Liquidity Surge Drives Indian Markets To Fresh Records
Indian stockmarkets are continuing to ride the Federal Reserve rate cut wave and are likely to do so for longer, though with some pauses
On Episode 395 of The Core Report, financial journalist Govindraj Ethiraj talks to G Chokkalingam, founder of Equinomics Research as well as Bjarne Schieldrop, chief analyst commodities at Oslo-based SEB Research.
SHOW NOTES
(00:00) The Take: Speculation Sahi Nahi Hai
(04:41) Liquidity surge drives Indian markets to fresh records
(05:54) Mutual fund investors set to cross 50 million
(06:46) Foreigners own $116 billion of futures and options
(13:36) Oil prices enter $75 a barrel range as war kicks off between OPEC and non OPEC countries
(20:54) The rains are going, finally
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regards any feedback, you can drop us a message on [email protected].
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Good morning, it's Tuesday, the 24th of September and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take: Speculation Sahi Nahi Hai
There are several reasons why people gamble, they could range from the classic rush that one gets, combined with the skill if elevated skills are involved.
And then, many gamble or speculate to make money.
There may be some distinctions between gambling and speculation but it is quite clear that for millions of Indians, it is more the former than the latter.
After all, the essential principle is that you bet a small amount on something that could become bigger, whether in the stock market or crypto or some gaming app.
It's turning out that those small bets are running into hundreds of thousands of crores.
The aggregate losses of 11.3 million individual traders exceeded Rs 180,000 crore over the three-year period between FY22 and FY24.
In FY24 alone, individuals incurred about Rs 75,000 crore in net losses.
In FY24, nearly 7.3 million individual traders lost money, with an average net loss of Rs 1.2 lakh per person, inclusive of transaction costs.
In contrast, foreign portfolio investors (FPIs) and proprietary traders booked gross trading profits of Rs 28,000 crore and Rs 33,000 crore, respectively, in FY24, says a new Securities & Exchange Board of India study.
It is also quite clear that there are winners here but they are the big guys who make the money while the small guy loses it, almost consistently.
Moreover, the almost sad part of the story is that algo traders, or those who use algorithms powered by high end computers for trading—took the larger share of the pie.
“Most of the profits were generated by larger entities that used trading algorithms, with 97 percent of FPI profits and 96 per cent of proprietary trader profits coming from algorithmic trading,” pointed out the Sebi report.
In all, 93 per cent of retail traders in derivatives trading incurred an average loss of Rs 2 lakh per trader during the last three financial years.
Daily turnover in the F&O segment often exceeds Rs 500 trillion.
Sebi has now proposed several measures aimed at curbing retail participation and speculation and are likely to figure and get pushed through in an upcoming board meeting this month, says a Business Standard report.
The report also says that despite consecutive years of losses, more than three-fourths of the loss-making traders continued their activity in F&O.
There are more and more grim and depressing statistics.
It is clear that people are betting their shirts and losing them, whether in derivatives or crypto or some other mobile app gaming app presented as a game of skill, something that tests your abilities and does not drain your bank account as it usually does.
It is equally clear that technology, particularly through the mobile device, is accelerating the process with almost no friction.
Frictionless transactions are a virtue and something to boast about but only upto a point.
It is no longer a virtue if it cannot introduce even a split second pause that might make you think twice before moving your earnings or savings into a speculative instrument.
Not that a split second is enough but we have to start somewhere.
For years, India’s mutual fund industry ran a campaign called Mutual Funds sahi hai.
Whether because of that long running campaign or despite it, the fact is that retail investor flows into mutual funds have hit record highs, over Rs 20,000 crore a month, mostly through the systematic investment plan route.
It is time to say " Speculation Sahi Nahi Hai.
Or speculation is bad for your health.
You might rightfully think that such public service messages won’t work.
But no one thought that mutual funds sahi hai would work either.
Our top stories and themes
Liquidity surge drives Indian markets to fresh records.
Foreigners own $116 billion of futures and options.
Mutual fund investors set to cross 50 million.
Oil prices enter $75 a barrel range as war kicks off between OPEC and non OPEC countries.
The rains are going, finally.
Markets and More
Indian stock markets are continuing to ride the Federal Reserve rate cut wave and are likely to do so for longer, though with some pauses.
