Friday, 18 September 2020

India’s Economy at the Crossroads?

The coronavirus pandemic has impacted many emerging markets hard. Beneath the surface, however, the pandemic is causing lasting change by accelerating disruptive forces. Two accelerating trends are likely to benefit India - a growing digital economy and its reinvestment in manufacturing.

Source: Asia Insurance Review

India’s digital economic potential was laid in 2014 when the country’s government began the process of formalisation (bringing its largely small-scale, cash-based economy into a more accountable, modern infrastructure). It was a necessary step, as India’s informal sector—which employed 90% of its workforce but contributed only 50% of GDP—significantly dragged down overall productivity.
Digitisation was central to the formalisation process. Under formalisation, every adult in India was given a bank account (Jan Dhan) and a 12-digit unique identity number (Aadhar) linked to a mobile phone number. Called the JAM trinity, it empowered people to conduct cashless, paperless, and presenceless transactions through formal channels.

The formalisation agenda coincided with the onset of 4G telecom networks, rising internet penetration, and the availability of online products and services. Digital adoption was evolving in India. The launch of Jio’s 4G network in September 2016 led to a significant growth in data usage.
The penetration of 4G jumped from 8% in 2016 to 49% in 2019, and average mobile data usage jumped 8x, to 11.2 GB per user, per month, between 2016 and 2019. As new e-commerce business models emerged, India’s internet economy attracted significant capital from the likes of Walmart, Amazon, and Facebook.

Despite the strong growth in user base and revenue, India’s penetration across digital opportunities remains far behind that of the United States and China. The events of the past five years have made India’s small businesses ready for e-commerce, but penetration in these small businesses has just begun. On one hand, smartphone penetration has grown considerably—to 65% as availability of data and devices has grown—and stands much closer to the United States and China. On the other hand, e-commerce penetration still lags far behind and presents a tremendous growth opportunity; India’s total addressable market is estimated at ~US$900 billion, with e-commerce penetration at just ~3%.

Governments across the world are turning more protectionist as they grapple with higher unemployment and falling domestic growth. Apart from announcements of rising tariffs on imports, which often make headlines, non-tariff trade barriers have also been rising. The current Indian administration has made it a priority to support growth in domestic manufacturing since coming to power in 2014 by making significant investments in roads, power, and telecom networks and by deepening the market for labour, goods, and services. In September 2019, the administration also announced tax reforms that incentivised corporate investment in new manufacturing capacities and encouraged global companies to reinvest in India’s manufacturing. Five years of such reforms have culminated in India showing the most improvement in the World Bank’s rankings for ease of doing business.
India can increase import substitution in products in which the domestic market size has reached critical mass and the share of import components as a percentage of total domestic consumption is still high. The country’s large market size makes it viable for global brands to set up shop and start developing the ecosystem to increase value addition over the medium term. In consumer durables, India’s domestic market size is second only to China within Asia, but penetration is much lower—an ideal condition for new investments.
India’s also sees strong interest as an alternative sourcing base as global supply chains reorganise themselves away from China due to trade tensions, rising environmental compliance risks, and demographic shifts. India is high on the list of preferred countries in shifting production away from China in various surveys. In one such survey, India was second only to Vietnam. India will benefit from this trend in products—such as specialty chemicals and engineering goods—as the country already has a sizeable manufacturing base and established export presence.

India’s formalisation through a digital economy and its reinvestment in manufacturing can serve as primary tailwinds for growth potential over the medium term. On one hand, formalisation is driving growth of a massive digital economy. On the other, the digital economy itself is driving the formalisation process by boosting productivity. India should continue to attract global capital to realise this potential. As manufacturing grows, there will be more formal jobs created, driving income growth and consumption and unleashing another virtuous cycle of growth.

India at the crossroads of disruption – a tipping point for growth, Rana Gupta, Koushik Pal, July 24, 2020 (

Thursday, 17 September 2020

The 4-Hour Workweek: The D Principle

The mainstream expectation of working life is to work hard during your 20s or 30s with 40 hours per week in-front of office desks until you reach your retirement age of say 60. Then you start to live life. But what if you could sample a mini-retirement on your deferred-life plan before working 40 years for it?

Timothy Ferriss published his book ‘The 4-Hour Workweek’ to teach people how to escape the 9-5, live anywhere and join the New Rich using his DEAL principle: Definition, Elimination, Automation and Liberation. Who are the New Rich? The New Rich are those who have abandoned the deferred-life plan and created luxury lifestyles in the present using the currency of the New Rich: time and mobility.

What separates the New Rich (NR), those who create options, from the Deferrers (D), those who save it all for the end only to find that life has passed them by? The Definition of goals.

D: To work for yourself.
NR: Will have others work for you.

