Fear And Volatility Hit Global Markets, Oil Below $89 A Barrel
Over the weekend, stocks fell around the world, while bonds climbed with gold on the continued concern that the Israel-Hamas war will escalate into a wider conflict in the Middle East, Bloomberg reported.
Our Top Reports For Today
- [00:00] Stories Of The Day
- [01:00] Fear and volatility hit global markets, oil below $89 a barrel.
- [03:37] Uday Kotak’s junior from Sydenham College takes charge as Kotak Bank CEO
- [07:26] Hindustan Unilever has Nineteen Rs 1,000 crore brands now
- [08:56] Indian IT professionals drive much discretionary spending in India. With a downturn, could that change? With Vinod Karki, ICIC Securities
- [18:28] Major activity in new port and concessions signed across India’s west coast. What is it adding upto? With Captain Jimmy Sarbh, Former CEO DP World
- [28:08] No Go To Cyrpto, says RBI Governor
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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Markets & Bank News
Israel said it will step up aerial strikes over Gaza in preparation for the “next stage” of its military operation, likely a ground invasion.
Food and medical supplies began crossing into Gaza from Egypt for the first time since the Israel-Hamas war erupted two weeks ago, addressing a key demand of US, European and Arab leaders as the humanitarian situation in the besieged territory worsens, Bloomberg is reporting.
At this point, oil is still holding below $89 a barrel.
Dozens of leaders and senior officials from the Middle East, Europe and Africa converged on Cairo, searching for ways to prevent the Israel-Hamas war becoming a wider conflict — and airing mostly entrenched viewpoints.
Over the weekend, stocks fell around the world, while bonds climbed with gold on the continued concern that the Israel-Hamas war will escalate into a wider conflict in the Middle East, Bloomberg reported.
The S&P 500 dropped over 1%, notching its worst week in a month. Wall Street’s “fear gauge” — the VIX — hit the highest since March.
Treasury yields have softened somewhat after the yield on 10-year U.S. Treasury notes was briefly bid above the 5% barrier on Thursday for the first time since July 2007, touching 5.001%, Reuters reported.
While the benchmark yield eased back from that level, it posted its largest weekly surge since April 2022, powered by solid economic data.
Elsewhere, financial stresses are told in different ways.
Americans are falling behind on their auto loans at the highest rate in nearly three decades.
With interest rate hikes making newer loans more expensive, millions of car owners are struggling to afford their payments. It’s a clear indication of distress at a time when the economy is sending mixed signals, particularly about the health of consumer spending.
There is of course a most unusual convergence of interest rates between the developed countries and even India. In the US, for those with the best credit scores, interest rates are about 5.07% for a new car and 7.09% for a used vehicle on average, according to Bankrate, quoted by Bloomberg. And for those with the worst credit, rates are about 14.18% and 21.38% for new and used cars, respectively.
India does not have such flexible interest rate offerings, at least in the formal market.
In Indian markets the BSE Sensex on Friday ended 232 points lower at 65,398, thus falling 1,031 points in the last three trading sessions.
The NSE Nifty50 was down 82 points at 19,543.
Kotak Gets A New CEO
Some seven weeks after Uday Kotak announced his resignation as CEO of Kotak Bank in an abrupt, handwritten resignation, the bank has announced a new CEO.
Ashok Vaswani, whose 3 -year appointment has been cleared by the Reserve Bank of India comes in from outside and seems to be Uday Kotak’s junior by two years from Sydenham College in Mumbai and possibly knew each other earlier.
Vaswani is a chartered accountant originally and has worked mostly outside India, including as CEO of Barclays Bank, UK and earlier as CEO of Citigroup Asia Pacific.
Right now, he is the President of Pagaya Technologies Ltd - a US-Israeli AI Fintech.
He is also a member on the board of the London Stock Exchange group.
Vaswani’s appointment is interesting as it rules out an internal succession for now though an internal succession may not may not have found it easy to get Reserve Bank of India nod. The RBI’s concern unstated openly is that an internal successor would have been a proxy for founder Uday Kotak.
In general, RBI does not want banks to be run like companies and has set clear guidelines on how long CEOs can stay, even if they are founders. The larger thinking obviously being that banks hold public deposits and have accountability beyond shareholders who might of course want continuity.
The announcement does bring an era of uncertainty to end, at least for now in one of India’s most successful private banks.
Uday Kotak’s top managers in the main bank have mostly grown within the company, excepting in new businesses like mutual funds.
If RBI had not put a spanner in the works, Kotak would have likely continued beyond the 15-year CEO limit now set by the regulator. Kotak’s tenure would have ended on December 31 this year as CEO. He will now remain on the board for five years.
Shanti Ekambaram and KVS Manian, both whole-time directors and frontrunners for the CEO position, will continue to remain in their current roles, the bank has said.