Indian shares hit record highs for the third straight session on Monday as the outsized U.S. rate cut last week boosted investors' risk appetite.
The BSE Sensex and NSE Nifty50 hit fresh highs before closing at record closing levels on Monday.
The Sensex rose 384.30 points before closing at 84,928.61. The index scaled a record high of 84,980.53 during intraday trade.
The Nifty50 gained 148.10 points or 0.57 percent at 25,939.05 and thus came close to 26,000.
Top performers were Bajaj Auto, Mahindra & Mahindra, ONGC, Hero MotoCorp, and SBI Life Insurance Company, of up to 3.66 per cent.
Broader indices rose with the Nifty Smallcap 100 index rising 1.12 per cent, and the Nifty Midcap 100 index gained 0.84 per cent at close on Monday.
The Nifty Midcap 100 index also scaled its all-time high of 60,759.45 during intraday trade on Monday.
Elsewhere, mutual fund (MF) investor base is set to surpass the 50-million unique investor milestone in September, with net additions expected to exceed 10 million in just 12 months, driven by sustained buoyancy in the equity market and a surge in new fund offerings (NFOs), Business Standard reported.
Previously, it took the industry 21 months to add 10 million investors, while growing from 20 million to 40 million took over 26 months.
The unique investor count is tracked using the number of permanent account numbers registered with MF schemes.
Bloomberg meanwhile reported that with Indian stocks hitting successive records, global funds have pushed up their derivatives wagers to unprecedented levels.
By Friday, foreign institutional investors owned 9.7 trillion rupees ($116 billion) of options and futures on equity indexes and single stocks listed on the National Stock Exchange, according to data compiled by Bloomberg.
That day, they bumped up their bullish bets on index futures, including those tied to the NSE Nifty 50 gauge, to over 500,000 contracts. That’s the highest level since 2015.
The Nifty has rallied 18% from a low that month to become one of Asia’s top performers. It hit a fresh peak Monday amid a risk-on sentiment in global markets following the Federal Reserve’s jumbo rate cut last week.
So where is the market poised right now and what are the directional signals at this point and of course how are valuations looking.
I reached out to G Chokkalingam, Founder of Equinomics Research and began by asking him how he was reading the all time highs.
INTERVIEW TRANSCRIPT
G Chokkalingam: There is a lot of optimism, at the same time, all of us know there is a lot of fear also. That is because of a small and mid-cap. The combined market cap of small and mid-cap is now 172 trillion rupees, 172 lakh crore rupees.
That is why people are not able to digest when the Sensex and Nifty keep rising. So there is a dichotomy in the market. Sensex and Nifty should keep rising.
Of course, there could be periodic profit booking and minor corrections. But I believe the trend is going to be very steady for Sensex and Nifty. There could be 6 to 10% further rise by end of current financial year.
By end of calendar year itself, Sensex should touch about 90,000, which should be about 5.15% upside. So by next March, comfortably, they should rise 6 to 10%. Reasons?
All of us know the Fed rate cut. This is only a beginning. Against a 500-basis cry, only 50-basis is cut down now, which is about one-tenth of the cumulative rise we have seen.
So it is likely that there will be another minimum 100-basis cut before end of the current financial year. That should augur well for India. RBI should also cut down because the monsoon is too good, one of the best monsoons, and retail wholesale inflation should come down.
Not only that, oil price is down 23% from 52-week high. That also should augur well. The problem of Chinese economy also should augur well for reversal of interest rate cycle because that is the main reason for fall in the oil prices and other commodity prices.
So monsoon has been good. The growth story remains intact. We are starting to hit 6-7%.
The relative valuation is also very comfortable for Sensex and Nifty. They traded at around 25 PE as against 32-35 PE for small and mid-cap. So history says, proves the point that beyond 3-4 years, this over-valuation of small and mid-cap always get corrected, which is logical.
So because of these reasons, I believe the Sensex and Nifty would keep rising. But small and mid-cap should definitely correct. One good thing has happened.
I was expecting some meltdown in the segment as a whole for SMC, small and mid-cap. But what has happened in the last one or two months, certain pockets are getting affected badly but not the whole segment is correcting. This is also healthy.
There are several hundreds of stocks in the small and mid-cap. It would be surprising to know they are already down 20 to even 40-50% in the SMC segment. So this is one welcome development.