D: To work when you want to.
NR: To prevent work for work's sake, and to do the minimum necessary for maximum effect ("minimum effective load").

D: To retire early or young.
NR: To distribute recovery periods and adventures (mini-retirements) throughout life on a regular basis and recognize that inactivity is not the goal. Doing only that which excites you.

D: To buy all the things you want to have.
NR: To do all the things you want to do, and be all the things you want to be. If this includes some tools and gadgets, so be it, but they are either means to an end or bonuses, not the focus.

D: To be the boss instead of the employee; to be in charge.
NR: To be neither the boss nor the employee, but the owner. To own the trains so to speak and have someone else run them on time.

D: To make a ton of money.
NR: To make a ton of money with specific reasons and defined dreams to chase, timelines and steps included. What are you working for?

D: To have more.
NR: To have more quality and less clutter. To have huge financial reserves but recognize that most material wants are justifications for spending time on the things that don't really matter, including buying things and preparing to buy things.

D: To reach the big pay-off, whether IPO, acquisition, retirement, or some other pot of gold.
NR: To think big but ensure payday comes every day: cash flow first, big payday second.

D: To have freedom from doing that which you dislike.
NR: To have freedom from doing that which you dislike, but also the freedom and resolve to pursue your dreams without reverting to work for work's sake (W4W). The goal is not to simply eliminate the bad, which does nothing more than leave you with a vacuum, but to pursue and experience the best in the world.

Ferriss believes that you don’t need a million dollars to live a million-dollar lifestyle. What you need to live the life of luxury are flexibility and mobility. It’s these two things that will allow you to live a life that enables you to do whatever you want, whenever you want. By redefining your goals, you will have a clearer perspective on how and what you should aim for in order to live the life you want.


Timothy Ferriss, The 4-Hour Workweek

Tuesday, 15 September 2020

US Fed’s Mortgage-Buying Spree at US$1 Trillion?

The Federal Reserve has acquired up to US$1 trillion of mortgage bonds since March. The US central bank is trying to blunt the impact of the Covid-19 recession on American homeowners.

The Fed bought around US$300 bil­lion of the bonds in each of March and April, and since then has been buying about US$100 billion a month. It now owns almost a third of bonds backed by home loans in the US. Buying the securi­ties has pushed mortgage rates lower, with the average 30-year rate falling to 2.91% as of end August from 3.3% in early February.

That drop has allowed homeowners to refinance their mortgages, tantamount to giving them a raise by cutting their month­ly loan payments. It’s also helped consum­ers buy homes. But the Fed’s efforts are causing its balance sheet to balloon, and with the central bank owning so many US home loans, it has unusually high power over setting mortgage rates.

The Fed’s purchase efforts started on March 15, when it said it was slashing its benchmark interest rate back to 0% and would purchase “at least” US$200 billion of mortgage-backed securities. On March 23, the central bank signaled its willingness to buy near-unlimited amounts of the debt, changing “at least” in its state­ment to “in the amounts needed.”

By the end of that month, mortgage purchases totaled US$291 billion, an av­erage of US$23.4 billion per day. While the Fed has been buying mortgage bonds, it has bought even more Treasury securities: around US$1.8 trillion since mid-March, according to data from the New York Fed. The central bank’s purchases have expand­ed its balance sheet to US$7 trillion from US$4.7 trillion on March 18.

Morgan Stanley analysts pointed out in late March that the mortgage buying was running at eight times the pace seen in prior episodes of Fed purchasing under programs known as quantitative easing. The current monthly rate of about US$100 billion translates to about US$40 billion net, after accounting for borrowers’ principal repayments from the mortgage bonds al­ready on the Fed’s balance sheet.

The latest statement from the Fed has promised to keep buying “at least at the current pace.” If the central bank does so, by year’s end it will have purchased about US$1.4 trillion in mortgage bonds — and added around US$900 billion net to its holdings.

The QE strategy has two significant consequences for consumers – mortgage rates are low but home prices move up. Lenders are able to reduce rates and increase volume. This has sparked a buying and refinancing spree. Mortgage applications shot up over 54% in June compared to same month in 2019. Prices of homes moved up with inventory of homes fell in June by 27.4% year-on-year.

So the U.S. will have created an asset bubble (stocks, homes etc) driven by responses to a health pandemic. Is that acceptable? Don’t bubbles burst at some point? Then what? More stimulus and more chaos?

1. US Fed’s Mortgage-buying Spree at US$1 Tril With No End in Sight, Christopher Maloney, TheEdge CEO Morning Brief, September 3, 2020
2. Fed Policy Has Kept Mortgage Rates Low. It’s Also Driven Up Home Prices, Natalie Campisi, Forbes Advisor, July 28, 2020

Monday, 14 September 2020

Could the Brexit Trade Deal Collapse?

