Can Stock Markets Hold The Bounce Back?
It was a good Friday ending to the week last week for the markets with no sense of specific direction yet
On Episode 349 of The Core Report, financial journalist Govindraj Ethiraj talks to Dr. Shubadha Rao, founder of QuantEco Research as well as Himanshu Parekh, partner at KPMG in India.
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SHOW NOTES
(00:00) The Take: The Gold Mirage
(04:21) Can stock markets hold the bounce back?
(06:01) The AI Euphoria, how long will it last?
(07:44) Cement industry sees more consolidation as capacity stays far ahead of production
(10:20) An economy plus tax forward overview from the Union Budget’s proposals
NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.
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Good morning, it's Monday, the 29th of July and this is Govindraj Ethiraj headquartered and broadcasting and streaming from Mumbai but right now in transit.
A fresh reminder, I am travelling and thus will be intermittent or have short episodes for the next few days.
The Take: The Gold Mirage
Gold prices and net asset values of GOLD ETFS fell sharply last week after the Government reduced basic customs duties on gold and silver from 15% to 6%, which is the sharpest reduction on record and the lowest since June 2013, says the World Gold Council.
I saw an interesting headline that was doing the rounds suggesting investors had lost Rs 10 lakh crore of their wealth when prices fell because of the drop in customs duties.
It was bizarre at so many levels that I did feel the need to address it. And also make a more important point which I will come to.
First, gold prices.
22 Karat gold is currently quoting at ₹ 63,000 for 10 grams. A year ago, it was quoting around Rs 60,000 per 10 grams.
If you look at international prices, gold futures were at around $2,000 in January and $2,430 the night before.
So, globally prices have risen steadily and we have talked about this consistently on The Core Report.
The reduction of import duty does hit the domestic price but not so much compared to a year ago and gold was never a AI stock that could keep rising. If you thought so, then well.
Also gold investments via mutual funds or ETFs are the hedging part of your portfolio and not the aggressive, risk based part of it.
But the reason is important before I come to the flawed conclusions.
Gold prices have risen largely because central banks from India, China and Turkey among others have been buying steadily.
And why is that ?
Because gold is an important reserve to hold in unpredictable times, particularly geopolitical uncertainty.
Moreover, several central banks are switching out of USDollars into gold, for similar reasons.
Back in India, while many people are investing in gold including via ETFs, most gold is bought as long term family holdings, including during festivals and occasions like weddings.
And more importantly, I am yet to meet anyone who measures the daily price of the worth of the gold hanging around their necks or adorning their fingers.
Now, back to prices.
The question to ponder is why are gold import duties still so high rather than spending too much time rejoicing on the lowering recently.
What happens when duties are high.
Smuggling picks up.
An ET report says gold smuggling in India was around 100 tonnes in 2022 and increased to 155 tonnes in 2023.
It is unwise to ignore this and policy makers, at least some, have understood this over the years.
Lower duties, like lower taxes, will increase revenue and deter smuggling or evasion rather than high taxes which only increase it.
But memories are short.
So, what should gold import duties be?
Well, the WGC chart is illustrative.
Import duties on gold were 2% in January 2012 or 12 years ago.
And then they kept rising, across Governments till they hit a peak of 15% in July 2022.
To me, import duties on gold prices are also an indicator on how policy makers including the mandarins at the ministry of finance are thinking over the years. The higher the duties, the more limited the vision and the fallback to the restrictive policies of yesteryears.
You will find then that this applies across the spectrum of trade, much to the disadvantage of the local economy which will do much better from lower tariffs.
The good news is that we have reversed course again and seemingly learnt lessons that erecting high walls don’t work.
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The Markets, Up And Not Away
It was a good Friday ending to the week last week for the markets with of course no sense of specific direction yet, beyond earnings and global cues which we will come to.
The domestic cues are actually negative, particularly if you look at the higher capital gains tax regime now in force for both equities and derivatives.
Which is alright for long term investors I think but not so good for sentiment-powered shorter term investors, of which there are substantial numbers nowadays.
On Friday, the Sensex and Nifty saw big jumps with the BSE Sensex climbing 1.62 per cent or 1292 points to end at 81,332 levels, while NSE’s Nifty50 closed 1.76 percent or 428 points at 24,834 levels.
Some 27 out of 30 stocks on BSE Sensex saw gains with Bharti Airtel, Adani Ports, Sun Pharma, Tata Steel, and Infosys among others ending 3-4% higher, said Business Standard,
The MidCap index outperformed benchmark indices rallying 2.12 per cent while SmallCap settled 1 per cent higher.
