Markets Crash 1800 points
Markets worldwide sank as tensions in the middle east ratcheted up in the last 48 hours
On Episode 402 of The Core Report, financial journalist Govindraj Ethiraj talks to veteran market analyst Ambareesh Baliga as well as Bjarne Schieldrop, Chief analyst commodities of Oslo-based energy research firm SEB.
SHOW NOTES
(00:00) The Take
(03:14) Markets crash 1,800 points. Could they fall further?
(05:06) Will retail investors sustain the beating?
(12:42) Oil prices are rising as traders brace for full-scale attacks
(19:39) Hyundai’s Rs 25,000 crore IPO poised for launch
(22:25) Mid and affordable segment house sales fall, expensive houses rise
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 Friday, the 4th of October and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take
There were many reasons proffered and offered for what could turn overheated stock markets eventually, war figured somewhere but was not on top of the list.
And we are almost there now.
Stock Markets across the world have turned distinctly nervous now, ranging from Asia and Europe to of course Wall Street.
On Thursday, Indian indices were down quite sharply in their worst session in two months, around 2%, more than many other markets.
Elsewhere, oil prices are rising and currencies are under pressure.
And gold prices which usually rise along with war tensions as investors migrate to safer assets, are also falling.
And there’s more.
The biggest dockworker strike at major US ports in some 50 years in the United States stretched into its third day, stopping unloading of ships.
West coast ports are functioning but ships will have to sail around the Panama canal to reach there. This obviously adds to the problems already afflicting commodity and merchandise exports and imports as the case may be.
Like before, India is not insulated against global market movements.
Oil prices are still around $75 a barrel though it could be worse.
But the fact that it is not is more worrisome in some ways as it reflects the perception that demand for oil in major economies from the United States to China is shrinking.
Which is not good news in the longer term because a global slowdown if it happens is not good news for anyone.
October 7 will be the first anniversary of the terror attack by Hamas against Israel.
A year on, hostilities have only increased even as a low intensity war has raged for many months now.
While the world at large, including the financial and oil markets had to some extent isolated the tensions in this part of the middle east, that may no longer be possible.
Particularly if Israel retaliates against Iran’s latest missile attack. Given Israel’s track record of going for the aggressive and ignoring international pleas, it would be best to brace for the worst.
For India, the only thing going for it is of course the domestic economy, including strong monsoons which will provide much needed relief to the agriculture economy and boost rural consumption.
On the other hand, China is pulling capital away. Reuters reports that stock brokerage Jefferies, for instance, has increased its weightage of China in its Asia Pacific ex Japan portfolio and reduced its India weightage.
There is one perhaps silver lining to all of this.
Indian stock markets by most accounts have been overvalued and needed some correction.
That this present correction is coming via external triggers and not internal is perhaps the only good news I can see.
And that brings us to the top stories and themes of the day
Markets crash 1,800 points. Could they fall further ?
Will retail investors sustain the beating ?
Hyundai’s Rs 25,000 crore IPO poised for launch.
Oil prices are rising as traders brace for full-scale attacks.
Mid and affordable segment house sales fall, expensive houses rise.
Markets Crash
Markets worldwide sank as tensions in the middle east ratcheted up in the last 48 hours.
Eurozone stocks were down as were stocks in Asia-Pacific shares outside Japan which bucked the trend.
Several markets, including mainland China and South Korea, were closed for the day.
On Wall Street, markets fell marginally overnight as they continued to show nervousness as traders watched the middle east for further cues.
Back home, the BSE Sensex, fell over 1,800 points on Thursday, marking its third-biggest decline this year.
The Sensex closed down 1,769 points to end at 82,497 while the Nifty50 broke the 25,300-mark to close at 25,250, down 547 points.
As a recap, the Sensex has fallen by 1,000 points or more on seven other occasions in 2024.
The Thursday fall was the third largest of 2024, the ET said, adding on June 4, the Sensex fell 4,390 points when the General Election results were announced. On August 5, the Sensex plunged by 2,223 points, recording its second-biggest decline.
One reason markets are falling is the selling by foreign investors.
Analysts say investors have sold over Rs 15,000 crore in the last two trading sessions.
Elsewhere, new regulations have kicked in to control speculation in derivatives and futures and options.
The new rules include increasing the contract size or tripling it from Rs 5 lakh to Rs 15 lakh, raising margin requirements and mandating the upfront collection of option premiums from buyers
I reached out to veteran market analyst Ambareesh Baliga and began by asking him how he was looking at the correction that had set in and also about the impact of the new F&O rules.
INTERVIEW TRANSCRIPT
Ambareesh Baliga: So see, if you look at the market, internally, everything seemed to be going extremely well. In the last few months, I would say the last two to three years, especially post-COVID, basically the markets were moving up because the liquidity was available and the sentiments were extremely good, because of which the liquidity was there flowing into the markets, getting out of the FDs, flowing into the markets. I mean, they're having a number of red flags, but the markets were, in fact, ignoring all that, because as long as you're making money, you're putting in more money.
