Fresh Bull Case For India From Morgan Stanley
Morgan Stanley Research has reiterated that India is getting started on a decade of record growth that could see its economy surpass Japan and Germany to become the world’s third-largest by 2027
On Episode 317 of The Core Report, financial journalist Govindraj Ethiraj talks to author and veteran economic journalist, Shankkar Aiyar.
Our Top Reports For Today
SHOW NOTES
(00:00) Stories Of The Day
(07:24) Fresh bull case for India from Morgan Stanley
(10:43) Why Wall Street is feeling nervous
(13:22) Hyundai files for mega India IPO, why this is more than just an IPO story
(16:05) Solving for India’s jobs and manufacturing gaps: New ideas and triggers
(26:17) Panama Canal to start allowing more ships even as Suez sees pressure
(29:31) Bubble gum sales last peaked in 2011, can Mars Wrigley change habits?
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 17th of June and this is Govindraj Ethiraj broadcasting and streaming from and headquartered in Mumbai, India’s financial capital.
Well, the bad news is that we are now sailing into calmer waters, from a markets and economy standpoint but that is good news too.
Persistent bull markets lead to theories, many of them absurd which are tough to counter except with history and retrospective intuition, most of which people do not believe because the biggest law of a bull market is the one that says it will never end.
One theory that I will consistently address is the supply theory. Which is that Indian investors are consistently diverting their savings into stock markets which in turn will ensure that stock markets will keep going up. Along the way, they also are absorbing foreign institutional investor selling.
For instance, Bloomberg has compiled that more Indians are investing via mutual funds — equity mutual funds added over 5 million investors in the past year to cross 45 million in April 2024. In just May, 5 million new SIPs were registered and SIP investment flow crossed $2.5 billion.
This is now being touted as a sign of Indian investor machismo.
Arguments like these get many factors wrong and forget that at the most basic level the markets comprise buyers and sellers.
For every buyer, there is a seller and every seller has a reason to do so.
An institutional investor is constantly measuring returns as per her or his stock exposure because the funds have to show growth and performance.
Individual investors like you and me could be doing the same which is to say that my stock has returned 200% so I must churn.
More likely, many investors, including in mutual funds, have targets ranging from house purchase to two and four wheelers and other important events like weddings and of course education.
Indians are saving and using the mutual fund route for this, if you don’t believe me, ask any mutual fund advisor, this is how they plan your investments for you. Set goals and then invest systematically.
Which means, people will be selling all the time.
The question of course is at what points will the selling volumes be higher or much higher than the buying volumes. There could be sudden triggers like an unexpected election outcome which is big but many smaller ones as well.
For instance, regardless of how many seats the current Government controls in Parliament, if capital gains tax on share of sales is increased, the markets will fall because investors will perceive that as a hit on their incomes, which it will be.
Remember, capital gains on sale of shares was already increased to 15% for a short term that is less than a year of holding and 10% to more than a year of holding. Before 2018, there was no tax if you sold after a year.
Obviously all signs point to an increase because it's tough for Governments to resist the temptation to tax capital gains in this area and also it could be seen as a voter friendly move.
Another argument was outlined in Moneycontrol last week which is that institutional investors are using the block deal route to book profits on their investments.
As per data from Prime Database, the five-month period between January and May saw a total of 392 block deals with a cumulative value of Rs 86,036 crore.
This is significantly higher than the previous five-month period – between August and December 2023 – when 226 block deals were struck with a combined value of Rs 54,351 crore.
Further, even if one compares the first five months of the current calendar year with the corresponding period last year, the spike is significant as January-May 2023 saw a mere 102 deals worth Rs 27,840 crore.
Venture capital funds too have been exiting their investments selling billions of dollars in the last few years, in many cases at fairly eye popping valuations. So eye popping that they got their exits and left retail investors holding the lemon, so to speak.
And then there are founders or promoters who have been selling too.
