MoneyFitt

27 January 2023

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US large-cap S&P 500 closed 1.1% UP ▲ Tech-heavy Nasdaq Composite closed 1.76% UP ▲ Pan European STOXX Europe 600 closed 0.42% UP ▲ HK’s Hang Seng Index closed 2.37% UP ▲▲Japan’s Nikkei 225 closed 0.12% DOWN 🔻

📝 Focus

Can India be the factory of the world? (Samsung, Apple)

📊 In the Markets

US economy good, but not great, which is goodScary planes and lots of money (Northrop Grumman)Luxury! Let the poor deal with recessions (LVMH, Diageo)

📖   MoneyFitt Explains

🎓 China vs India manufacturing

📝 Focus

Can India be the factory of the world?

The economic side-effects of Covid made it crystal clear that most countries, including India, were overly dependent on China for hardware, electronic components, etc. Unlike many of its Asian neighbours, India’s growth story is led by its services sector. Manufacturing still contributes barely 15% to the country’s GDP.

This led to the genesis of the PLI scheme or Production Linked Incentive in March 2020, a reward system to provide incentives to manufacturers to produce locally. The idea was to reduce dependence on a single geography like China, cut down imports and make domestic industries more competitive globally.

PLI started with three manufacturing sectors (Pharmaceuticals, Electronics and Information Technology and Medical Devices) but has now expanded to fifteen, and was a step in the right direction considering the trend of deglobalization that has emerged since the pandemic.

The PLI-led incentives announced in consumer electronics, notably the mobile handset industry was a major hit.

Korea’s Samsung opened its biggest manufacturing facility outside Korea a couple of years ago and has already beaten Xiaomi as India’s biggest seller – and exporter – of ‘Made in India’ smartphones.Apple too announced that it has started manufacturing its current running model – the iPhone14 – in India and may soon shift almost half of its smartphone production to India by 2027.

Thanks to this, India’s exports of mobile phones touched $3.16 billion in FY21 from near zero in 2014. That’s not all. Apple exported Rs 11,000 crore worth of iPhones in FY 2021-22, but exports have already doubled as of December 2022. (One crore is 10 million.)

There is more than what meets the eye:

Despite Samsung and Apple announcing mega investments in India, most of the manufacturing in India is still assembly work. Localization and indigenous production has not progressed much beyond packaging, charges, cables, etc. Some of the high-end components like chips and displays are still being imported from China, Korea, and Taiwan and being assembled here.

There are growing expectations of PLI 2.0 to be announced in the Union Budget 2023-24. For what to expect from PLI 2.0, please see the original article by our friends at Tavaga here, from which this piece was (hopefully accurately) adapted.

Tavaga is an India-based robo-advisory platform “that helps you invest for your dreams and life goals.”

📊 In the Markets

US markets were led by Tesla, which popped up 11% after the earnings results announced after the close of trading on Wednesday, tripling the “after-hours” price move that day. Earnings per share in 4Q jumped 40%, beating estimates, and though analysts were mixed on the results, investors reacted positively on Thursday and led some other beaten-up tech giants like Microsoft, Nvidia, Amazon and Alphabet higher. Focus now shifts to next Wednesday’s Federal Reserve policy meeting, where a 0.25% hike is expected (a 98% chance implied futures prices via the CME FedWatch tool.)

US economy good, but not great, which is good

The US economy slowed to 2.9% (annualised) in the fourth quarter of last year (4Q22) from 3.2% in 3Q, but came in better than the 2.6% growth economists were forecasting. Together, second-half growth blew past the 1.1% shrinkage in the first half, and for the year the US expanded 2.1% vs 5.9% in 2021.

Bullish investors have been dithering between looking for (a) stronger growth to show that a soft landing or a mild recession is possible, and (b) weaker growth to show that inflation drivers are milder so that the Fed won’t want to hike interest rates much higher and keep them there for longer.

Thursday’s release gave investors a bit of both, by beating their own estimates (a) and also showing some underlying signs of weakness (b). Picking through the details showed that much of the growth came from a sharp rise in inventory (goods all ready to be sold) held by businesses, which counts as growth now, but could be a drag on sales in coming quarters if unsold for much longer. Consumer spending was also strong, but a lot of that came in October, in a surge of car buying and early Christmas spending when big retailers offered huge discounts, before turning pretty sad in November and December as pandemic savings started to run out. And business spending on equipment actually fell.