So therefore, I believe the whole market in terms of Sensex and Nifty would be very strong. But one has to be very very careful in certain pockets of small and mid-cap which are extremely over-valued.
Govindraj Ethiraj: So the correction that's happened in some segments or pockets as you say, which in turn reflects certain sanity coming into the market. And what's that driven by or who's driving that? Obviously, you know, in the large cap, the institutional players are there.
G Chokkalingam: But in the small and mid-cap, there are many stocks where mutual fund holding is zero. So what happens in my learning in 32 years of this experience in stock market, what I learned in the small and mid-cap also, there are two pockets of investors. One set of investors are, you know, with entrepreneurial experience, H&Is.
They have a lot of experience in the business and they are very smart. They are not carried away by persistent driven rally all the time. You know, ultimately, some point in time, they try to book profit because of their entrepreneurial experience or even if they are not entrepreneurial just because they are a successful H&Is.
You know, they have seen a lot of success in the business or market. So this particular pocket of investors, they tend to book profits when small and mid-cap stocks individually, they hit abnormal valuation, mad valuation. So the second set of investors are basically the retail investors.
As Dr. Kenneth Galbraith has mentioned, most of them are new investors. They come and burn the finger by buying the small and mid-cap stocks at a super rich valuation. So this is what I observed in the last 30 years.
So I think that's happening now also. So at some point in time, at the peak of the valuation, so many H&Is, entrepreneurial investors, they first book the profits and then the retail investors try to, you know, compete in taking out a profit from such overvalued stock and they fail and then they start correcting very badly.
Govindraj Ethiraj: Are you seeing any specific trends in the large cap side? I mean, on the BSE, Sensex or the NSE Nifty, which is really much bigger companies, older companies?
G Chokkalingam: What is happening, you know, Sensex and Nifty, different sectors are participating on a rotation basis. Till recently, the banks were underperforming. There are a lot of several headwinds.
But suddenly you saw today, you know, the banking stock rising. Earlier, IT stocks were suffering, but then they gave some leg up to the Sensex and Nifty. So I believe that kind of trend could continue.
There could be a sector rotation and, you know, so underperforming sector could come and rescue the Sensex and Nifty. We already saw a lot of FEI buying happening in the last few days post the rate cut by US Fed. So therefore, I believe it may not be confined to one or two sectors.
Most sectors could do it, you know, could come up, you know, on a rotation basis.
Govindraj Ethiraj: Chhoka, thank you so much for joining me.
Oil Prices
Oil is now steady in the $75 a barrel range after a sharp jump in the last week, the biggest since April.
The strength in the dollar offset fears that the conflict between Israel and Hezbollah could morph into a regional war, Bloomberg reported.
There is now rising concern that the war could worsen, threatening oil output in a region that supplies about a third of the world’s barrels.
Elsewhere, in China, which is the world’s largest importer of oil, there were hints that there could be more efforts to revive flagging growth, apart from a cut in short term policy rates.
There is an interesting trade off between the optimism around the US rate cuts which has taken crude oil prices back up versus the concern of falling demand.
“Sentiment among energy investors has turned decisively bearish as OPEC now plans to add barrels into a surplus oil market,” BofA analysts wrote in a note.
According to them, $60 a barrel is a soft price floor to our central Brent forecast of $75 a barrel for 2025 if downside risks play out.”
I spoke with Bjarne Schieldrop, Chief Analyst Commodities at Oslo based SEB Research that specialises in Nordic markets and of course oil.
And began by asking him Where are prices headed now. What is the natural bottom if so at least for the present period.
INTERVIEW TRANSCRIPT
Bjarne Schieldrop: I think it's too early to say what's sort of the natural bottom, but what we can say is that leading up to this fall down to $68.68 intraday low on 10th of September and then rebounding was big confusion about what exactly is OPEC Plus up to. What do they want? They said, okay, we want to add 2.2 million barrels per day over one year, gradually starting October this year. And yes, they had said, maybe we don't increase, maybe we do, depends on circumstances, but quite vague, the whole thing. So the market didn't feel comfortable that they actually were, they actually going to support the price or just straight out sort of adding supply. And then what we saw when price broke down below $75, almost immediately following that, it's a very sharp sell-off.
