India’s economic boom a re-run of two decades ago: Morgan Stanley

Morgan Stanley’s economists believe that the recent strength of India’s economy parallels the boom period of 2003-07 – just before the global financial crisis – when its gross domestic product (GDP) growth averaged 8.6%.

After a decade in which investment to GDP steadily declined, capex has emerged as a key growth driver in India, the brokerage says in a research note. “We think the capex cycle has more room to run, therefore the current expansion closely resembles that of 2003-07,” say its analysts.

According to Morgan Stanley, the defining characteristic of the current expansion is the rise in the investment-to-GDP ratio. “In the 2003-07 cycle investment to GDP rose from 27% in F2003 (the fiscal year ending March 2003) to 39% in F2008, which was close to the peak. Investment to GDP then hovered around those levels until it peaked in F2011.

“2011 to 2021 then registered a decade of decline – but the ratio has now inflected again to 34% of GDP and we expect it to rise further to 36% of GDP in F2027E,” states the report titled The Viewpoint India – Why this feels like 2003-07.

India’s GDP grew 8.4% in the quarter to December 2023, higher than the Reserve Bank of India (RBI) monetary policy committee’s forecast of 6.5%.

In 2003-07, investment grew faster than consumption and the capex boom triggered an acceleration in productivity, job creation and income growth. Gross fixed capital formation (GFCF) growth in India rose sharply from 8.2% in 2002 to 17.5% in 2004 and the pace of growth held firm in 2003-07.

“In that cycle, the fiscal deficit was already consolidated, the banking system’s non-performing loans were cleared up and the economy was poised for a capex upswing,” says Morgan Stanley. “However, the initial pick-up in private consumption growth was more modest, averaging just 4.8%Y in 2003-04 (vs 2.8%Y in 2002). The sustained capex cycle drew stronger employment and income growth, which led to a more marked acceleration in private consumption to an average of 8.3%Y in 2005-07,”

This cycle too, investment growth has been stronger. Real GFCF growth continued to hold strong at 10.5%Y in Q4 2023, staying above the pre-Covid 2017-28 average of 9.6%, This has been mainly driven by public capex so far, as the corporate sector has been working through multiple shocks from previous years that have weighed on its ability to invest.

“However, now that corporate profit (based on bottom-up company data) to GDP has picked up from a trough of 1.1% in F2020 to 5.4% in F2023, we are now seeing early signs of private capex gaining momentum. On the flip side, private consumption is still relatively weak, tracking at just 3.5%Y in Q4 2023, below the pre-Covid 2017-18 average of 6.5%Y,” the research note says.

Government fixed capex as a percentage of GDP rose from a trough of 3.6% in F2019 to 4.0% in F2021, again picking up ahead of private capex. In contrast, private capex rather than public capex drove the broader capex cycle on 2003-07, as favourable external demand conditions provided a strong uplift to private capex. However, the lagged increase in public capex to GDP meant infrastructure remained a key constraint for growth, says Morgan Stanley.

 

Japanese firms agree major pay hikes

Several major Japanese firms have agreed to solid pay increases as part of this year’s spring wage negotiations, sustaining momentum for hikes in a nation that has for decades struggled with low wage growth.

This year’s annual negotiations, known as shuntō, conclude this month and are being monitored closely by policymakers, as they are likely to influence the Bank of Japan’s (BOJ) decision on whether to adjust its ultraloose monetary policy next week or next month.

Japan’s inflation has slowed, most recently to 2.2% from 4.3% a year ago but is still at historically high levels and is hindering consumption. Economists want to see a virtuous cycle of wage increases by large companies with these also spreading to small and midsize enterprises.

“With strong corporate earnings and labour shortages, the current environment certainly motivates companies to raise wages,” said Shinichiro Kobayashi, an economist at Mitsubishi UFJ Research and Consulting.

Japan’s largest automaker, Toyota, has accepted workers’ demands and offered its largest wage hike since 1999. The carmaker's labour union had demanded a rise  of between yen (JPY) 7,940 (US$54) and JPY28,440 for monthly wages depending on job type and position. Toyota will also raise salaries for new employees. Nissan also met the union's demand of an average ¥18,000 hike to monthly pay.

Other major manufacturers, including electrical machinery companies and steelmakers, have also agreed to labour unions' demands.

