Markets Flounder Again
Wall Street continues to ride the Trump wave to record highs even as the Indian markets are struggling to hold on to gains
On Episode 433 of The Core Report, financial journalist Govindraj Ethiraj talks to Vivek Kumar, Economist at QuantEco Research.
(00:00) The Take: MTNL, Time To Pull The Plug
(05:00) Markets flounder again
(06:13) Wall Street balances on record highs
(07:49) Oil prices fall on lower demand expectations
(10:04) Inflation hits 14-month high of 6.21%
(18:51) Hyundai results come a cropper
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 regarding any feedback, you can drop us a message on [email protected].
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Good morning, it's Wednesday, the 13th of November and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital but now in transit.
The Take: MTNL, Time To Pull The Plug
A few years ago, while moving homes in central Mumbai, I tried to get my state owned telecom company MTNL’s landline transferred to the new residence.
After all, the previous number had been in service for several years, was known to many and had largely worked fine.
It took several days of calling and visiting, including by a persistent office boy to establish that MTNL had no cables in the area in question.
In one call to the telephone exchange, an Assistant Engineer picked up the phone and helpfully asked me if I was okay with a fibre connection for the internet.
Sure, I said.
And then the engineer was not to be found. In retrospect I felt he had picked up the phone accidentally.
It finally emerged that there was never any prospect of a new MTNL cable in that area, at least to the apartment complex I was moving into.
In frustration and some sadness, I surrendered the phone line, which by the way is a term that is quite unique to the Indian telephone system.
MTNL’s travails are not new, the company which ran telephone operations in Mumbai and Delhi has been on a death spiral for more than two decades.
More than a decade ago, a colleague told me that once he visited a telephone exchange in central Mumbai and was shocked to see that the line to return or surrender the phone was much longer than the one where people were applying for new connections
That was my first anecdotal but real warning sign.
While the explosive growth of mobile phones has obviously edged out the likes of Government owned MTNL and BSNL over the years, these companies also completely lost out on the fibre opportunity for data cum voice.
These markets were completely captured by the likes of Reliance, Airtel and Tata.
Reports say MTNL has now failed to repay a Rs 1,000 crore loan from Bank of India which in turn has affected the bank’s second quarter financial results thanks to a Rs 200 crore provision.
It is highly unlikely this money will ever materialise unless of course MTNL is liquidated or assets sold to repay loans.
MTNL’s total debt is around Rs 31,944 crore, including Rs 7,873.52 crore owed to various banks and financial institutions, reports suggest. Losses were over Rs 3,300 crore
The current revenue run rate seems to be less than Rs 800 crore and that too on a slowing trot.
MTNL is a listed company and quite likely its best asset is prime real estate, already being put to good use by leasing out to other, mostly Government organisations.
Air India’s sale to Tatas, despite it being done at a much delayed stage when the airline was on life support systems, was a good step and demonstration of the Government’s intent to not be in the business of doing business, particularly consumer facing ventures like airlines.
In the last few years several public sector enterprises have done well, both in terms of balance sheets and in the stock markets.
Despite those successes, failures like MTNL stand out like sore thumbs.
A private company which fails to repay a Rs 1,000 crore and in a similar financial condition would have been visited by multiple tax and enforcement agencies by now.
It would appear that because its Government owned, a company like MTNL is getting a pass.
Quite possibly the Government and the Department of Telecom under whose jurisdiction this falls has been attempting various methods to resuscitate MTNL. But clearly those efforts have been in vain.
This also raises the issue of who is accountable for rising losses, falling revenue and increasing interest burden of unpaid loans.
Quite likely, no employee or official of the company is under any real pressure and possibly they could do little even if there was. This of course is the case in any state-owned organisation where responsibility is diffused at best, particularly when the stakes are down.
The Government has made it amply clear, in actions if not in words that it wants to be in the business of doing business.
Debating this point might be futile.
But the Government is accountable for tax payers money propping up lifeless enterprises who have no role present or future to play in our lives.
There must be immediate efforts to liquidate the company and dispose of the assets and return money to shareholders which of course includes the Government too.
Tax payers have a right to hold the Government accountable for how our taxes are used in state owned and run organisations even as they are taking their last and dying breaths.
Our top stories & themes for the day..
Markets flounder again
Inflation hits 14-month high of 6.21%
Wall Street balances on record highs
Oil prices fall on lower demand expectations.
Hyundai results come a cropper
Markets Adrift
If Wall Street is sneezing, India is not catching the flu.
Wall Street continues to ride the Trump wave to record highs even as the Indian markets are struggling to hold on to gains.
The markets are now following a familiar see-saw pattern of ups, downs, ups and then down again, with some variations of course.
The markets fell for the fourth day now.
The Sensex and Nifty50 were down at 78,675.18, down 820.97 points once again seeing sawing in a wide range, in this case close to 1,300 points.
