Major Indices Take A Pause
Metal stocks were shining today on the bourses after China unleashed a series of stimuli into the markets
On Episode 396 of The Core Report, financial journalist Govindraj Ethiraj talks to Rahul Jain, vice president of research at Dolat Capital Market.
SHOW NOTES
(00:00) The Take: The fear of a real stock market scam
(04:12) Major indices take a pause, metal stocks shine on China light
(05:44) JP Morgan highlights India manufacturing opportunity & SE Asia
(07:24) Will India’s IT sector have better quarters ahead?
(12:08) S&P maintains India’s growth at 6.8%
(13:29) China unveils series of monetary measures to boost economy, speaks of propping up stock markets
(15:27) How Indian banks are surviving through institutional deposits as retail fails to pick up
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 Wednesday, the 25th of September and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take: The Fear Of A Real Stock Market Scam
It is early to say whether a scam has been perpetrated, at least of the scale that we have seen before in the financial markets but it is quite clear that many financial market players have played fast and loose with rules and been already hauled up for it.
All thanks to a booming market in financial products of all kinds as investors and savers have sought to find better returns.
These range from non bank finance companies disbursing gold loans to banks going all guns out on opening fresh savers accounts to now, investment banks helping small companies raise funds from the stock market.
My fear: could there be something bigger lurking behind the record high indices and the stretched valuations of many companies in the stock markets.
Reuters is reporting that it has found that at least half a dozen small investment banks have charged companies fees equivalent to 15% of funds raised via their IPO, they added.
The problem.
That fee is much higher than the standard practice of 1-3% in India.
The modus operandi obviously becomes somewhat clear now.
Working backwards, companies and promoters have evidently and obviously paid a substantial sum to investment banks to coordinate the whole process and offer, including bringing in the big subscriptions from high networth and other investors and then rake in the retail subscription that follows.
SEBI has already been warning investors about the dangers of investing in some small businesses as well as plans for tighter rules for such IPOS.
SMEs are companies smaller than Rs 250 crore in turnover and can list on the BSE and NSE.
Moreover, there are fewer disclosure requirements and the offerings are vetted by the exchanges and not the Sebi which focussed on larger or what they call mainboard issues.
Reuters says SEBI's preliminary findings suggest that the high fees are being charged to ensure the offerings are oversubscribed by huge bids.
"These bids are not genuine and are cancelled at the time of allotment but the high subscriptions end up attracting more bids and investments from other investors," the source added.
In the last fiscal year ended in March, 205 small firms raised 60 billion rupees, a sharp jump from the 125 companies that raised 22 billion rupees a year earlier, according to PRIME Database, a capital markets data provider.
Rigging prices or initial public offers in this case by cornering floating stock is a methodology that now seems as old as the market itself.
And it is interesting that it has returned in full form and glory, if that is what has happened here.
The worry of course is that if there is effective rigging happening in this segment of the market, could there be malfeasance in other segments of the stock market ?
Well we don’t know and we hope that is not the case but all bull markets usually see such signs before they start fizzling out if not crashing.
Indian markets have considerable genuine flows of capital both from domestic and international investors and that is keeping the markets up and away.
But mini scams like this which expose chinks in the armour so to speak can shake confidence in the overall system and lead to questions elsewhere.
Hopefully, Sebi will act quickly and nail the offenders and make public the nature of the mischief that investment bankers have been upto.
And the top stories and themes for the day:
Major indices take a pause, metal stocks shine on China stimulus.
JP Morgan highlights India manufacturing opportunity & SE Asia
Will India’s IT sector have better quarters ahead?
S&P maintains India’s growth at 6.8%
China unveils series of monetary measures to boost economy, speaks of propping up stock markets
How Indian banks are surviving through institutional deposits as retail fails to pick up.
Markets Pause
Metal stocks were shining today on the bourses after China unleashed a series of stimuli into the markets. More on that for a moment.
The rest of the market was steady to weak, taking a pause after rising for more than three days.
And perhaps for the good.
The indices did rise to fresh all-time highs late on Tuesday afternoon but were down later. The BSE Sensex closed down 15 points to 84,914 after touching a fresh record high of 85,163.
The Nifty 50 also touched a fresh record high and crossed the 26,000 market we spoke of yesterday. At close, the 50-stock index was up by barely 1 point at 25,940.
Stocks like Tata Steel, Tech Mahindra, Mahindra & Mahindra were up quite sharply, while Hindustan Unilever, Ultratech Cement were down.
The Nifty Metal index was the big gainer, rising 2.97 per cent at close.
Sticking to commodities, oil prices have eased off.