Nippon Steel will raise its monthly base salary byJPY¥35,000, exceeding the JPY30,000 that the union had demanded and marking a 14.2% increase when combined with an annual seniority-based pay hike. JFE Steel and Kobe Steel will meet labour unions’ demands of a JPY30,000 increase to monthly pay.

This year’s shuntō season reached a peak among large firms on Wednesday, but several companies had already struck deals with union’s on wage rises.

 

Swift helps Bangladesh's central bank rebuild after cyber heist

The Society for Worldwide Interbank Financial Telecommunication (Swift) international payments network has signed an agreement with Bangladesh’s central bank to help it rebuild its infrastructure, which hackers infiltrated in 2016 to steal U$81 million in the world's biggest cyber heist.

Unidentified hackers, suspected to be from North Korea, carried out the heist by breaching Bangladesh Bank’s systems and using the Swift network to send fraudulent money transfer orders to the New York branch of the US central bank, with which the Dhaka bank has an account.

Swift announced the agreement came after the New York Fed said that it would provide “technical assistance” to Bangladesh Bank in its lawsuit against Manila-based Rizal Commercial Banking Corp (RCBC). RCBC was used to funnel the money, much of which disappeared into the casinos of the Philippines.

RCBC has called the legal action Bangladesh Bank filed last week as beyond the US jurisdiction, “completely baseless” and “nothing more than a thinly veiled PR campaign” to transfer blame for the heist.

“Swift, the New York Fed and Bangladesh Bank have worked together since the cyber fraud event occurred ... to recover the entire proceeds of the crime and to bring the perpetrators to justice in cooperation with law enforcement from other jurisdictions,” Swift told Reuters.

The firm would continue to lend its support to international efforts to protect the global financial system from future cyber-attacks, it added.

 

Israel plans to launch interest-bearing shekel CBDC

Israel’s central bank will support a new Israeli shekel central bank digital currency (CBDC) that has the option of bearing interest.

 

Spain’s Inditex allocates €1.8 billion for logistics

Spain’s fast fashion giant Inditex, owner of the international retail brand Zara, announced a €1.8 billion (US$1.97 billion) investment plan to bolster its logistics operations as it announced a near 30% jump in full-year profits.

The group said it would invest €900 million to “increase logistics capacities” across the next two years with the investments having the “highest standards of sustainability and use the most up-to-date technology”.

It comes as the group reported its pre-tax profits surged 28.2% to €6.9 billion in the year to 31 January, which it attributed to the “strong execution” of its business model and ongoing investment into its retail offer.

Inditex also announced that Zara is preparing to bring the stores’resale platform to the US after the company experienced substantial profit growth in 2023.

The group launched the service, called “Pre-Owned’ in the UK and France in Zara stores and through its website and app, before extending it to several other European countries.

Pre-Owned offers customers the chance to sell, repair and donate their second-hand clothes, reducing the impact of fast fashion and the waste of raw materials.

Pippa Stephens, an analyst at GlobalData, said; “Sustainability is still one of Inditex’s key priorities, driving it to soon roll out its Zara Pre-Owned platform to the US, enabling it to capitalise on the country’s lucrative resale apparel market.

“Its next move should be to publish a full list of its suppliers, as is currently being pushed by investors, and has already been done by key competitors like H&M and Primark.

“As well as reassuring investors, this increased transparency would also aid shopper perceptions, giving them greater confidence in the sustainability and ethics of its operations.”

 

GE Aerospace to spend US$650 million on supply chain

US aircraft engine manufacturer GE Aerospace announced plans to invest US$650 million in its manufacturing facilities and supply chain this year “to increase production and strengthen quality to better support its commercial and defence customers.”

“As GE Aerospace prepares to become a standalone company this spring, we are making significant investments in the future of flight and in the dozens of communities and supplier partners helping us build it,” said H. Lawrence Culp, Jr., Chairman and CEO of GE and CEO of GE Aerospace. “These investments are part of the next chapter for GE Aerospace, supporting cutting-edge equipment and safety enhancements that will help us meet our customers’ growing needs.”

The 2024 investment plan includes nearly US$450 million for new machines, inspection equipment, building upgrades, and new test cells and safety enhancements at 22 GE Aerospace facilities across 14 states. An additional US$100 million will go to supplier partners based in the US.