British Prime Minister Boris Johnson has warned Britain could walk away by October 15 from post-Brexit trade talks with the European Union if no deal is achieved in the next round of discussion. The key sticking points are European boats' access to UK fishing waters and state aid to industries.

Mr Johnson insisted a no-deal exit would be a "good outcome for the UK". The EU, in turn, accused Britain of failing to negotiate seriously. Britain left the now 27-nation EU on January 31, more than three years after the country voted in favour of ending more than four decades of membership. The political departure will be followed by an economic break when an 11-month transition period ends on December 31 and the UK leaves the EU's single market and customs union.

Without a deal, 2021 will bring tariffs and other economic barriers between the UK and the bloc, its biggest trading partner.

Why does the UK need an EU trade deal? A post-Brexit trade deal will stop tariffs and reduce other trade barriers coming into force after the transition period ends on 31 December 2020.
During the transition period, the UK remains part of the EU's trading arrangements - the single market and the customs union. That means no tariffs, quotas or checks will be introduced.

The point of the transition is to give both sides some breathing space while a trade deal is negotiated, and to give businesses time to get ready.

What about a Canada-style deal?

Prime Minister Boris Johnson has spoken in favour of an EU trade agreement that builds on the deal that Canada has.

Tariffs on most Canadian goods, such as machine parts, have been eliminated. However, there are some additional checks, such as customs and VAT.
Services, like banking, are much more restricted.

The financial sector is important to the UK economy - so getting a deal in this area will be a priority.

How easy will it be to negotiate a UK-EU trade deal? Right now, the UK and the EU share the same rules in areas like workers' rights, competition and environmental policy - they're known as level playing-field rules.

While the EU insists the UK must stick to these rules - so UK businesses don't gain an advantage - the UK government says it wants the freedom to move away.
Access to fishing waters has also proved to be a major sticking point.
Even if a trade deal is agreed, it will not eliminate all checks, because the EU requires certain goods (such as food) from non-EU countries to be checked.

What happens if UK-EU trade talks fail?

If negotiators fail to reach a deal, the UK faces the prospect of trading with the EU under the basic rules set by the World Trade Organization (WTO). If the UK had to trade under WTO rules, tariffs would be applied to most goods which UK businesses send to the EU. This would make UK goods more expensive and harder to sell in Europe. Having WTO terms would also mean full border checks for goods, which could cause traffic bottlenecks at ports and lead to significant delays.

And the UK service industry would lose its guaranteed access. This would affect everyone from bankers and lawyers, to musicians and chefs.

What trade deals has the UK done so far?

While it was an EU member, the UK was automatically part of around 40 trade deals which the EU had struck with more than 70 countries. So far, 19 of these existing deals, covering 50 countries or territories, have been rolled over. This represents just over 8% of total UK trade.
All of the following agreements are expected to take effect at the end of the transition period, according to the Department for International Trade:

The government says it is still in negotiation with a further 18 countries which have existing EU trade deals, including Canada and Mexico. In addition, the UK government is also holding trade talks with the US, Australia and New Zealand.

Whatever Johnson says or believes, a no-trade deal is a massive disaster for the UK and EU. Will commonsense prevail?

1. United Kingdom to quit Brexit trade-deal talks if no agreement with European Union by October 15, ABC News (
2. Brexit: What trade deals has the UK done so far, Tom Edgington, BBC Reality Check, 20 July 2020

Friday, 11 September 2020

Retail Industry to Contract Further?

The extension of the Recovery Movement Control Order (RMCO) to December is expected to delay the recovery of the retail industry. Annual performance will be down by 9.3%, from an earlier forecasted contraction of 8.7%. A 9.3% contraction means retailers will only be able to report sales of about RM97.5 billion compared with RM98.2 billion projected previously.

“The RMCO started on June 10, 2020, and is expected to extend until the end of this year. With strict social distancing measures continuing to be enforced in the next few months, shopping centres and retailers will not be able to operate at full capacity compared to the pre-COVID-19 period,” according to the Malaysia Retail Industry Report (September 2020) that was released on 3rd September.

“This year has been the worst period for retailers in Malaysia since 1987. The retail market turned into a bloodbath since the middle of March with the implementation of the MCO.” The report was compiled by Retail Group Malaysia on behalf of the Malaysia Retailers Association (MRA).

And with the six-month moratorium on loan repayments ending on Sept 30, 2020, consumers are expected to tighten their spending in the final quarter of the year as they recommence servicing their loans, the report wrote.

The retail sector is now expected to contract 2.5% in the fourth quarter, as opposed to just 1.5% previously. Retailers who had traditionally relied on year-end festivities, school holidays, back-to-school purchases and bonuses may not see much, as many companies are not expected to give bonuses. The year-end school holidays have also been shortened to just two weeks from the usual six.