That’s because there is a continued weak outlook for fuel demand and a chance that the conflict between Iran and Israel could de-escalate after its recent flare-up, Bloomberg reported.
Brent crude has gone back below $74 a barrel.
After days of Israel and Iran-backed Hezbollah trading rocket fire, Iranian President Masoud Pezeshkian said on Monday that his country is prepared to de-escalate tensions as long as it sees the same level of commitment on the other side.
The overture is easing some concerns that the conflict will worsen, threatening oil output in a region that supplies about a third of the world’s barrels.
The Perennial Bull Is Back
America’s largest bank, JP Morgan, said yesterday it continues to be bullish on India and Japan within Asia but is also keen to allocate resources towards Southeast Asia, which is benefiting from the "China Plus One" strategy, a top official at the bank said.
"India is still firmly in the top three, possibly top two in Asia, together with Japan. Growth in India is actually very broad-based," Sjoerd Leenart, JPMorgan's Asia Pacific CEO, said in an interview on Monday quoted by Reuters, adding JP Morgan was investing in India on all fronts, including people and capital.
JP Morgan highlighted a focus on the manufacturing ecosystem saying India would need to build further in manufacturing to ensure scalability and gain from the "China Plus One" strategy of diversifying investment and supply chains from China into other countries.
Most of this has flowed towards the Southeast Asian countries, he added.
According to him, if the manufacturing focus strategy does not work, then India may not do as well as people expect. That's probably the hardest to execute," he said, adding he still expected India could succeed.
JPMorgan's business in China has been growing significantly and Leenart said despite concerns about slow economic growth there, the country cannot be ignored.
But the new theme, at least as I could take away, is south east Asia.
JPMorgan is looking to invest in Southeast Asia, where the size of the combined economies is around $3 trillion, making it almost as big as India, Leenart said.
"Obviously it is a little bit more difficult to navigate because it's fragmented across five or six countries, but that's a place where we are keen to invest."
Will India’s It Sector Have Better Quarters Ahead?
Meanwhile, India’s IT stocks have been looking up, precisely because banks like JP Morgan have said they are hiking their spending in technology.
The question is will Indian IT companies benefit and to what extent ?
Also, IT stocks have been rising once again but their underlying growth has been somewhat stagnant.
Could that change ?
I spoke with Rahul Jain, Vice President - Research at Dolat Capital Market and IT sector analyst and began by asking him how he was seeing fortunes for IT companies ahead.
INTERVIEW TRANSCRIPT
Rahul Jain: Basically, what we are seeing, based on the commentary that we heard post the Q1 call, is that things are improving for better, but these things are very uniform across the player, across the sector, and is it affecting or benefiting all the players in the same manner? That's not happening. Directionally, things are turning better, and people are expected to see a better traction in terms of commentary as well as delivery in Q2.
Specific to your question related to the late reaction, I think this was long, long due. So, there should be visible, positive thought process that should come from a BFSI perspective, but will it still be cautioned around is something that we have to see. So, that's what we are thinking about.
Govindraj Ethiraj: Okay, and you said that all companies will not benefit similarly. So, can you elaborate on that?
Rahul Jain: This is what we also observed in Q1. If you look at, there were companies which already saw BFSI doing well, while some others said, yes, it is happening for this quarter, but will it be sustaining is something that people are still non-committed about. So, I think commitment would only come once you hear that kind of conversation from their client.
Otherwise, it's more like better than the last year or better than the last quarter, but how sustainable is that is vendor to vendor.
Govindraj Ethiraj: And how are you seeing overall valuations versus the outlook for the IT sector? So, things are all right, I mean, but obviously, the top line growth has slowed down in recent years, and this is a broader question. At the same time, valuations are picked up again.
So, how are you seeing this?
Rahul Jain: I mean, just like any other part of the market in terms of valuation, I think valuation are discounting anything that can happen very, very fast. So, market has been anticipating a much faster recovery in the IT sector for last 12 months, and we see a lot of starts and fail in the past. And this time, it's no different.
So, I think the valuation are at stretch, it can build in a significant improvement in terms of financial performance. But if it does not fall through, then obviously, these are rich valuation and may not be sustainable.
Govindraj Ethiraj: Right. And what's the medium term outlook like for IT industry? I mean, that is the IT majors in India.
And the subset to that question is, is anything likely to stand out now going forward? And the other part is, of course, what do things look like for the next six months or so?
Rahul Jain: Just like different part of the market, I think valuations are discounting all the positive that could happen, and that adds significant amount of risk because the financial growth could be slightly slower. And in case it does not happen to the pace that is anticipated, there could be risk to these valuations. So, I think in best case, you are at par.