The US$100 million will strengthen the company’s US supply chain, helping suppliers build and maintain capacity and capabilities needed for sustained growth.

The group said that to support its customers operating around the globe, it also plans to invest approximately US$100 million at some of its international sites in North America, Europe and India.

“This is an investment in the future of manufacturing, ensuring we can continue producing high-quality, cutting-edge engines and services while meeting customer demand,” said Mike Kauffman, GE Aerospace Supply Chain Vice President.

 

South Africa “must manage threats like water outages”

South Africa needs to manage “new and emerging” threats to the economy such as breakdowns in parts of its national water system, with taps running dry from Mbombela in the east of the country to the south of Johannesburg, the head of a key business-lobby group said.

“Bulk water supply to large manufacturers and mining companies is an increasing concern, posing further risks to economic activity,” Business Leadership South Africa Chief Executive Officer Busi Mavuso said in her weekly newsletter.

Thousands of residents in Johannesburg, the country’s financial centre, have been without water this month as the utility struggles to return supply after a blast shuttered one of its key pump stations. Businesses are working with the government to end a national power-supply crisis and the collapse of state port and rail infrastructure.

“We cannot find ourselves in a situation where we have resolved the energy and logistics crises only to be confronted with a new crisis that ultimately means economic activity doesn’t happen,” Mavuso wrote. “So, while tackling immediate crises head on is important, we must maintain vigilance on what the next major constraint is.”

The BLSA chief also singled out the looming cut-off of gas supply to industrial users. Energy group Sasol is set to curb production of the fuel from its fields in Mozambique between 2026 and 2027 as reserves dwindle and retain more output for its own operations, as many as 400,000 jobs at firms that use gas for industrial purposes are endangered, Energy Council of South Africa CEO James Mackay said in November.

 

UniCredit CEO hints at M&A deals

It would be “disappointing” if the strict criteria UniCredit has set for considering potential acquisitions prevented the Italian bank from deploying at least part of its ample excess capital in this way, said its chief executive.

“My view is that at some point you need to build the business, so M&A at the right price is better (than distribution),” CEO Andrea Orcel told the Morgan Stanley investor conference in London.

In the absence of good M&A opportunities, UniCredit would need to add €1.5 billion to €2.0 billion (US$1.6-$2.2 billion) a year to its ordinary capital distribution, which is already among the highest in Europe as a combination of share buybacks and cash dividends.

“If you ask me, I’d be disappointed to be there because it means I haven’t found profitable ways to invest in the business, and most probably it will be a balance of the two,” he said.

Orcel said that banks’ elevated cost of equity prevented UniCredit from “lowering the bar” on possible acquisitions, even when assets could be a strategic fit.

Even when an asset is strategic, the market needs to have full confidence in the cost benefits of any deal and the risk-adjusted internal rate of return must be at least 15%, Orcel said.

“So we're very disciplined on that ... even if some people think we should lower the bar,” he added.

“We’ve looked at a lot of things. Because we look at a lot of things there is a lot of noise, but noise should also indicate to you that unless we hit what we want to hit ... [we won't act] and ... people waiting for that speculative move are going to be disappointed.”

 

TerraPay and Alfardan partner for cross-border transactions

Global cross-border payments network TerraPay announced a strategic alliance with Qatar’s Alfardan Exchange. The partnership “aims to combine TerraPay's digital payment infrastructure with Alfardan Exchange's recognised industry presence” and “to unlock myriad benefits for Alfardan Exchange, with a primary emphasis on harnessing TerraPay's state-of-the-art digital payment framework.”

Together, ”the entities aspire to streamline cross-border payments, rendering them efficient, cost-effective, and responsive to diverse customer requirements.”

Sudhesh Giriyan, the President of Cross-Border Payments at TerraPay, said: “TerraPay, a pioneering provider of white-labelled digital payment infrastructure, is dedicated to transforming the remittance landscape. The partnership with Alfardan Exchange is seen as an opportunity to strengthen our market presence in Qatar and gain strategic leverage in the remittance sector.”

The partners added that they will jointly pioneer advanced digital cross-border remittance solutions. “This concerted effort amplifies financial inclusivity and fortifies connectivity across global corridors,” they said.