Stake sales by promoters through OFS (listed firms and IPOs), and bulk/block deals jumping over 93 percent in FY24 to Rs 1.57 lakh crore, from Rs 81,545 lakh crore in FY23.
And foreign institutional investors are selling so actively now that at 18%, they now own less shares than individual investors for the first time in 18 years.
This is all good for the market because FIIs too would like to buy and sell in a way that their actions alone don’t trigger market upsetting moves as they have in recent decades.
And thus, none of these categories of sales will stop.
Between greed and need, investors will continue to sell and for the same reasons investors will continue to buy.
To assume it will all go in one direction is futile, dangerous and betrays a common sense lack of understanding of how markets function.
This does not in any way impact the longer term story of investing in equities here. But to assume that the pathways to the long term is a straight line up is plain wrong.
Now, let's look at some top stories and themes for the day. Monday, June 17th is a market holiday for id and thus there is no trading today.
- Fresh bull case for India from Morgan Stanley
- Why Wall Street is feeling nervous
- Hyundai files for mega India IPO, why this is more than just an IPO story.
- Solving for India’s jobs and manufacturing gaps. New ideas and triggers.
- Panama Canal to start allowing more ships even as Suez sees pressure.
- Bubble gum sales last peaked in 2011, can Mars Wrigley change habits ?
The Fresh Bull Case for India
TIll the next month or July and till the Union Budget surprises either way, the markets as I had spoken of at the start of last week are likely to be range bound.
In international markets, this is also seen as a long period of calm which is concerning.
But back to India, with the elections over and the new Government,being the old one, in place, the foreign brokerage bulls are back, with fresh reports, also paraphrasing old ones.
Morgan Stanley Research has reiterated that India is just getting started on a decade of record growth that could see its economy surpass Japan and Germany to become the world’s third-largest by 2027.
In this report released last week, it links back to a report from November 2022 saying roughly the same thing.
So there is consistency one could say.
Morgan Stanley also says Indian markets are on track to rank third in the world by the end of this decade.
The market’s confidence in India’s growth picture has driven stock valuations higher, discounting expectations of future cash flows at lower rates of return.
That said, investors may be missing other key factors that could help India run its longest and best bull market ever. MS has claimed
“The most important thing to note in picking businesses for one’s portfolio is not the total addressable market but whether the business can sustain its competitive advantage,” MS says.
“There are several themes in India that fit this bill, given under-penetration and strong growth rates.”
The list includes and I will get down to it so you have something to take away for the day.
Consumer-focused plays, such as travel, retail, luxury and healthcare services
Large lenders and life insurance, among financials
Green hydrogen, gas, power utilities, batteries and renewables
IT and non-IT professional services
Industrials, including energy, mobility, defence and railways, as well as sub sectors such as power plants, steel and cement
You could say that this is not exactly breaking news but it is useful to note that the verticals with promise for the coming few years are similar and with some new ones, including in renewables and services.
Also, IT is making a slow comeback into portfolios or at least trying to, from conversations I have been having with fund managers.
Back to the markets on Friday, the Sensex gained 182 points to end at 76,993 while the Nifty50 shut shop 67 points, or 0.29 per cent, higher at 23,466.
The Nifty also hit a new lifetime high of 23,490.40 in the intraday trade as did the Mid Cap and Small Cap indices of the BSE, hit lifetime highs that is.
The rupee closed nearly unchanged on Friday as intervention from the Indian central bank prevented it from hitting a lifetime low even as a broadly stronger dollar pressured most Asian currencies, Reuters reported adding that the rupee closed at Rs 83.55 against the U.S. dollar, down 0.2% week-on-week.
Oil prices by the way have now crept up above $82 and are just under $83 a barrel over the weekend.
The coming week should tell us more about which way oil is headed and what will drive it.
Wall Street Is Nervous About Calm Markets
Markets are unusually calm—and that’s making Wall Street nervous, says the WSJ over the weekend.