This was the best session for the BSE and NSE in seven weeks, one which also saw the Nifty also hit a record high.
Both Nifty and Sensex had logged losses for the last five sessions, weighed down by weaker-than-expected results from several companies including Reliance Industries, said Reuters. And of course the capital gains regime which will hang over the markets for a while.
Elsewhere, Brent crude oil is quoting a little above $81 a barrel, which is quite sharply down from the previous week.
Prices have struggled recently amid selling pressure from trend-following commodity trading advisers and a wider retreat in equity markets earlier this week, said Bloomberg.
Artificial Intelligence Euphoria
Earnings season is underway on Wall Street as well.
The latest earnings reports are fanning two worries that were already gnawing away at the US stock market: That the euphoria about artificial intelligence had run too far and that — at some point — consumers spending will start to stall, says Bloomberg.
While profits overall are still expanding at a solid pace and banks’ earnings have continued to swell, those concerns have derailed a stock-market rally that until this month kept pushing major indexes to fresh record highs.
Last week was a jolt.
The tech-led stock rally that has turbocharged markets for the past year and a half on the promise of AI sputtered Wednesday. The Nasdaq 100 suffered its worst day since October 2022.
The S&P 500, meanwhile, was dragged down by the big technology companies, plunging 2.3% to end a streak of 17 months without a drop of 2% or more. That was the best stretch since the start of the financial crisis.
Stocks rose on Friday but more importantly, the turbulence has crystallised anxiety that the latest bull run, fueled by Nvidia Corp. and a handful of other stocks, could be running out of steam.
Earnings this week showed AI investments eating into profits.
But there are signals from elsewhere as well, that consumption there could slow down, picking up on updates from airlines, consumer companies and even delivery companies like UPS.
Cement Heads For Consolidation
As industries go, cement is perhaps one of the biggest beneficiaries of the twin forces of massive public spending in infrastructure and private investment in construction and real estate.
Add to that the fact that cement is a localised industry, as in there is a limit to how far you can transport bags of cement, at least economically.
And then economies of scale. This is critical because cement is also a low margin business.
As manufacturing processes go, the main raw material is limestone which is mined, crushed, mixed with other raw materials like bauxite, clay and iron ore. So you have to be near limestone mines for your factory.
All of this ground into a powdered mix and there are several more processes including burning before it becomes the fine powder that goes into a 50 kg sack and sold.
This is a background of course to point to why consolidation is picking up space, including in the lucrative southern markets of India.
UltraTech Cement, of the Aditya Birla Group, has purchased a 32.72% equity stake of the promoters & their associates in India Cements Limited.
It was expected that UltraTech would move for full control, which would also help Birla meet its production target of around 183 million tonnes in three years time. Its current production is around 150 million tonnes.
UltraTech earlier invested in India Cements to acquire 22.77% equity at a price of Rs 268 per share in June 2024.
The Ultratech management has said they were approached by the promoter group to sell their holding in the company, and we found it appropriate to acquire their stake in the company.
India Cements has a total capacity of 14.45 mtpa of grey cement. Of this, 12.95 mtpa is in the South (particularly Tamil Nadu) and 1.5 mtpa is in Rajasthan. The transaction is subject to regulatory approvals.
Here is the interesting part.
While prospects for India’s cement production, the second highest in the world, look good, there is a pretty big gap between capacity and production.
India has an installed capacity of around 600 million tonnes but production was only 391 million tonnes as of last year, as per data via the Ministry of Commerce.
So industry has clearly invested ahead of demand, an approach which brings its own problems, including financial, which is another reason for the consolidation that we are seeing.
Adani, the other big player, via acquired entities like Ambuja and ACC controls around 77 million tonnes and 14% of the market but wants to come close to Birla's UltraTech in the near future.
Ultratech wants to reach around 200 mtpa of capacity while Adani is targeting 140 mtpa, as per reports.
Union Budget 2024
The Union Budget 2024 had a series of proposals for the broader economy and of course tax which will keep us busy for some weeks if not months.
The larger question of course is the impact of these proposals going forward even as the fine print has been gone through.
There are some important points on how the Government is seeing both income and expenditure, the former is projected lower while the latter has been reined in.
And then taxes, including on companies.
I caught up with Shubadha Rao, Founder of QuantEco and Himanshu Parekh, partner and head of tax west for KPMG in India.
And I started off with Shubhada Rao by asking her about the reining in of expenditure.
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