So it was a virtuous cycle which was there. It needed an external, I mean, event to break that cycle. And none of the events so far have been extremely strong to really break that cycle.
I mean, it had put a temporary stop. I mean, whenever we have heard of geopolitical issues, the markets have reacted negatively. But within two or three days, we realized that it is more localized and it's not in our backyard.
So the markets have again bounced back, and that's happening globally. This time, I think the fear is that possibly, I mean, it could extend, it would get worse, and because of which we have seen this fall. But even as of now, we are not sure whether it will get worse or not.
I mean, that's the sort of expectation which is there in the market, because of which we have seen this correction. Now, this correction, if you look at 50, it's about 1,000 points from the top, which is approximately about 3% or so, 3, 3.5%. So I mean, even as of now, you can't be too sure that this will extend. Now, in case we see that extension happening, and markets lose possibly another 1,500 points, that's the time we need to see as to what happens to the financiers of the market.
And the financiers of this market are retail investors. And for them, possibly this will be the first time they will be seeing a decently large fall, because most of them are post-COVID, they've seen one-way market. So in case they start panicking, because the other thing I would like to say is, in the last three to four weeks, we have seen new highs for the market, but most of the retail portfolios are not performing.
In fact, they were, I mean, staring at losses, and losses are slowly increasing. So right now, if that panic happens, in case, like I said, in case we see another 1,000, 1,000-dollar fall on the Nifty, in case we see panic, all this sentiment and liquidity which we were talking about will actually vanish. And when that vanishes, you can expect a further fall.
So I think this is what we need to wait and watch out for, possibly post that, decide what to do. Again, the larger picture, longer-term picture, you really can't go wrong in India, assuming that we still continue to have a stable political atmosphere here, you really can't go wrong in India. So in case we see a panic, I would say that's an opportunity.
Govindraj Ethiraj: The other conjoined factor is the new regulations on futures and options, where SEBI has come out with a series of regulations. And I mean, they include, for example, more intraday monitoring of positions, and primarily increasing the contract size from 5 to 15 lakhs. So tripling the contract size, raising margin requirements, and also mandating upfront collection of options premium from buyers.
So what is all of this adding up to in your assessment?
Ambareesh Baliga: No, I think it is high time that they did this, you know, because right through we've been hearing, we've been seeing that most of these traders, and I would say most of them are fairly new to the markets.
Govindraj Ethiraj: And that's something the data is showing itself. I mean, they're new and they're losing money. Yeah, exactly.
Ambareesh Baliga: And like continuously losing money. I don't think anyone is really asking as to where this money is coming from, because most of them are small traders, like retail investors. So I would say investors, retail traders, I would say, and this money is coming from their pocket.
So either it is fixed deposits. Now, once the fixed deposits are over, because of which also we have seen a lot of fixed deposits getting withdrawn from the banks, post that, it is personal loans. Personal loans have been increasing quite sharply, and especially gold loans.
Again, the RBI governor being a bit worried about the gold loan increase. I don't think the worry is from the gold financing companies' point of view, because they are completely secured. But I think there is a systemic issue out here, because typically you take gold loans, especially as a last resort.
And my fear is that a lot of personal loans and a lot of gold loans have been taken to finance these losses. We need to see as to where we land up, because figures are huge. I mean, we are talking of those three and a half percent top loss makers, I mean, four lakh traders losing 28 lakhs per person.
I mean, just look at the figure. And basically, where has this money gone? F&O is a zero-sum game.
Govindraj Ethiraj: Yeah, it's mostly the big traders with trading with algorithms who have taken it, yeah.
Ambareesh Baliga: Exactly. And those are large guys, maybe institutions, quite a few of them are institutions. So the money has gone out from the retail into larger pockets.
Govindraj Ethiraj: Right. Okay, so let me come back to the secondary markets. Now, one of the things you've been, for instance, consistently pointing out is the parts of the market which have clearly been stretched, for example, some PSU stocks, defense stocks, and such categories of stocks.
Do you think that this kind of a correction that we're seeing right now could see some positive rebalancing? And if so, what could that lead to?
Ambareesh Baliga: Yeah, there could be positive rebalancing, because I mean, I would still see that these sectors, especially you're talking about defense, railways, PSUs, especially all those sectors which had become multi-baggers, I think you'll see some sort of a further correction. Because again, talking about defense, I mean, these stocks were more or less 10 to 15 baggers in the last three years. Now, a 15-bagger losing 30% is nothing much, which is about 4.5x of the original valuation. So even if it falls another 25, 30%, still, I mean, those who have been sitting on it for the last three, four years still are making good money. But with the other fall of 25, 30%, at least the valuation will become decent. So, I mean, I would see still a further fall for most of these stocks.