The NSE Nifty50 closed at 23,883.45, down 257.85 points.
46 out of the Nifty50 constituent stocks ended in the red, dragged down by Britannia, Bharat Electronics, NTPC, Asian Paints, and HDFC Bank, with losses extending up to 7.30 per cent, said Business Standard.
The broader markets were down too, with the Nifty Smallcap100 and Nifty Midcap100 falling 1.28 per cent and 1.07 per cent.
Also indicating that the bearish undertone is more market wide unlike before when small caps would hold out better when large caps were falling.
While Indian markets struggled, the Dow Jones Industrial Average surged more than 300 points on Monday and closed at a record high above 44,000 for the first time.
Both the S&P 500 and the Nasdaq Composite also closed at fresh records.
“The Republicans’ decisive win has ignited ‘animal spirits,’ despite already lofty expectations,” Morgan Stanley Wealth management chief investment officer Lisa Shalett wrote in a Monday note, reported CNBC.
“Rather than viewing developments as a fundamental shift toward the reflationary, no-landing scenario, we see sentiment and liquidity-driven positioning for what it is, and we are maintaining our balanced stance.”
Stocks like JP Morgan Chase and Goldman Sachs were up between 1 and 2% respectively, powering the Dow higher. Bank of America and Citigroup shares both closed up about 2%.
There is a general expectation that Trump as President would lead to more lax regulation in the financial sector. How that could translate to more profits is not clear as yet.
Tesla also continues to rise, this time by 9% still riding on its CEOs proximity to the Trump administration and expectations of goodies, presumably.
Large tech stocks lost out on Monday though.
Oil Lower
Oil prices are now holding at this month’s low, following a fall this week.
The reasons continue to be weaker demand in China, a strong US dollar and lingering concerns that the market might see over production.
A strong US dollar means countries including India have to pay more per barrel of oil we import.
It would be of course interesting to see how the US, already the world’s largest oil producer, would view the oil market given just elected president Donald Trump’s promise to drill baby drill.
Higher production from the US if that happens would send prices much lower than what they are. It is not clear at least to me if the mega oil corporations in the US necessarily want to drill for more oil at this point beyond what they are, even if they have the freedom to do more.
Brent crude is now around $72 a barrel.
Bloomberg reported that traders continue to track tensions in the Middle East, the prospects of a second Trump presidency, and OPEC+ decisions on output.
The outlook remains weak, with global supply expected to outpace demand next year.
Gold Prices
Gold prices are still falling and now at their lowest level in nearly two months on Tuesday.
Spot gold slipped 1% to $2,594.55 per ounce after hitting its lowest since Sept. 20 at $2,590, Reuters reported, quoting analysts saying the dollar strength is weighing heavily on gold.
Interestingly, the relationship seems to have dissipated for much of the year, but now it's back in force ever since the election.
The dollar index rose to a four-month high, making the bullion more expensive.
The dollar is expected to benefit from some of Republican President-elect Donald Trump's policies that will likely keep U.S. interest rates relatively higher for longer, an environment negative for non-yielding gold.
The other factor is that markets like the US have done very well in recent times, right upto yesterday actually and this obviously means money is less likely to go to gold and such assets or move from gold to equities.
Inflation
Inflation levels have shot up again, rising to 6.21 per cent from 5.49 per cent in September.
Food inflation rate rose to 10.87 per cent from 9.24 per cent in the previous month.
This was of course on the cards, ever since vegetable and food prices started shooting up and as we discussed on The Core Report a few days ago.
Meanwhile, the IIP growth rate for the month of September 2024 is 3.1 per cent which was (-) 0.1 percent in the month of August 2024.
A report by Emkay Securities says CPI inflation accelerated much more than expected in October to 6.2%, with core hitting the high of 3.84% - a ten-month high.
The uptick is led by rising perishable vegetable prices, edible oils, and wheat, while the rise in gold prices is also reflected in the personal care category in CPI.
Edible oil prices have shot up after the Government imposed a higher import duty to protect domestic farmers.
However, November CPI inflation will likely soften to ~5.4%+ with easing vegetable prices.
At these levels, overall inflation for the year and upcoming quarter is higher than what was projected a few quarters ago.
Thanks to high food and vegetable prices, high inflation is directly affecting monthly food budgets across homes in India.
This also reduces, as it appears now, the prospect of a rate cut by the Reserve Bank. Remember most major central banks including the Federal Reserve, European Union and the UK Exchequer have been cutting rates this year.
INTERVIEW TRANSCRIPT
Govindraj Ethiraj: I'm now joined by Vivek Kumar, economist at Quantico Research. Vivek, thank you so much for joining me. So, you've put out a report on the latest CPI or consumer price inflation numbers which have hit a 14-month high of 6.2% and you've also said that it's darkest before the dawn. Now, before I come to the outlook which is the dawn, tell us about what the trend line is looking like because this inflation number is also driven by a 42% rise in vegetable prices which I think is a five-year high.