Stocks have been rising through 2024, with the S&P 500 up 14% and closing at 29 records along the way.
The Cboe Volatility Index, or VIX, dropped below 12 last week, a nearly five-year low.
In India, as elections were on, the volatility index was spiking sharply, for reasons, in retrospect it is quite clear.
Back on Wall Street, the economy has remained stronger than almost anyone predicted after the Federal Reserve began raising interest rates. Corporate profits are rising again. Inflation cooled more than expected in last week’s consumer prices report, and Fed officials signalled that they expect to cut benchmark rates later this year, the WSJ said.
Incidentally, the Nasdaq Composite closed at a record high for the fifth straight session on Friday, up 0.12% to end at 17,688.88.
Of course, the AI boom is adding steroids to stocks like Apple and Nvidia.
Wsj says history shows that periods of extreme market calm rarely last. The VIX traded in line with current levels for most of 2005 to 2007, before surging above 80 during the 2008 financial crisis.
Part of the problem with a strong economy and calm markets is that they create an environment in which investors let their guard down and turn to riskier, more speculative investments in their hunt for fat returns.
“On a really calm day, it’s easy to blow bubbles. They can grow to humongous sizes,” said David Kelly, chief global strategist at J.P. Morgan Asset Management. “When the wind picks up, they pop.”
In the US, since the bull market started rolling in late 2022, the S&P 500’s gains have been driven by a handful of mega cap tech stocks.
The 10 biggest stocks recently represented 36.8% of the index’s total value, the highest since September 2000, according to FactSet.
A narrow rally leaves the market vulnerable if a few of the biggest companies can’t meet the lofty expectations priced into their valuations, analysts told the WSJ.-
Hyundai Motor Steps On The Gas In India
28 years after entering India as a wild card that few knew or understood, Hyundai Motors India entity has now sought regulatory approval on Saturday for a stock market listing in India which could be the nation's biggest and will see the South Korean parent sell a stake of up to 17.5% in the company.
Actually, many people even laughed at Hyundai’s first offering, the tall boy design Santro launched in 1998 because it looked very unusual and that’s putting it mildly.
Hyundai’s IPO will make it the country's first car maker to go public in two decades since Maruti Suzuki in 2003.
Reuters says Hyundai aims to raise around $2.5-$3 billion at a valuation of up to $30 billion.
The IPO could take 4 to 6 months to materialise as that is the usual time it takes after filing and the back and forths with the stock markets regulator.
Reuters has compiled that Hyundai has invested roughly $5 billion in two manufacturing plants and will invest another $4 billion in the next 10 years.
For Hyundai, India is the third largest revenue generator globally.
Hyundai’s IPO is a first not just in the automotive space but also among large multi national companies offering equity to local investors and laying a stronger foundation in the Indian or local market.
In many other cases, like in pharmaceuticals, multinationals have gone private or pulled back from the country.
Some of Indian top performing MNC stocks, including Maruti which is now a MNC owned by Suzuki of Japan, go back several decades, including before liberalisation in the 1990s.
They also went public because they had to dilute their holdings in India around 50 years ago, one of the few policies from the Government at the time which led to substantial wealth creation over time.
Hindustan Unilever or then Hindustan Lever went public in 1977, around the time an Indian entrepreneur by the name of Dhirubhai Ambani also took his company Reliance Industries public.
Hyundai itself has said the listing of the equity shares in India "will enhance its visibility and brand image", and "provide liquidity and a public market" for the shares.
Hyundai’s listing which quite likely had no trigger or push from policy makers will hopefully set the path for other multinationals in automotive or other areas in manufacturing to explore public offers as well.
Solving for Manufacturing Growth and Jobs
There are several wishlists for the incoming Government.
Since there is no change in the economic ministries suggesting greater continuity than was perhaps anticipated, the expectation that they will get down to business is also high.
