leadership, including military: The WSJ describes “how China systematically pries technology from US companies”. Trump accuses China of technology theft, an issue central to the trade dispute with it. The Wired carried an article which points to Chinese hackers as Advanced Persistent Theft (APT) who hack into Managed Service Providers (MSPs). MSPs provide IT infrastructure services, including data storage and password protection, to thousands of businesses. This technology also has military applications.
A panel of US security experts commissioned by the National Security Defence Commission concluded that the US may not be able to defend its/allies interests militarily against Russia and/or China. Russia, for example, has developed a hypersonic glider, travelling at over Mach 5, which cannot be stopped.
So, if the arms race takes precedence over the human race, the misdirected spending has implications on economic and job growth.
For now, the reduced crude oil prices and the encouraging news on Q2 corporate performance and on recovery of corporate outstanding dues, should result in a rally.
(The writer is India Head — Finance Asia/Haymarket. The views are personal.)