Kotak also announced its results meanwhile, reporting a 21% rise in loans for the second quarter, which contributed to a 24% increase in standalone net profit to Rs 3,191 crore.
Net interest margins were up 23% to Rs 6,297 crore.
Broadly, most Indian banks are consistently reporting double-digit loan growth over the past few months due to rising demand for credit, amid increased consumer spending. More on that later.
ICICI Results
ICICI Bank has reported a 36% growth in net profits to Rs 10,261 crore for the current year 2023-24 attributing it to lower provisions and higher income.
The big kicker appears to be a strong growth in retail lending with
retail loans that account for more than 54% of ICICI Bank’s total lending growing 21% year-on-year.
Retail loan growth is of course encouraging and worrying at the same time, the latter to the banking regulator, the RBI.
Overall advances rose by 18.3 per cent with business banking growing 30.3 per cent.
ICICI’s net interest income (NII) increased by 24 per cent to Rs 18,308 crore.
Provisions for bad loans were down to Rs 583 crore, against Rs 1,644 crore in the year-ago period.
ICICI says deposits rose by 19 per cent in the period under review with term deposits rising by 31.8 percent across the time period.
The asset quality improved, with the gross non-performing assets (GNPA) inching down to 2.5 per cent from 2.76 per cent in the first quarter.
More on banking… The Reserve Bank of India has said on Friday that only around Rs 10,000 crore of Rs 2,000 notes are still in circulation.
The Rs 2,000 note of course was the second demonetisation exercise in 7 years, though positioned differently the second time.
The rationale in both cases, the first was Rs 500 and Rs 1,000 notes in November 2016 has never been too clear, at least to me. The hardship caused by the demonetisation, much less for the second round than the first, is quite evident and either way points to policy uncertainty.
HUL’s 19 Rs 1,000 crore brands
FMCG major Hindustan Unilever on Thursday reported an 4% year-on-year rise in its standalone net profit for the fiscal's second quarter ended September (Q2FY24) to ₹2,717 crore. Sequentially, the net profit was up 10%. Total revenue from operations increased 3.6% to ₹15,276 crore and earnings before interest, taxes, depreciation, and amortisation (EBITDA) margin for the quarter ended September, came in at 24.6%, up by 130 basis points on year.
The question is of course where the crystal ball is telling us, on overall consumer and consumption trends and we will spend some time on that today.
HUL’s new CEO Rohit Jawa told investors that India's per capita FMCG (fast moving consumer goods) consumption when compared to other similar economies is significantly low and within that rural is highly under indexed, even as he hinted at a relook at costs.
He also said that premiumisation is bound to accelerate as Indians become more affluent and urban, the Business Standard reported.
“The more affluent population is expected to double by 2027. Naturally, their per capita FMCG consumption is much higher at about 1.5x to 2x compared to national average,” Jawa said.
In a reference to the scale and size that HUL operates in, he pointed out that HUL has a wide portfolio of 50-plus brands, of which 19 brands clock more than Rs 1,000 crores turnover annually.
We reach about 3 million outlets directly, of which 2.3 million outlets are covered through our distributor network, and the remaining by our Shakti entrepreneurs in the rural hinterlands,” he told investors.
“We will also need to structurally reset our cost base, which will help generate fuel to invest back in growing the business,” he said.
Discretionary Spending Is Increasing, But what if the spenders pull back
To pick up where the HUL management left off, India is indeed seeing more discretionary spending as opposed to essential spending. This has been steadily in the last two decades but is also perhaps now more stark than ever.
It also means that industries are set up and flourish, take entertainment or hospitality in a broad sense, to cater to this growing spend, driven in turn by aspirations.
But what happens when it reverses? What if those who spend and thus driving all this discretionary spending are finding their incomes slowing down or losing them altogether.
Of course, there is nothing absolute or extreme in a way that businesses will start folding up tomorrow. But it is the growth rate that could be affected.
Let us look at what has been happening in the transition from essential to discretionary. An interesting report from ICICI Securities out last week points out a few interesting things:
ICICI Securities says per capita private consumption is up 8x over the last two decades while on the other hand population growth is beginning to moderate.
More specifically, private finance consumption expenditure stood at 61% of GDP in nominal terms in FY23. Put differently, it has now reached INR 10,000 per month which is up 8x over the past two decades driven largely by the rising wallet share of discretionary consumption.
Point about population being that the role of population growth in expanding consumption is fading over time, while per capita growth in discretionary consumption is likely to be the primary driver of consumption.
This is interesting of course but also note that the shifts are all gradual over years, with acceleration in some cases caused by new types of consumer behaviour or external impulses.
So essentials which are down include food, clothes, rent, utilities are losing wallet share while transportation, personal automobile, personal care products, financial services, education, miscellaneous services, audio- visual recreation are among areas that are gaining wallet share.
