India’s economy set to overtake UK – knocking it from The Commonwealth’s top spot

This week Britain is playing host to the leaders of The Commonwealth nations. As the event takes place, the UK will still hold the crown as the largest economy out of the 53 countries included in the lineup, but by the time of the next meeting in Malaysia in 2020, it’s almost guaranteed that India’s economy will have surpassed Britain’s in size. It will be a change that symbolises the tectonic shifts in the world economy, as Asia’s booming nations continue to challenge the economic dominance of the West.

Currently India stands at number 6 on the International Monetary Fund (IMF) world GDP rankings, with a GDP of over $2.26 trillion behind Britain’s $2.61 trillion, but bullish forecasts from both the World Bank (WB) and IMF suggest India will cruise comfortably into 5th place behind Germany in the next 2 years. The WB forecasts 7.3% growth this year for India’s booming economy, up from 6.7% last year, while IMF pegs it at a slightly more upbeat 7.4%. This will make India the world’s fastest growing economy in 2018, surpassing China.

But it’s not only India’s current shorter-term (1-2 year) growth prospects that should be cause for excitement, not least for investors in Indian equity markets. The longer-term equation looks equally lucrative. The Indian economy has plenty of room for future growth. Putting aside any external tailwinds from problems elsewhere in the world which could affect global trade and investment, India has the recipe for success including:

– A rising middle class which is spending and investing more.

– A young population (more than 65% below the age of 35) with more and more people entering the workforce, growing the pool of labor available for companies.

– A massive rural population that currently has low access to digital services and infrastructure, but with a government that is pushing to create a digital revolution in India, ecommerce companies like Amazon and Flipkart will be able to grow quickly as people who once never had access to internet start buying goods online.

– A stable government that has launched a flagship health insurance scheme to cover over 100 million families, while also pledging to invest large sums in the agricultural sector (the most important sector of the Indian economy accounting for 18% of India’s GDP which employs 50% of the nations workforce).

The IMF said today that India needs to address weaker aspects of its labour market and reform issues in its financial sector. With these issues solved, more jobs will be created and banks will feel more comfortable lending, both adding yet another stimulus to an already rapidly expanding economy.

Britain will now be looking to secure an even closer partnership with India, (which was referred to the ‘crown jewel’ of its empire in the colonial period), especially given the need it has to establish new trading relationships post-Brexit. It is likely that trade will be a key factor of discussion as representatives from both nations, and all other members of the Commonwealth community representing over a quarter of the world’s population, meet in London this week.

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Stock markets rise despite growing Syria tensions

Markets are still poised for the possibility of military conflict erupting in Syria between the US and her allies (Britain, France, Saudi Arabia and possibly Turkey) and Russia, with the backing of Iran and the Syrian regime. While NATO members are preparing a response to the alleged chemical weapons attacks in Ghouta, Trump’s Defense Secretary James Mattis warned any strike should be carefully planned to avoid a major conflict between the superpowers.

Even if a war is avoided, the events of the last 2 weeks (including US sanctions on Russian businesses and oligarchs) have severely damaged US/Russia relations. Reports say Russian lawmakers have drafted legislation which proposes to ban American imports including software and medicines, as well as stopping cooperation on atomic power and more.

The American sanctions put in place a week ago, caused the Russian RTS index to fall -11.4% on Monday, it’s biggest one-day decline since December 2014. The Russian Ruble also suffered a dramatic fall against both the Euro and Dollar as foreign investors pulled out of Ruble-denominated Russian government debt.

At the moment, peace reigns and stock markets are in positive territory. European indices are on track to make weekly gains despite geopolitical worries. The FTSEurofirst 300, which tracks the 300 largest companies ranked by market capitalisation in the FTSE Developed Europe Index, is up for the week despite geopolitical turbulence (see the chart below).

Keep in mind that in the long term, a US strike in Syria may not have too much of an impact on indices, and may only cause a short term bearish movement. It all depends on whether the situation deteriorates further. Right now NATO countries seem to be waiting on Trump’s administration to act, but what they will do is no clearer now than it was earlier in the week.

Eurofirst

Trump adviser Kudlow calms the markets. Is now the time to buy the dip in stocks?