Vivek Kumar: Correct. You've actually hit the pain points pretty clearly. The last two or three months, this pain of food inflation which has been there continuously in the system for the last two or three months has probably now reached its peak.
The reason why we are saying it's peak is because of the fact that the anticipation of khari which typically happens around late October and beginning of November, that khari produce starts coming on board. That's number one. And we all know that khari was vividly healthy when the sowing data was confirmed.
That's one comforting part. The second comforting part is that ravi sowing has begun on a promising note. There is a likelihood of a larvina developing later on in the year which basically means that winter rainfall is going to be more or less on the surplus side once again.
And reservoir levels are pretty much healthy which again bodes well for ravi sowing. So putting two and two together, if let's say one has to discard or ignore all the pain points that we have suffered in the last three months and start looking forward, then one has reasons to be slightly optimistic about one, the usual impact of khari and ravi starting to depress food prices and two, the fact that winter seasonality typically begins or kicks in from November and December onwards. That should also start to have its moderating influence.
So we are possibly at the peak. That is what we incur from the recent shock. So having said that, you know, last two months we would acknowledge that we were surprised on the higher side with the actual patient data.
And the surprise in data has been predominantly on account of food prices and within the food basket as well, Govind. It's not that the entire food basket is the culprit. It's just two or three key items within the food basket which are the culprits in the current episode.
Govindraj Ethiraj: Right. So what's the trend line looking like then, Vivek? For example, if as a consumer I'm paying, let's say in Mumbai, 60 rupees per kilo of onion and 25 rupees a kilo of tomato.
I mean, I have to pay these prices when I buy produce. So how does this even out over a year, for example, or at least this year, let's say 2024?
Vivek Kumar: So Q3 for us, which is the October-December quarter, has begun on not a very good note. Even if we anticipate prices to come down sequentially going forward, the average for the quarter would still be upwards of 5%. Possibly it would be in the range of closer to 5.5%. The actual relief on the quarterly basis would only come about in the final quarter of the financial year where inflation could actually fall below 5%. So the reason why we're saying is because we anticipate the food price shock to be of a short duration. So short duration is typically associated with anything of two to four months. We've already suffered and all the reasons that we talked about with respect to why anticipate food price inflation to come up, there is optimism.
In fact, there is a reasonable chance of headline inflation coming below 5% level in the final quarter of 2024-25. For the year as a whole, I think the average number would still be somewhere close to 4.7% with a minor upcycle.
Govindraj Ethiraj: So this is a question I've been asking elsewhere to Vivek. So when you look at it, let's say over a year or more, do we have a sense about which way vegetable prices can go? For example, we know that there are fluctuations.
We know that those fluctuations are somewhat unpredictable. And to that extent, we don't know when prices will suddenly shoot up and then shoot down as well or come down as well. So in which case, how do we look ahead and try and project if so?
Vivek Kumar: So projecting vegetable prices within CPI would be the task that the most ambitious person on the street would probably undertake. So for us, having a shot at CPI itself is laced with a lot of adventurism. And we take that with a pinch of salt.
So it's easier to forecast CPI inflation because positive errors on one end to offset the negative error that you make while forecasting on the other. Whereas vegetable prices within food is extremely volatile. It can be in triple digits in one month.
It can be in negative territory within a span of two quarters. So that's the kind of volatility that one faces. For example, you said vegetable inflation, it's 42%.
This number was 6.8% just three months back. So that's the kind of volatility that I'm talking about. And within vegetables, if you look at the highly perishable items, for example, the OTP inflation that we typically refer to, which is the onion, tomato, and potato inflation, they are much more volatile than the vegetable basket as such.
They can easily run into triple digits. So from a retail consumer point of view, I think this kind of volatility in some of the highly perishable vegetable items or food items is bound to continue. And to a large extent, Govind, if I can recall, especially in the last three, four, five years, the volatility has risen.
Possibly it somewhere reflects the impact of climate change, which is a global phenomenon, and which is something that we've also been witnessing. So on the headline level, we often see monsoon ticking the checkbox pretty well. But there are wide variations within that headline being normal.
Last year, also last two or three years, the overall rainfall was pretty good. But there were wide variations. That is something that we saw even this financial year.
So this, to me, is a reflection of climate change. Especially this year, we moved, or in fact, the pendulum swung from an extreme heat wave in the summer months to a situation where monsoon was highly deficient in the beginning and then followed the latter half of the monsoon peak and was extremely high in terms of rainfall. So the volatility is huge in terms of climate, weather patterns, and that is getting reflected in your perishable items.