OPEC went out, Saudi Arabia went out, they will postpone two months, right? We'll start in December anyhow. So it basically showed the hands of OPEC, where is their pain point?
And what they showed us was that they really want the price to be at $75 or higher, and they are ready to defend it by delaying the production increase by two months. It still kind of feels too much because they didn't sort of change the total amount of 2.2 million barrels per day increase, just shifted it out like two months starting December. And adding 2.2 million barrels per day next year starting December is still way too much. So this is still hanging over the market, but at least we saw some response from OPEC. The moment we got under $75 and then tumbled further down, Saudi Arabia was like, oh, two months out.
Govindraj Ethiraj: Right. So this is what OPEC is doing on the supply side. How are things looking on the demand side, including U.S. and other economies?
Bjarne Schieldrop: Exactly. And that is, of course, the combo that made it very problematic for the oil market, both the confusion on the OPEC plus side, as well as strong signals of weakness both in China, but also increasing weakness in the U.S., plus the double rate cut in one go from the U.S. Fed. It's a response to the weakness they see.
Govindraj Ethiraj: And how are you seeing prices and trends in the next three months or so? And what is going to be the key driver? Is it going to be the supply side or demand side, or which is going to outweigh the other?
Bjarne Schieldrop: The demand side is really the big one, I think, to a very large degree. Of course, with supply side as ever, but the market is like, look at speculative positions in Brent crude. It's net short.
And it's been net short now for two weeks. The week before last week, it was minus 13 million barrels. And the last data point last week was minus 8 million barrels.
Those are the first two negative points in data going back starting 2011. The market is short and bearish and still sort of the rebound here. So the market hasn't really changed its position in terms of what it thinks about the future.
What we can say is that the current situation just here and now in the spot market isn't especially bearish. It's kind of balanced. What the market is saying is that going forward, it is going to be very bearish.
And it's kind of the vote of the market is that demand is going to be weak and supply non-OPEC plus is going to be strong. And I think the further information we get from the US economy of further weakness and also potentially further weakness from China in terms of oil imports, those are going to be extremely important for what actually OPEC is able to handle. They are able to handle robust growth in non-OPEC plus, but maybe it's going to be difficult to have also weak demand at the same time, a potential US recession and further deterioration in China.
That would be sort of very problematic, two negatives hitting OPEC from both sides, rising non-OPEC supply and global demand weakness. That would be sort of the ultimate negative cocktail.
Govindraj Ethiraj: Are you seeing any shifts in production or source of production between, let's say, Venezuela now maybe coming into the market, Iraq stepping up, the Emirates stepping up, at least from an India perspective, are you seeing any shifts there? Russia, of course, going down slightly.
Bjarne Schieldrop: I mean, we're going to have some strong increase in non-OPEC supply from Brazil over the next two years, Ghana, Canada and Qatar. Those are sort of the main contributors. And then, of course, it's always volatility in terms of production coming from Venezuela, Libya, etc.
Those are the main sort of uncertainties very often. But some of these uncertainties is rather robust supply growth from these non-OPEC plus countries. And that is sort of a challenge for OPEC plus, especially if demand is weak.
Govindraj Ethiraj: Bjarne, thank you so much for joining me.
Bjarne Schieldrop: Thank you very much. Thank you. Have a nice evening.
Manufacturing Index
Growth in India's business activity slowed to a nine-month low in September amid a slight cooling in demand and an uptick in costs, according to HSBC's flash India Composite Purchasing Managers' Index, compiled by S&P Global.
The survey also showed that services sector jobs rose at the fastest pace in two years and overall activity remained strong, taking the expansionary streak - the 50-mark separating expansion from contraction - to over three years.
Nevertheless, the pace of growth remained well above the long-term average."
Rains Rains
India's monsoon rains have started retreating from the northwest of the country on Monday, nearly a week later than normal, the Government’s India Meteorological Department (IMD) said in a statement.
India's monsoons provide roughly 70% of the rain the country needs to water farms and replenish reservoirs and aquifers and is a lifeblood of a nearly $3.5-trillion economy, Reuters said, adding the rains starts to retreat by September 17 but continued this year, which helped to replenish reservoirs but damaged the harvesting of crops that were ready in some states.
Monsoon rains this season have so far been 5.5% above average, according to IMD.