President Trump’s key economic adviser Larry Kudlow (pictured) jumped into action to try and soothe volatile stock markets yesterday, which were flagging at the open due to China’s announcement of retaliatory tariffs on over 100 American goods. Speaking to Fox Business, Kudlow said Trump’s tariff plans were just “the first proposals”. He added: “In the United States at least, we’re putting it out for comment, it’s going to take a couple months. I doubt if there will be any concrete action for several months.”

The statement seemed to indicate the US is flexible in its approach, and may soften tariffs. Perhaps all of this could just be Trump’s ‘art of the deal’ in action – talking tough to make China come to the negotiating table. Regardless, stocks moved up at the close after the big early selloff yesterday. The S&P500 closed up 1.15% higher. Investors took Kudlow’s words as a good thing.

Is it time to buy the dip in stocks?

It could very well be. Fear over the trading situation between America and China was a significant part of the reason why stock prices (particularly in key US indices) fell over the past month. However, now that reports seem to indicate the two nations are trying to find a way to resolve the dispute behind the scenes in private talks, it seems there is a chance that fears of a full-scale trade war may not come to fruition. Any confirmation of a cessation of hostilities over trade may prompt a surge upward for stocks, not to mention the fact that the start of the earnings season is just around the corner – another potential boon for stock market indexes.

Buying the dip in stocks ahead of the upcoming earnings season could bode well for investors, historical data from Jefferies shows. Analysts at the bank said in a note last week that the S&P500 averaged a gain of nearly 2 percent during an earnings season since 2000 when the period follows a monthly decline.  Keep this in mind as the U.S. earnings season kicks off on April 13 with J.P. Morgan Chase, Wells Fargo and Citigroup releasing quarterly results!

It was a tough first quarter for equities. Here’s some reasons why…

It has generally been a rough first quarter for global stock markets. The rip-roaring gains that made 2017 so lucrative for investors came to a screeching halt in the first 3 months of this year.

The Nasdaq index, which boasts the biggest names in American tech among its constituents (including Apple, Amazon, Facebook and Nvidia among others), went into the red (a loss) for the year after a 3.5% fall during trading this week. The weakness came as investors worried about the future profitability of these companies, in light of a spate of bad press for them recently.

For example, Facebook shares were pulled down by over -12% for the month due to concerns about user privacy following the Cambridge Analytica scandal, while Amazon stock has been under pressure after coming under fire from Trump as well the European Union, which has had the Bezos behemoth in its sight for some time. Last month, the European Commission revealed plans to clamp down on the market dominance of the business of Google amongst other tech titans including Amazon by aiming to tax consumers differently.

Nvidia shares took a large hit too this month (down over -5%) after the firm said it would be halting tests for its autonomous vehicles in light of an incident in which a self-driving Uber hit and killed a pedestrian in Arizona.

The broader picture for stock markets

Despite individual company woes, the broader macro picture is also worrying the markets. It seems reasonable to point out that a lot of selling may be taking place off the back of worries about the future of the US/China trading relationship. In response to President Trump’s tariffs on steel and aluminium enacted last month, China unveiled retaliatory duties worth $3 billion on US food imports, which was quickly followed by tariffs for over 100 goods on April 4th, including cars, certain aircraft, tobacco products, whisky and many others.

Investors will be watching closely for any further escalation in rhetoric and action. Given that both economies provide so much to the engine of global economic growth, the outcome of the trade dispute will be seen as very important for investors trying to predict the future for world stock markets.

Elon Musk takes the wheel at Tesla to try and solve Model 3 production issues

It’s no secret that the Tesla Model 3 car has had its share of issues in production terms. The vehicle was touted as the first affordable model for the mass-market, with a lower price tag compared to Tesla’s of the past which would encourage consumers to make the move to electric cars, but deliveries of it to customers have been delayed multiple times, a fact which has repeatedly frustrated investors over the last year. Some were worried that the side projects of Tesla CEO Elon Musk (the Boring Company and SpaceX) were taking up far too much of his attention, contributing to the bottleneck in deliveries.

