Global Market Views - Dec 17
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* The flurry of monetary policy decisions announced over the past 48 hours highlight that central bankers globally are responding to inflationary risks. Following Fed’s policy statement, the Norges Bank hiked by 25 bps, the BoE lifted rates by 15 bps, while the ECB trimmed its tapering program.
* US indices declined on Thu (S&P500 down ~1%, Nasdaq down 2.5%) as markets digested this news. While rate hike reduce the appeal of the high-growth tech sector, earnings growth for leading tech names is still expected to be strong. US 10 yr was flat at 1.42% while Dollar index declined to 96. Gold strengthened 2% to $1,800 on weakening dollar. Brent crude rose 1% to $74.6.
* US IT company Accenture’s results came in above expectations. And it also raised its FY22 revenue growth guidance to 19-22% y-y in constant currency terms (vs. 12-15% earlier). Accenture’s strong growth guidance and an indication of improving pricing in some of the businesses is a positive read-through for India based IT Services companies.
* The Union Cabinet has approved a $10bn program to promote an Indian semi-conductor industry. This will help to reduce India’s external balance as semiconductors is second only to oil imports. While a good start, significant effort might be needed to attract companies to India when several large countries such as USA, S. Korea, Germany and China have launched similar schemes. In any case, initial semiconductor facilities are unlikely to be 'cutting-edge' as $10bn may not cover the capex for advanced plants. India will have to ‘start small’ and hope to grow local capabilities over several years. Getting an established global company to move to India would help seed this process.
* Electric Vehicles (EV) transition in India is accelerating in 2Ws with multiple tailwinds at play, while 4Ws is still at nascent stages. EV adoption is expected to reach low to mid-teens for 2Ws by FY25. Supply chain ramp up, battery localization and product credibility will matter, beyond early adoption stage. Brand, physical reach, and battery/ product performance holds the key for market share hence incumbents will likely have a strong play too.
* A surge in demand is visible across EV OEMs reflecting that there is customer pull vs. push from startups over last few years. Customer profiling suggests that the journey is no longer niche, but acceptance is rising in tier 2/3 markets as well as first time buyers. Drawing on increasing order backlog across players, multiple companies have announced aggressive expansion plans - close to 4-5M e-scooter capacity to be onstream in next 2 years.
* Supply chain has been the biggest constraint over recent past mainly coming from inadequate chip/ electronic availability and limited battery cell allocation to India which is probably not a priority market for Korean and Chinese battery manufacturers as global supply is turning tight. In addition, 1. Battery prices are moving up against a common industry assumption of 7-8% decline pa; and 2. Roadmap on subsides is crucial as Total Cost of Ownership (TCO) is favorable due to 40-50% demand incentives under FAME II for 2Ws which will expire by FY24. A gradual /milestone-based withdrawal is key for sustainable EV adoption.
* Govt's PLI scheme for Advanced Cell Chemistry (50GWH, US$2.4B) puts in place a strong policy to incentivize investment in battery cells in the country.
* Home charging seems a more viable solution for personal segment in both 2Ws & 4Ws. Public fixed charging has very low usage and is primarily to address the range anxiety perception.
Source: ABSLAMC Research