A big challenge is obviously manufacturing growth and jobs growth, both of which are inextricably linked to each other and something policy makers must see holistically as they are in some ways trying to do.
But there is much more required, Shankkar Aiyar, author and veteran economic journalist argued in a column over the weekend in the New Indian Express.
Manufacturing needs new ways of incentivising corporations and reducing hurdles even as that provides the pathways to jobs which in turn needs friendlier labour laws, among other things.
I reached out to Shankkar AIyar and began by asking him to walk us through the jobs challenge in a broad sense and then onto manufacturing.
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Panama Canal & Suez Canal
Global trade has come under sudden pressure in recent weeks leading to rising freight costs thanks to shipping routes being altered in response to Red Sea diversions.
Singapore’s port, already one of the busiest in the world, is facing a sustained period of congestion as vessel diversions to avoid the Red Sea push more container ships to the Asian maritime hub, Bloomberg reported last week.
Singapore’s Port’s utilisation rate at 90% compared with 70% optimum level, Bloomberg said.
This is causing ships to wait upto 7 days as opposed to half a day, the ET reported.
Why is this happening now ?
According to Bloomberg, the attacks by Yemen’s Houthi rebels have resulted in shipowners opting not to transit the Suez canal and taking the longer route around the Cape of Good Hope at the southern tip of Africa.
This has been happening for some months obviously but it has gotten worse and June to August is obviously peak season as well.
Bloomberg says that ships don't get a chance to refuel or unload cargo at ports in the Middle East, leading to worsening marine gridlock in the waters off Singapore.
A top official at Jindal Stainless told The Economic Times that ports like Port of Singapore and Port of Colombo were highly congested right now. Imports and exports in Singapore and Colombo used to take 4 to 5 days. Now they are taking 15 to 20 days.
Shipping lines are now anticipating more port congestion, container shortages, high freight rates and situations that could mirror what we saw during Covid, Ajay Sahai, director general and CEO at Federation of Indian Exports Organisations (FIEO) told the ET.
The good news, though not really for traffic from India, is that the Panama Canal has managed to ward off a shipping crisis that threatened to upend $270 billion a year in global trade.
With falling water levels and narrower sailing paths, the Panama Canal Authority slashed the number of vessels allowed to cross each day to 22, about 60% of normal.
Shippers paid millions of dollars to jump the growing queue and avoid wait times that stretched more than two weeks, said Bloomberg.
But recently, with water levels rising, the authority has started to raise the limit.
It said on Tuesday that 34 vessels will be permitted daily beginning in late July, close to the pre-drought cap of 38.
Shippers now wait less than two days to transit the canal. If rain patterns hold, the waterway could return to full capacity next year, the canal authority said in a written response to questions.
The Panama Canal handles about 3% of global maritime trade volumes but 46% of containers moving from Northeast Asia to the US East Coast.
All this obviously points to the importance of factors like climate and geopolitics.
It also means that businesses have to more sharply focus on both these aspects as risks and costs, something they did not have to even until last year.
Can Bubble Gum Sales Revive After 2011 Peak?
Mars Wrigley is spending millions of dollars in an effort to restore chewing gum to its former glory with consumers, starting with an international ad campaign that tries to go beyond the pitch of fresh breath or great taste, the WSj is reporting.
Mars is instead promoting its Orbit and Extra gum brands through the lens of mindfulness, claiming that mastication can silence anxious thoughts, improve focus or boost confidence. “Quiet your mind with Extra Gum,” one ad said according to WSJ.
Gum sales have slowed down, reasons attributed include younger consumers’ desire for natural ingredients to the drop in store visits during the Covid-19 lockdowns.
Global gum sales fell to $16.1 billion in 2020 from $19.5 billion the year prior, and only crept back up to $18.6 billion in 2023, according to market research firm Euromonitor, which is forecasting sales of $19.7 billion this year.
The industry’s peak to date came back in 2011, when nearly $25 billion of gum was sold in today’s currency.