This may now change however. The enigmatic Musk is taking over responsibility for Model 3 production, according to sources, pushing aside his Senior VP of Engineering Doug Field. The news helped the stock to rally by over 4% on April 3rd, but may not come as a big relief to investors overall, given that Tesla shares have just seen their worst month in 7 years, down over -24%!

The biggest losses came after news broke that a Tesla driver had died using a Tesla vehicle’s autopilot mode on a California highway. Tesla say the driver received visual and audible warnings but ignored them, so it wasn’t the fault of the autopilot system but human error which caused his death.

Despite investor concerns about production bottlenecks and vehicle safety, clearly Musk has kept his trademark humour intact. On April 1st the CEO Tweeted that Tesla was bankrupt despite intense efforts to raise money including a mass sale of Easter eggs.

Though the Tweet was sent in jest, it was not a million miles from the truth. Nothing was funny about Tesla’s financial statement for Q4 2017. The company lost $1.96 billion that year, up from a $675 million loss in 2016. To boot, the company already owes investors over half a billion Dollars in interests paid annually on debt. Total liabilities for Tesla stand at $24 billion, or 84% of its assets.

There’s no guarantee that with Musk on board, the Model 3 production issues can be resolved completely, and while the massive dip in the share price might have prompted a tasty buying opportunity for investors, caution should be exercised!

Trump puts world markets on edge – but relief for stocks may be at hand

Stock markets around the world took a large blow last week. The biggest factor at play was President Trump’s instigation of new tariffs on China over concerns of intellectual property theft – the second action on trade in as many weeks after the administration enacted steel and aluminium tariffs for the Chinese and other nations.

However the other reason concerned geopolitics, and perhaps the future of the world as we know it today. The sitting National Security Adviser at the White House H.R. McMaster was axed, and Trump replaced him with a former ambassador and mouthpiece for the military-industrial complex John Bolton. This appointment has palpably raised the prospect of an armed conflict between the United States and one of its adversaries, most likely to be Iran. Indeed, John Bolton called for Israel or the US to bomb Iranian nuclear facilities as recently as 2015, in an op-ed piece for the New York Times. Bolton was also a firm supporter of the war in Iraq, which many consider to be an illegal war driven purely for the benefits of American corporate interests, including oil companies.

Trump has seen more moderate and reflective members of his administration leave in recent months. Hope Hicks, who was known as having a calming influence on the President, left her post as White House Communications Director, shortly followed by Gary Cohn – Chief Economic Adviser. A former Goldman Sachs employee, Cohn had opposed Trump’s metal tariffs, and was one of the key players behind getting the popular tax reform bill passed last year. Soon after Rex Tillerson got the chop as Secretary of State, another moderate who favoured keeping the Iran nuclear deal and seeking a diplomatic resolution to tensions on the Korean peninsula. Trump replaced him with Mike Pompeo, the former CIA Director who holds a noted aggression towards Iran.

Jeremy Bash, a former Chief of Staff at both the CIA and Defense Department said on MSNBC that Trump was “assembling a war cabinet”. Given the direction of his team, this seems hard to argue with. With less mediating influences at his side, Trump will be less likely to hear opposing arguments from more dovish staff. Instead his views on Iran may be blindly accepted in an echo chamber where voices of dissent are minimal. Ironically, Trump ran on a platform based partly on withdrawing the US from expensive overseas wars, but he has constantly reaffirmed his commitment to increase military spending since he took office.

A war in Korea has been made less likely thanks to Kim Jong Un approaching South Korean leader Moon Jae In, but a question mark still hangs over the Middle East, not only because of the possibility Trump will scrap the Iranian nuclear deal, but also the prospect of a conflict erupting over Syria, where Russian forces are still propping up the Assad regime. Just last month, The Guardian reported that scores of Russian mercenaries had been killed by US airstrikes in the country as the US attacked pro-regime forces. If events like this continue to occur, the prospect of a confrontation between the US and Russia rises. Russia already resents the fact that NATO military buildup on its borders in Eastern Europe, and it goes without saying what a war between the two could mean for the global economy.

None of this is good news for the world as a whole, except those in the military-industrial complex who hold stock in military companies!

Today though things look brighter. US stock futures are up, on reports the US and China are trying to resolve the trade dispute behind the scenes. European markets are also driving higher led by the DAX (Germany 30). We have our fingers crossed that the worlds foremost superpowers can be pragmatic, adult and reasonable – though with Trump at the helm of one of them, this is not guaranteed.