The ICICI Sec study also says that wallet share of F&B is declining structurally - Food and beverages (F&B) was the dominant consumer category at the turn of the century in 2000, commanding a consumer wallet share of 49%.
However, over the past two decades, the wallet share of discretionary products (ex – food, beverages, utilities, health, rent) have gained pole position by rising to 43%, while that of food and beverages has dipped to 32%.
Moreover, spending on protein foods is rising structurally - even within food and beverages, the share of the relatively high discretionary consumption involving high protein products such as dairy, meat, eggs and fish has been rising structurally and now commands the lion’s share at 32% of F&B consumption.
A lot of businesses obviously benefit from this, and it is quite easy to spot them and the stocks that reflect them.
But on the other hand, the question is what if private expenditure slows down ? As it is now predicted thanks to corporate salaries, notably in industries like IT, slowing down or disappearing altogether.
Almost all major IT companies continue to report lower headcount which would have been unthought of even a year ago. The IT industry is reporting a decrease in net headcount, with a cumulative decline of over 16,000 employees across just the four or five big companies. These big five themselves employ a million or so people, the numbers are obviously very small but it is the shift in trend that is of concern.
To understand more of the shift from essential to discretionary incomes and what could happen if trends reverse, I am joined by Vinod Karki, Equity Strategist with ICICI Securities
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India’s Ports Are Buzzing With Activity.
There is much happening in India’s ports beyond the ships that come and go.
A slew of announcements mostly in the form of MoUs to expand port capacity up and down the west coast of India have poured forth in recent weeks.
The announcements were largely around a recent Government hosted Global India Maritime Summit but also in sync with a few other developments including India’s announcement of an India Middle East Corridor or IMEC.
The Adani Group has also reminded us al,, via full page advertisements, that Mundra in Kutch was a barren piece of land 25 years ago before it took it over and built it into port.
Fun fact, Adani Ports CEO Karan Adani was most likely 11 years of age when the port project was incorporated in 1998.
Adani Group is India’s largest private port operator with 13 ports and terminals representing, according to it, 24% of India’s port capacity.
Adani Port also announced its Vizhinjam Port project in Kerala a week before.
The port will be the first transhipment port in India and is fully owned by the Kerala government and being built by Adani Vizhinjam Ports Pvt. Ltd, a subsidiary of Adani Ports and SEZ Ltd (APSEZ).
It is expected to be fully operational by December 2024 and is apparently the first such project in Kerala in almost a century.
Meanwhile, DP World or Dubai Port World which currently operates five container terminals in India – two in Nhava Sheva, one each in Mundra, Cochin and Chennai has signed a MoU to work on the Wadhwan Port Project and also with the Cochin Port Authority.
Apart from another MoU with Deendayal Port Authority for a container terminal also in Gujarat at Kandla called Tuna Tekra Container Terminal.
Incidentally, most ports are owned by the Government but operated by companies like DP World or Adani. Many port projects have overshot their commissioning estimates by decades, like Vadhavan.
In India, DP World was earlier P&O Ports which was taken over globally by DP World in 2006. More on P&O Ports and its India avatar shortly.
The Wadhwan port is an ambitious project as it is a mega port. It is north of Mumbai and is close to Mumbai and Gujarat and well located from a trade point of view.
Once ready, it will be in the top 10 in the world in handling capacity, officials from the Government owned JNPT which owns ports next to Mumbai have said.
JNPT has also signed MoUs with other players like JM Baxi and International Seaport Dredging Private Limited of Belgium to develop other terminals at the Wadhwan port.
The larger question is of course all this activity, what is the potential at this point, with all these new projects and what are the trade opportunities this opens up. I reached out to Captain Jimmy Sarbh, former Regional Director, South Asia and the Middle East at P&O Ports and considered a pioneer in private port operations in India and in the region. I began by asking him how he was seeing the Wadhawan announcement.
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NO GO TO CRYPTO
Back to banking or at least a version of money.
Reserve Bank of India (RBI) Governor Shaktikanta Das has said, thankfully, that the central bank’s stance on banning crypto assets remained unchanged, which is an outright ban despite a global trend towards regulating them.
“On crypto, I have already spelt out our position very clearly time and again and we continue with the same view. The IMF-FSB (International Monetary Fund-Financial Stability Board) synthesis paper also points out the risks involved in crypto,” Das told reporters at the sidelines of a conference.
Following the adoption of a road map on crypto assets in the synthesis paper by G20 finance ministers and central bank governors at a meeting in Marrakech earlier this month, the domestic crypto industry had hoped for the government to work towards a consensus on regulating crypto assets. However, the RBI’s firm stance may complicate matters.
The synthesis paper had argued against a blanket ban on activities linked to crypto assets, suggesting that such a move could be costly and technically challenging to enforce. In the past, the RBI has stressed the need for an outright ban on cryptocurrencies.
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That’s it from me then…have a great week ahead and a Happy Dussehra for tomorrow.