Govindraj Ethiraj: So investors at this point of time, I mean, what are you telling investors in particularly, let's say the mid-size or maybe even the larger ones, and how should they be looking at this market right now?
Ambareesh Baliga: No, like I said, I mean, I really don't know whether, I mean, this is the beginning of the fall. I think over the next two, three days, we should have more clarity. And I would suggest to people to be, I would do an extent in cash.
I mean, that figure was close to about 40% for most of my clients and subscribers. With this sort of fall, I would say, I mean, don't clearly sit on the sidelines. Since you're sitting on that level of cash, maybe invest 2% or 3% of that 40%.
Because in case of a good bounce back, at least you make some money there. But in case the markets fall further, we are still sitting on a pile of cash, which can be invested.
Govindraj Ethiraj: Right. Ambareesh, thank you so much for joining me.
Ambareesh Baliga: Thank you.
Oil Prices Up
Oil prices are inching up once again, as markets assess whether there could be an actual hit on Iranian oil infrastructure and more on that shortly.
Brent crude crossed $75 per barrel, while West Texas Intermediate topped $72, with both benchmarks rising nearly 5% over the past three days.
India has been actually preparing for lower oil prices with several references to a potential cut in prices at the pump.
Which may be on hold now.
Reuters reported that gold prices too have come down as U.S. economic data tempered expectations of an aggressive rate cut in November.
Spot gold was down 0.5% at $2,645.38 per ounce by 1125 GMT, after hitting a record high of $2,685.42 last week.
So there is no big impact of war tensions on gold prices yet.
So where could oil prices go and what are the key factors playing here.
I reached out to Bjarne Schieldrop, Chief analyst commodities of Oslo based energy research firm SEB.
I began by asking Bjarne, connecting with me from London, how he was seeing the middle east factor affecting oil prices right now?
INTERVIEW TRANSCRIPT
Bjarne Schieldrop: So the first instance where Iran and Israel shot directly at each other, it was in April this year. And before that, you know, they had always just been shooting at each other through proxies, you know, in Syria, via Lebanon and so on. But now, and that Pandora's box has been opened yet again.
So now Iran recently shot at Israel and we know that Israel will retaliate. And everyone knows it's going to happen. And I think most likely it's going to happen within five days, probably before Monday, 7th of October, which was one year ago when Israels were attacked by Hamas.
And no one knows exactly how forceful the attack from Israel will be. You know, the sense is that Israel is now has a very high level of confidence following success in Lebanon and that they might feel superior and actually go hard in. And I think that is making the market very, very nervous, because if Israel this time around retaliates heavily versus the retaliation in April, which was kind of feeble, just to show that they can and not really aiming to damage, they might actually aim to damage some part of Iranian infrastructure of different levels, many choices to pick from.
But if they go hard, then Iran again is forced to retaliate yet again. And that is the escalatory tit for tat situation which the market is very concerned about.
Govindraj Ethiraj: Right. So two situations. I mean, one is that Iran's physical infrastructure takes a hit and Iran produces about 3 million barrels per day.
And what's the potential fallout there? The other is that even if, let's say, there is no infrastructure hit and there's no direct attack, the tensions that are now at a higher level, what is that likely to do to oil prices or any other thing that might happen?
Bjarne Schieldrop: So oil price bottomed out earlier in September at 68.68 dollars per barrel. That was the low point in September. And now we are up at 75, 76 dollars.
So it's not a big increase. And that gain is so far, it's two things, risk premium for what might happen and also short covering among speculators who have been selling a lot of oil and has to buy back and they're forcing the price back up because they don't want to sit short if it happens. So if you look at the different targets which Iran, Israel could hit in Iran, you know, it's oil facilities, yes.
And Iran is producing a lot of oil and it's exporting around 2 million barrels per day. So if Israel went heavy handed and actually damaged all of that infrastructure and capacity to export like 2 million barrels per day, which I think is very hard to do because it's a big infrastructure. It's not so easy to take all that oil infrastructure out in one go.
But if they did, then OPEC has or OPEC plus has a spare capacity of 5 to 6 million barrels per day at hand. And Saudi Arabia alone can easily lift production by 2 million barrels per day. So the world is not going short oil even if we lose all of Iran.
But spare capacity would be lowered dramatically from current 5 to 6 to instead 3 to 4. So a smaller question would be left for flexibility on the supply side. And if that happened, market would be extremely concerned that the next level could be some development that involves the straight over news currently exporting some 18 to 20 million barrels of oil into the global market or 20, around 20% of global supply.