Retail data tabulated by RGM does not include big-ticket items such as cars and houses. Also not included are online retail sales, unless they were conducted on sites established by brick-and-mortar stores.

Retailers in Malaysia recorded their worst quarterly performance in the April to June 2020 period (Q2), with a sales contraction of 30.9%, as the MCO forced a majority of retailers to remain shut for a prolonged period during the quarter. The Q2 contraction was worse than the decline in the country’s economy during the same period, when Gross Domestic Product shrank by 17.1%.

The worst-hit retail sub-sector was department stores — which included retailers like Parkson Holdings Bhd — with sales shrinking by 62.3%, followed by fashion and fashion accessories (down 44.2%). Fashion retailers in Malaysia that have closed in the past few months include German-based ESPRIT, which has shut all its stores in Malaysia, and US-based NYX Cosmetics.

Sales at specialty retail stores shrank by 40.9%. These are stores which sell items like toys, photographic equipment and optical stores, which have been performing well over the years,
Meanwhile, the department store-cum-supermarket category declined by 34.6%. Aeon Co (M) Bhd, for example, sank into the red with a net loss of RM9.56 million during the period.

The pharmacy and personal care segment saw retail sales contract by 26.2%. This segment has not been immune to the impact of the COVID-19 as outlets within malls experienced the biggest sales decline, with many pharmacies having to shut to cap losses.

Meanwhile, supermarkets and hypermarkets, which were also allowed to operate as usual during the MCO to sell essential goods, recorded a 9.9% decline in sales.

Coupled with the Q1 retail sales decline of 11.4 %, retail sales in the first half of 2020 have already contracted by 20.2%.

Moving forward, retailers are expecting some improvement in Q3. The department stores-cum-supermarkets, in particular, are expecting to see sales growth to rebound to 5.7%, outpacing all other sub-sectors, while the fashion and fashion accessories segment expects a 4% expansion.

However, four segments are still expecting to show declines in the Q3, namely the pharmacy and personal care segment (down 10.6%), specialty retail stores (down 9.5%), supermarkets and hypermarkets (down 6.7%) and department stores (down 3.5%).

The Government seems oblivious to the implications – GDP shrinks, job losses increase, stores close, and manufacturers will totter to bankruptcy. Why can’t there be a government-private sector recovery plan drawn-up for retail, tourism, manufacturing and other sectors?

Bigger annual retail sales contraction seen after 2Q’s record 30.9% slump, Vasantha Ganeson, TheEdge CEO Morning Brief, September 3, 2020

Thursday, 10 September 2020

Composition of Wealth: Middle Class vs. Ultra- Rich

A person’s wealth can be made up of many different assets. It can comprise of liquid savings, stocks, mutual funds, bonds, real estate, vehicles, retirement accounts (IRAs, pensions), and other types of assets. But how does the composition of net worth differ for a person with middle income compared with that of an ultra-rich?

The chart above breaks down the difference in the composition of wealth between middle income, upper income, and ultra-wealthy (top 1%) Americans.

Middle Income: Home is Where the Wealth is
For Americans in the middle class ($0 to $471k of net worth in 2017), principal residence is their main asset. For households that fall in this wide range the combination of housing and pension accounts make up nearly 80% of total wealth on average.

Assets like stocks and mutual funds only make up about 4% of wealth in this income bracket. As their income ladder moves up this situation changes.

Upper Income: A Diversified Portfolio
If a household has a net worth that ranges between $471,000 and $10.2 million, it is in the upper income band. This represents the 20% richest households in the U.S., minus the top 1%, which are put in a separate bracket.

For this group, the principal residence makes up a smaller slice of the wealth pie. Instead, we see a higher mix of financial assets like stocks and mutual funds, as well as business equity and real estate. Almost half of the households in this group own real estate in addition to their principal residence.

As households become wealthier, we tend to see a lower share of liquid assets as compared with the other components of net worth.

The Top 1%: The Business Equity Bulge
In the richest 1% of households, the principal residence makes up a mere 7.6% of assets. At this stage, almost half of their assets fall under the category of business equity and real estate.

A prime example of this is Jeff Bezos. The lion’s share of the Amazon founder’s net worth is tied to the value of his company. Another example is President Trump, whose sprawling real estate empire comprises two-thirds of his estimated $3.1 billion net worth.

One of the more prominent features of the ultra-rich wealth bracket is a much higher level of financial asset ownership. In fact, the top 1% of households own over 50% of the US equities.

1.     Nick Routley, How the Composition of Wealth Differs, from the Middle Class to the Top 1%,
2.     Jeff Desjardins, Chart: What Assets Make Up Wealth?