And in case you discount, there could be weakness that we may see on the valuation going forward.
Govindraj Ethiraj: And is there anything jumping out, Rahul, and this is the last question, you know, even within the IT sector universe, is there some, you know, for example, could there be someone who would really or is likely to excel in, let's say, AI kind of offerings or something else?
Rahul Jain: So, I would say IT services businesses are fairly valued to slightly richly valued, but there could be opportunity in the software space. This space has still a very large time. These companies can compound much, much faster than IT services and even ER&D space.
So, I think that is where the businesses have sustained growth in the last two years. And I think that is where we expect the momentum to continue. Just to take example, I think we have seen very strong numbers from software companies supporting the BFSS space, be it like OFSS, NuGen, Nucleus.
I think those kind of businesses should continue to do well going forward as well.
Govindraj Ethiraj: Rahul, thank you so much for joining me.
S&P Economic Outlook
S&P Global Ratings on Tuesday maintained India's growth forecast at 6.8 percent while noting that the Reserve Bank of India (RBI) may cut interest rates in October.
In its economic outlook for the Asia-Pacific region, S&P also retained its gross domestic product (GDP) growth forecast for the financial year 2025-26 (FY26) at 6.9 per cent.
"In India, GDP growth moderated in the June quarter as high interest rates tempered urban demand, in line with our projection of 6.8 per cent GDP for the full financial year 2024-25," S&P said.
Last year, India's economic growth rate reached 8.2 per cent.
S&P also emphasised the Centre’s focus on fiscal consolidation, as outlined by Finance Minister Nirmala Sitharaman in the July Budget.
The RBI MPC has not altered rates since February 2023, maintaining it at 6.5 per cent for the past nine policy reviews.
Speculation about an RBI rate cut has risen following the US Federal Reserve’s decision to announce larger-than-expected reductions in rates—50 basis points—amid concerns of a slowdown in the US economy.
China SOPs
China’s central bank unveiled a broad package of monetary stimulus measures, underscoring concerns over slowing growth and depressed investor confidence, Bloomberg reported.
People’s Bank of China governor Pan Gongsheng cut a key short-term interest rate and announced plans to reduce the amount of money banks must hold in reserve to the lowest level since at least 2018.
He also appeared at a rare briefing alongside two of the country’s other top financial regulators in Beijing. That marked the first time reductions to both measures were revealed on the same day since at least 2015, said Bloomberg.
Those moves were followed by a slew of other announcements which pushed up the stock markets, including a package to shore up China’s challenged property sector, including lowering borrowing costs on as much as $5.3 trillion in mortgages and easing rules for second-home purchases.
The central bank would also provide at least 800 billion yuan ($113 billion) of liquidity support, adding that officials were studying setting up a market stabilisation fund.
This is the equivalent of the Reserve Bank of India creating a special fund to invest in the stock markets to prop it up, incidentally.
“It’s hard to say what silver bullet can help resolve everything,” said Ken Wong, Asian equity portfolio specialist at Eastspring Investments Hong Kong Ltd. “While it’s good to have monetary easing measures that are accommodative, more needs to be done in order to help solidify fourth quarter growth.”
China’s benchmark CSI 300 Index of shares rose as much as 4%, close to erasing losses for the year, though the gauge is still down more than 40% from its recent peak in 2021.
On the other hand, Commodities markets gained and pushed up prices elsewhere, including for metals in India.
Higher prices for commodities like steel in China will mean prices will rise here too or at least could.
Indian Banks Are Selling Institutional Deposits
Indian banks will issue more certificates of deposit aimed at institutions like mutual funds or companies to meet year-end loan demand as deposit mobilisation remains challenging, six bankers told Reuters.
The stock of outstanding CDs rose to a record high of 5.15 trillion rupees (about $61 billion) at the end of August.
Since then, banks have issued another 1 trillion rupees of these notes, clearing house data showed, taking it a total of 6.15 trillion Rs.
Certificates of deposit (CDs) are debt instruments with maturities of less than one year issued by banks.
Which also means that retail deposits are not flowing in as desired, despite all the complex financial models being proffered by some to suggest that was not the problem.
Demand is expected to pick up this festive season.
Retail sales peak during October-December.
Loans in India are growing in double digits thanks to extensive borrowing for consumer spending but deposit growth has not kept pace.
People are clearly moving the money more to other assets including financial and real estate and within financial stock markets and quite likely speculative assets like derivatives as well.
Banks' loans grew 13.3% year-on-year in the fortnight to Sept. 6, while deposits rose by 11.1%.
Banks' reliance on these short-term notes is likely to persist despite the central bank urging them to garner more long-term funds to minimise potential asset-liability mismatches
