Expert Analysis of the Global Macro Events & News affecting the Indian Markets

Hi, this week we’ll be talking about the past, present and future of the US dollar i.e., where it all started, how it is going and what you should expect. I would not give you any false hopes but this piece is going to be long, detailed and comprehensive but worthy of your time, I promise. So let’s get started. 

It all started with a simple agreement between nations, popularly known as Bretton Woods agreement. You see, during World War II, the US supplied most of the weapons and other goods. But as smart as it was, it accepted Gold as payment in return. Cut short to 1944, when 44 nations met to decide on the standard currency, they voted for the US Dollar as the US had most of the gold at that time but it had depleted for other countries. The delegation decided that the world’s currencies would no longer be linked to gold but could be pegged to the U.S. 

Hence, started the domination of the US as a superpower country and US $ as world currency.

Call it luck or whatever, the US managed to surpass all the major downturn events, be it dot com bubble, Global financial crisis of 2008 or US China trade war. But as they say, every sweet has its sour. The US too began facing the wrath of inflation, increasing interest rates, unemployment, economic slowdown post Covid 19. But even if we ignore all these facts, we cannot ignore the Russia-Ukraine war that bought new geopolitical tensions with itself. 

Hence, began the era of  “de-dollarization”

Russia Ukraine war- Beginning of the Changing World Order

• The concept of de dollarization started long back but the aforementioned war gave it the limelight it needed. As Russia invaded Ukraine, the US and its allies froze an estimated $300 billion in Russia central bank assets held in non Russian Financial Institutions.

• This sent a wave of fear amongst other countries. Following this, countries around the world started exploring alternative solutions that would not challenge their foreign currency reserves in times of crisis. Countries reflected upon the importance of diversification in the global financial system.

History repeats itself

Let’s rewind the tape to 2014. Back in the year, Russia was keen to find an alternative energy market for its gas as it faced the possibility of European sanctions over the crisis in Ukraine. 

Russia and China signed a deal which facilitated long term supply of Russian natural gas to China, also called Power of Siberia Pipeline. Now, Gazprom, Russia’s state owned giant has said that all the payments will be settled partially in Yuan and Ruble. 

A look at the facts:

• As you can see in the chart below, post invasion, China- Russian trade has skyrocketed.
• Recently, China’s yuan has replaced the US dollar as the most traded currency in Russia. 
• If we look at the structure of trade between China and Russia, more than 70 per cent of bilateral trade is settled in yuan or ruble. It stood at 30% two years ago. 
• Even after all these facts, we cannot ignore the fact that Chinese yuan only constitute 2.76% of global financial reserves. 

A look at India

It all starts with oil and energy, every time. During the Russia-Ukraine war, when most of the countries were hesitant to trade with Russia due to sanctions from the US, India stepped in, truly making an example for the phrase- make hay while the sun shines. Russia offered steep discounts on oil to India, and what would have India done? It started buying oil from Russia.

Where the share of Russian oil was only 1 per cent in India’s oil imports, it has now increased to 35 percent and Russia even offered to settle the payments in Rupee but all that glitters is not gold.

Fast forward to 2023, Russia and India have both suspended negotiations to deal in INR. According to Print Media, Russia has accumulated billions of INR in trade in its books but this could be a problem as for Russia to use the balance, it has to be converted to another currency. India has only 2% share in global exports and this reduces the incentive for other countries to conduct trades in INR.

India had also tried a bilateral payment system with Iran earlier but it collapsed as soon as sanctions on Iran by the US were waived. 

But on a secondary note,  Banks from 18 countries have been permitted by the Reserve Bank of India (RBI) to open Special Vostro Rupee Accounts (SVRAs) for settling payments in Indian rupees. UK, Germany, Malaysia, New Zealand, Russia, Singapore are few countries that are part of this agreement.

What lies ahead?

While there is a decline in the dominance of the US dollar in international trade, we cannot ignore the fact that approximately 60% of the global currency reserves are still in the US dollar. Although the share has declined from 85% in 1977, it still is very significant. 

Dollar acts as a safe haven for institutions and investors but its dominance could see reduction, mainly due to efforts by other nations to diversify their reserves. The battle of reserve currency has been won and lost by the Dutch, the British and now the US. 

Will the US continue dominating the reserves despite the debt ceiling and expected recession? Only time will tell but it will be an interesting journey to witness. 

Important Economic Events

Company In Focus: Valiant Organics

The stock is part of High Quality Right Price, the Ethical portfolio and our PMS. It’s been a long time since we have been holding this stock. The stocks faced several headwinds in the form of slowdown in one of its main segments, selling of promoters, rise in input costs and as a nail in the coffin, a fire accident in one of its major plants.

The Sarigam plant which facilitates the Chlorination business was down for the most of the year because of the fire accident. The company derives the highest margin from this vertical and the plant contributes INR 80 Crores/quarter to topline which is close to 1/3^rd of the company’s overall revenues. So, when this plant is out of the equation for the best part of the year, you can imagine the impact this has on the business and the stock.

The recovery we saw in the latest Quarter 4 results is due to the volume pick up from this factory. In Q4 it was operating at 60% utilization, and the management is guiding 80-85% utilization.

The following table shows the revenue generators in terms of end user industry and processes. Dyes and pigments saw a sharp increase (in terms of relative contribution to revenues) due to a contraction in the agrochemical output since the Sarigam plant was partially offline for most of the year.

Demand for dyes and pigments which is majorly used in paints, textiles, and automotive industry saw a sharp decline which impacted Valiant. Its not just Valiant, it was a sector specific headwind affecting other listed companies like Asahi Songwon, Sudarshan Chemicals, and Bodal Chemicals.

The stock further faced headwinds because a person classified as a promoter was selling down their stake. Infact, it was the former Managing Director Mr. Hemchand Gala, who technically isn’t a promoter.

All the factors barring dyes and pigment bit were temporary and the stock reacted violently to the downside because of this. And since the last two months, the stock is up more than 50%. Overreaction is a nature of the markets, and as investors, identifying the reason why the stock is doing what it’s doing and whether those reasons are justified will help identify undervalued names.

The stock trades at a Price-to-earnigns multiple of 19x when the forecasted growth is 20%+ (topline and bottom line). The demerger of the pharma business to Valiant Laboratories, the valuations unlocked, and the improving demand from the export markets should further support the stock price. 

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Green Portfolio is a SEBI Registered (SEBI Registration No. INH100008513) Research Analyst based at Ground Floor, 7/7, Darya Ganj, Ansari Road, New Delhi, 110002. For more information and disclosures, visit our disclosures page here