The US Senate has voted to roll back Dodd-Frank rules for banks – what does this mean?

Last week the US Senate passed a bank deregulation bill that would begin the process of rolling back parts of the Dodd-Frank Wall Street reforms, passed during Barack Obama’s tenure. The original bill in 2010 placed restrictions on banks in order to try and prevent another meltdown like the world had seen during the financial crisis.

The new bill passed with 67 votes to 31, but was met with stern opposition from house Democrats, who argued that Republicans were undermining financial stability by voting in favor of reducing rules for lenders.

The new legislation would raise the threshold at which banks become subject to tighter oversight. Under the original Dodd-Frank act, a bank with assets greater than $50 billion is subject to stricter regulation, including stress tests. Now though, the proposed legislation would raise that threshold to $250 billion, a change that affects 25 of the 38 largest banks in the country.

The change would mean mid-level banks such as BB&T would not have to submit to the Federal Reserve’s stress tests (which were designed to make sure a bank could withstand a major financial crisis). Specifically, banks with less than $100 billion in assets would be immediately exempt from the current SIFI rules. SIFI stands for a ‘systematically important financial institution’, one whose failure may trigger a financial crisis. This basically points to a large scale relaxing of the rules and limits on the behaviour of small and mid-level banks.

Crucially, the new legislation gives banks with assets under $10 billion and limited trading assets a pass on the Volcker rule. This rule was put in place to stop banks from using their own accounts for short-term proprietary trading of securities, derivatives, and commodity futures, as well as other instruments. Derivatives in particular are known as riskier investments. 

The concern is that a rolling back of regulations (a common talking point for Trump in his speeches about the American economy) may lead to another financial crisis. The reasons for the crash in 2007/8 were many, but one key driver was deregulation in the financial sector before the crisis, which allowed banks to take on more and more risk, as well as becoming extremely highly leveraged.

It was a lack of oversight of the financial sector that encouraged banks to shift toxic financial products onto consumers, as well as between eachother.

The argument in favour of the changes to Dodd-Frank is that cutting red-tape could spur banks, especially local ones in smaller communities, to lend more, encouraging businesses and individuals to take on projects and generally put their money to work.

Some think the new changes to the bill are overstated. In a note to clients, Jaret Seiberg, an analyst at Cowen & Co said: “We believe this bill is broadly positive for regional banks and trust banks while offering little help to the mega banks.”

Whether or not the bill will really affect the bottom line of the ‘mega’ banks is yet to be seen, but it’s pretty clear investors think it will. Some big bank ETF’s saw record inflows this week. Bloomberg reported that 2 funds run by State Street Corp saw their biggest one-day inflows ever, with the SPDR S&P Regional Banking ETF taking in $606 million, and the SPDR S&P Bank ETF taking in $323 million, thanks to excitement about what deregulation could mean for bank stocks.

However we shouldn’t forget that these ETF’s have been on the up and up for the last year anyway because the Federal Reserve made clear it was raising interest rates, and that’s good news for bank profits. With 3 or 4 rate hikes forecasted for 2018, it’s unlikely investors will be disappointed.

Here’s the worry though – what happens if banks start taking on more risks again? What happens if the aspects of their business that involve trading riskier financial instruments get overlooked by regulators? The world economy is still only just recovering from a crash that was caused by the banks 10 years ago. It’s taken years of low interest rates, quantitiative easing and austerity measures to try and get markets back on an even keel. We are only just seeing central banks begin to talk about rolling back QE and start to push interest rates higher to ‘normal’ levels, yet now the Senate has decided to lower the safeguards 10 years after a crisis in which American households lost roughly $16 trillion in net worth.

Many will argue they have done so in error, but memories are short, and last year’s stock market rally has fuelled an irrational exuberance in the markets which has fuelled more risk taking. These changes to Dodd-Frank could undermine the system again before it’s even recovered, putting investors portfolios at risk.

The prospect of bank deregulation has helped financial stocks to rally over the last year, including JPMorgan Chase, Goldman Sachs, BB&T and Bank of America