And the market started fearing some kind of disruption in that flow would add a significant risk premium. I mean, if you look at the current price of like $75, $76. So yet the market is not very concerned about the straight over news being disrupted or really not a high level of concern of Iranian exports being damaged either.
But it's definitely a big level of uncertainty of what is going to go down in the coming five days from Israeli retaliation toward Iran.
Govindraj Ethiraj: Right. And how are you seeing trends on the demand side and at this particular point of time? And to what extent is that keeping prices down?
Bjarne Schieldrop: That is, of course, has been the big story for 2024, has been the very weak Chinese oil imports and consumption and also weak economies in OECD. So we haven't had much of any strong impulse on the demand side, except for a few emerging markets around in the world or patchy global demand. So I think we still have the same situation.
Yes, we've got the stimulus package in China, but that is basically aimed at preventing the economy from faltering further rather than to boost it massively. It's a backstop rather than a bazooka growth story. So I don't think that demand is anything to be extraordinarily happy about.
But right now, it's all about concerns for what is going down in the Middle East, the biggest source of oil in the world that is sort of capturing the market, capturing the oil price. But the demand side is still weak and soft and nothing to be celebrating.
Govindraj Ethiraj: Right. Bjarne, thank you so much for joining me.
Bjarne Schieldrop: Thank you very much. Have a nice evening.
Hyundai Giant IPO
Hyundai Motor India Ltd, the Indian subsidiary of South Korean automaker Hyundai, is set to go ahead with its much-awaited Rs 25,000-crore initial share-sale for public subscription on October 14, Business Standard quoting wire agencies said.
This would be the largest initial public offering (IPO) in India after LIC's initial share sale of Rs 21,000 crore.
According to the Draft Red Herring Prospectus (DRHP) filed in June, Hyundai Motor India's proposed IPO is entirely an Offer-for-Sale (OFS) of 142,194,700 equity shares by promoter Hyundai Motor Company, with no fresh issue component.
In its draft papers, Hyundai Motor India stated that it expects that the listing of the equity shares "will enhance our visibility and brand image and provide liquidity and a public market for the shares".
Hyundai Motor India launched in India in 1996 and currently sells 13 models across segments.
The primary market is experiencing heightened activity across the board.
So far this year, 62 companies have already mobilised around Rs 64,000 crore collectively via mainboard, marking a 29 per cent increase from Rs 49,436 crore collected by 57 firms through the route in the entire 2023, Prime Database figures showed.
While markets would welcome Hyundai and such IPOs for their badge and balance sheet quality, the size of the IPO is also worrying at this time, given the markets are already weak right now and could stay so for some time.
It would be interesting to see if Hyundai goes ahead as planned and how the pricing stands.
Rice All The Way
In other markets, rice prices fell the most in more than 16 years in Asia as concerns over supply eased after India relaxed some export restrictions, Bloomberg reported.
Officials The Core Report spoke to at the ALl India Rice Exporters Association earlier this week said they were expecting rice prices globally to fall, as India which represents close to 45% of global rice trade, re-entered the market.
Thai white rice 5% broken — an Asian benchmark — plunged about 11% to $509 a ton on Wednesday, according to the Thai Rice Exporters Association.
That was the biggest decline in data compiled since May 2008, and extended a prolonged slide in prices to the lowest level in more than 15 months, Bloomberg said, adding rice is vital to the diets of billions and contributes as much as 60% of the total calorie intake for people in parts of Southeast Asia and Africa.
While the price of rice has cooled, the costs of other food staples are rising as extreme weather threatens harvests around the world.
Mid and affordable segment house sales fall, expensive houses rise.
Real Estate
India’s residential sector witnessed another robust quarter across the leading eight residential markets.
In Q3 2024, home sales grew by 5% YoY to be recorded at 87,108 units, the highest quarterly sales in the year, a report from real estate consulting firm Knight Frank has said.
This brings total residential sales to 2,60,349 units in the first nine months of 2024, 9% higher than 9M CY2023.
Mumbai led with sales of 24,222 units making this the best recorded quarterly sales volume since 2018.
Home sales in the ticket size category of INR 10 mn (INR 1 Crore) and above continued to witness an uptrend.
However, the share of sales in the mid-size segment has moderated, while the affordable segment continues to witness a downtrend.
Homes priced in the INR 10 million and above category constituted 46% of sales, growing by 41% YoY with 40,328 units sold in Q3 2024.
Residential prices grew the most in Bengaluru at 10% YoY.
And NCR was the only residential market to see a decline in this quarter.
Though for the past 13 quarters, high-end properties in the NCR region (INR 10+ mn) have consistently surged, accounting for 46% of all sales in Q3 2024, up from a year ago.
NCR is the only residential market to record a de-growth of (7%) in sales. NCR has historically been among the more speculative markets with a relatively higher quantum of investment interest.
Broadly, the market continues to look strong though more at the top end.