Meanwhile, the US job market continues to be red-hot, with weekly claims for first-time jobless benefits (a proxy for job losses in the economy,) falling to a nine-month low at 186k last week from 192k the previous week, well below the 205k expected. A strong jobs market is an inflation risk for the Fed (as rising wages may push up prices, which push up wages, further pushing up prices) and often Wall Street rejoices when there are more job losses (other than their own) — but not this time, perhaps since there are some warning signs even here.

Employers cut 35k temporary workers last month, the largest monthly drop since early 2021. Cuts in temp numbers are often an early sign of labour market weakness since firms can “scale down their operations readily and without the added expense of separation pay or having to let go of their best workers,” according to government analysts.

Northrop Grumman makes scary stuff (and lots of money)

Rounding out the five prime defence contractors’ results, Northrop Grumman smashed past forecasts with adjusted earnings up 25% to $7.50 per share, vs Wall Street’s $6.57, and raised its 2023 sales outlook on strong global demand for weapons. The company makes counter-artillery equipment, radars and surveillance aircraft and systems. It also manufactures F-35 fighter jets with Lockheed Martin, as well as the B-2 stealth bomber. And now this:

In December, it unveiled the 6th generation stealth bomber for the USAF, the B-21 Raider, “the future of deterrence.” Echoing the cringe-worthy “we’re a tech company with a banking licence” line from all sorts of banks (Habib Bank of Pakistan, DBS of Singapore, Goldman Sachs of the US, ING of the Netherlands, IDFC FIRST Bank of India etc etc etc) Northrop Grumman calls itself “a technology company, focused on global security and human discovery.”

While the US defence budget is at an all-time high, Republican lawmakers may stall the debt ceiling increase, which could in turn potentially affect defence spending in 2023.

Luxury! Let the poor deal with recessions.

Luxury shoppers in Europe and the United States were splurging over the holiday season, driving sales up 9% at LVMH, Europe’s most valuable company and the world’s biggest luxury group, to US$25 billion in the final three months of last year. However, it was way off the 20% seen in the first nine months, due to the hit in China.

LVMH does not break down sales for its brands, but said that in 2022 its flagship Louis Vuitton label sold double what it did in 2018 and made up a quarter of total group revenues for the year.

Investors are eagerly anticipating the return of the Chinese luxury consumer in 2023, both within China as well as in key shopping destinations like Paris, Milan and London. This has sent the shares of LVMH, Burberry, Hermès, Richemont (owner of Cartier), Kering (owner of Gucci, and not a heavy metal music magazine) through the roof in the last couple of months, despite the threat of a slowdown in Europe and the US. China’s luxury spending accounted for a third of global luxury sales pre-Covid.

Consultants Bain & Co estimates 2022 global luxury sales grew 22% to over US$380 billion, but after two years of stellar growth, sees a slowdown overall with growth expected to be between 3% and 8%.

While on luxury: Diageo, the world’s largest spirits maker, said profits were up 15% in the last six months of 2022, mainly driven by steep price rises. Spirits sales have proven resilient to inflationary pressures even as other non-luxury consumer goods categories suffered. Plus there was a tequila boom, which saw sales up 27% in its premium Casamigos brand (which they bought off George Clooney for US$1 billion in 2017.)

Diageo, which also makes Guinness and Baileys, warned, though, that sales growth had slowed to just 3% in the crucial North American market, which contributed about half of 2022 profits.

📖 MoneyFitt Explains

🎓 China vs India Manufacturing

China’s manufacturing industry is much more developed and advanced than India’s. It has a larger and more diverse range of products, and it exports a much greater variety of goods. The sector is much larger in terms of both output and employment in China, and it accounts for a much larger share of its country’s GDP.

China is one of the world’s largest exporters of goods, exporting a wide range of products, including electronics, machinery, vehicles and textiles. India, on the other hand, is a relatively smaller exporter, mainly focused on textiles, engineering goods, and chemicals.

India’s manufacturing sector faces challenges like inadequate infrastructure, a shortage of skilled labour and lack of technological advancement. The Government aims to increase the share of manufacturing in GDP to 25% by 2025.