Looks like Gold is poised to shine the brightest!!!

Looks like Gold is poised to shine the brightest!!! What really moves gold prices? Real Rate of Return – A combination of Inflation & Interest Rates – moves Gold prices. What is a real rate of return? Real Rate of Return in simple language is: Interest Rate – Inflation If bank fixed deposit is paying 6% interest rate & inflation is 7%, the real return is 6% – 7% = -1% If inflation is 4%, your real return is 6% – 4% = 2% What’s the relationship between real rates & gold prices? Negative Real Rates (-1% in the above example) is supportive of gold prices Positive Real Rates (2% in the above example) works against gold prices Why is this so? Gold is a non interest-baring instrument i.e. does not pay any fixed interest. Hence, whenever rates drop, you make less fixed interest by investing incremental money in fixed income & hence it moves to Gold & When rates go up, you want to invest incremental money in Fixed income & not gold Hence, assuming inflation to be constant, you will invest more in Gold when Interest rate falls to 4% & inflation is 6% = -2% real rate and you will invest less in Gold when interest rate rises to 7% & inflation is 6% = 1% real rate Positive Real Rates (2% in the above example) works against gold prices Apart from Interest Rate & Inflation, does $(DXY) affect gold price? Yes. Gold is traded in $ terms. When $ increases/ strengthens, gold becomes expensive & hence demand is expected to fall & hence the price comes down. But when $ drops/ weakens, gold becomes cheap & hence demand is expected to rise & hence the price is expected to go up. Globally interest rates are expected to top out. Market is expecting rates rate cuts starting middle of 2024; & hence fixed income investors would lean more towards Gold as against fixed income assets When interest rates go down, the currency (Dollar in this case) is expected to soften as well. With this view, the expectation also is that softening dollar will be positive for gold.

The Red Sea issue and what it meant for India Inc

The Red Sea issue and what itmeant for India Inc The Red Sea crisis, also known as the U.S.-Iran proxy war, originated from Houthi rebels’ attacks on Israel in October 2023, causing significant disruptions to global trade via the Red Sea. This includes attacks on commercial vessels, leading to:  Increased shipping costs: Ships are taking longer routes, raising fuel consumption and operational costs. Delays in delivery Rerouting adds significant time to shipments, impacting supply chains and potentially leading to shortages. Higher insurance premiums War risk insurance for the Red Sea has soared, adding to costs for businesses. The potential for further escalation remains, which could result in the shutdown of key trade routes, leading to price increases and economic instability worldwide. It’s important to note that the situation is ongoing and its full impact on global trade is still unfolding. However, the potential for significant disruptions and economic consequences remains high. Key point to note: The crisis predominantly affects trade between Europe and Asia, with India particularly vulnerable – with a large portion of its trade reliant on the Red Sea. India Inc – In Q3 2024 management discussion calls, the term ‘Red Sea’ was mentioned 48 times, primarily impacting industries such as Mining and minerals, Manufactured products, chemicals, plastics and rubber materials. Discussions revolved around: Increased freight costs Affecting export-oriented industries, notably steel, pharmaceuticals, and oil. 2. Delays in deliveries due to rerouting, especially impacting exports. 3. South African coal offered at discounted rates due to EU delivery disruptions, benefiting Indian industries. Delays in deliveries Due to rerouting, especially impacting exports.   South African coal offered at discounted rates Due to EU delivery disruptions, benefiting Indian industries.   As of Q3, the impact on most companies is marginal, with ongoing monitoring for potential future actions. Note: only the companies whose concall transcripts were available on Factset database as on February 8, 2024, are considered

Unravelling the US Banking Puzzle: The Commercial Real Estate Dilemma

Unravelling the US Banking Puzzle: The Commercial Real Estate Dilemma In the world of US banking, the spotlight has turned on the Commercial Real Estate (CRE) portfolio, stirring discussions following the acquisition of Silvergate Bank last year by New York Community Bank. The announcement of increased provisions in its CRE portfolio during the fourth-quarter results on January 31st resulted in a significant 57% decline in its stock and 8% fall in the regional banks index since the result date, as of the closing price on February 7th. This has prompted a closer look at the challenges faced by the sector. Other banks with high exposure to CRE including Zions Bancorp, Valley National Bancorp and Western Alliance Bancorp have also borne the brunt. What is driving this? High-Interest Rates The low-interest rate party of the past decade is officially over. The Federal Reserve’s decision to crank up the federal funds rate has thrown a curveball at the commercial property market. Loans taken at rock-bottom rates now need a refinance makeover at significantly higher rates. Office Vacancy Trends The surge in remote work, born during the COVID era, has elevated office vacancy rates to 19.6%. This shift has adversely affected property demand, potentially leading to defaults on associated loans. Anticipated Impact Delinquency rates are expected to rise as loans mature for refinancing, especially for banks heavily invested in the CRE rollercoaster. What is driving this? The drama seems to be localized, with major banks like JP Morgan and Bank of America sporting less than 5% exposure to the CRE theatrics. The impact appears to be concentrated among regional banks and select foreign banks having high exposure to CRE loans. Despite the CRE challenges, commercial property prices have managed to weather the storm, providing some stability in uncertain times. Also, CRE loan repayments are evenly distributed from 2023 to 2028, with the majority not falling due this year. Conclusion – Finding Balance: As US banks grapple with the intricacies of the CRE market, the overall impact on the economy appears to be manageable. Proactive measures, staggered repayments and the limited exposure of major institutions indicate a more localized challenge than a widespread economic crisis. Relevance in Indian context Indian banks are sipping their chai, unfazed. Stable interest rates, sustained demand for commercial property and a mere 3% exposure mean they’re not hitching a ride on this rollercoaster.