To some extent, you can control the non-perishable food items or probably the items which have a longer shelf life, like cereals and pulses. But the highly perishable ones, especially fruits and vegetables, would continue to bear the brunt.
Govindraj Ethiraj: Vivek, thank you so much for joining me.
Vivek Kumar: Thank you so much, Govind.
Hyundai Results
There is a moral in the story here.
Hyundai Motor India Ltd., country’s second-largest carmaker, posted a 16% fall in the first quarterly profit after its public listing last month.
The company reported a net income of 13.4 billion rupees ($159 million) for the quarter ended Sept. 30, according to a filing Tuesday reported Reuters.
Revenue slipped 8.3% to 168.8 billion rupees, while costs dropped 7.9%.
The decline in profit was “mainly due to weak market sentiments and geo-political factors,” the carmaker said in a post-earnings statement. Tt “expects a sustained demand momentum” in the mid to long term.
Hyundai earlier made news for a tepid $3.3 billion IPO last month which was helped through by institutional investors.
It is highly likely that Swiggy, a food delivery company, who also benefited from institutional support in its IPO fund raise will also list weak or down in coming days.
The tepid earnings is the latest show of the broader consumption slump in India that has hurt sales of everything from soaps to instant noodles and paint, Reuters said.
Meanwhile, Hyundai will roll out an electric version of its Creta in the coming months and sees it as “a game changer in the EV market,” Kim said.
And the moral of the story.
Is of course to not sell your shares at such high prices when you know tough times are not far ahead.
The Hyundai stock has fallen around 9.2% since debut and Reuters reports that it has dropped faster than the benchmark NSE Nifty 50 index which is down 3.3% in the same period.
What Does Buffet Know?
Warren Buffet, the legendary investor is now sitting on some $325 billion of cash and equivalents mostly in Treasury bills.
This is causing concern now on Wall Street and presumably elsewhere with investors wondering if there is something Buffet knows that they don't. And if the markets are indeed overvalued ?
When the world’s most-followed investor doesn’t feel comfortable investing, should the rest of us be worried, asked the Wall Street Journal yesterday.
Warren Buffett, has often said that his favourite holding period for a stock is “forever,”.
The WSJ says Buffett and his late business partner Charlie Munger didn’t outperform the stock market 140-fold by being market-timers.
Probably Munger’s most famous quote is his first rule of compounding: “Never interrupt it unnecessarily.”
Investors who follow Berkshire closely and hope for a bit of its magic to rub off on their portfolios pay very close attention to what it is buying and selling, but much less to when.
Buffet has apparently turned cautious before, famously shutting his extremely successful partnership in 1969 when he said markets were too frothy and also building up substantial cash in the years leading up to the global financial crisis—money he deployed opportunistically.
Stock values being stretched doesn’t mean they are on the precipice of a crash or even a bear market.
Goldman Sachs strategist David Kostin predicted recently that the S&P 500’s return over the next decade would average just 3% a year—less than a third of the postwar pace.
Kostin’s report went over like a record scratch at a time of high investor optimism, but it is consistent with other forecasts.
With T-bills now yielding more than the prospective return on stocks, it might seem that Buffett has taken as many chips off of the table as possible since there is no upside in risky stocks. But he is on record saying that he would love to spend it.
“What we’d really like to do is buy great businesses,” he said at Berkshire’s 2023 annual meeting. “If we could buy a company for $50 billion or $75 billion, $100 billion, we could do it.”
With Berkshire now worth $1 trillion, it would take a deal of that size to move the needle.
Could it also mean that Buffett sees value in keeping dry powder ahead of the next crisis or general froth in the market?
Yes, but he isn’t saying, and individual investors also have more options than he does.
Direct Taxes Are up
The government's net direct tax collection grew 15.4% year on year to 12.1 trillion rupees ($143 billion) after tax refunds during the period April 1-Nov. 10, according to the Central Board of Direct Taxes on Monday
Direct taxes, which include corporate and personal tax, grew over 21% to 15 trillion rupees on a gross basis during the period, a statement issued by the income tax department quoted by Reuters said.
Corporate tax collection after adjusting for refunds stood at ₹5.1 trillion over this period, up from ₹4.79 trillion in the same period a year ago.
Securities transaction tax contributed ₹35,923 crore so far this financial year, 90% more than the ₹18,909 crore collected in the same period a year ago, CBDT data showed.
So far, the tax department has collected 55% of its ₹22 trillion direct-tax collection target for the full financial year. The 15.41% growth in net-direct-tax revenue collected so far this year is faster than the 12.8% growth rate assumed in the full-year budget presented in July.
This gives comfort to policymakers on achieving the full-year target.
A report in Mint says a growing tax base has helped, backed by extensive data collection, wide use of taxes deducted or collected at source, pre-filling of tax return forms, restrictions on use of cash and promotion of digital payments.
