Markets Hit A 7-Month Low
Stock prices fell sharply on Monday, with the benchmarks and mid and small cap indices hitting 7 month lows
On Episode 480 of The Core Report, financial journalist Govindraj Ethiraj talks to Viktor Katona, head of oil analysis at energy research firm Kpler as well as Rama Bijapurkar, author, business advisor and researcher of Indian consumer markets.
(00:00) Stories Of The Day
(01:00) Markets hit a 7-month low, some fund managers still wary of valuations
(04:45) Rupee slides past 86 to the US Dollar for the first time
(05:21) Shipments of Russian oil to India assured for now as India braces for impact
(06:56) Why oil prices are falling and India’s bargaining stance
(15:14) How to interpret consumption trends in India when data is weak
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 Tuesday, the 14th of January and this is Govindraj Ethiraj, headquartered and broadcasting and streaming like always from Mumbai, India’s financial capital.
Our top stories and themes
Markets hit a 7-month low, some fund managers still wary of valuations
Shipments of Russian oil to India assured for now as India braces for impact.
Why are oil prices falling and India’s bargaining stance?
Rupee slid past 86 to the USD for the first time.
How to interpret consumption trends in India when data is weak.
Markets Hit A 7-Month Low
Stock prices fell sharply on Monday, with the benchmarks and mid and small cap indices hitting 7 month lows.
A strong US jobs report and thus the likelihood of fewer interest rate cuts in the US coupled with worries over slowing domestic earnings were among the reasons driving the markets down, which admittedly, were weak to start with.
And thus the week began on a weak note.
The 30-share Sensex tumbled as much as 1,031.65 points to settle at 76,347.26 and the NSE Nifty50 also ended lower by 345.55 points or 1.47 per cent at 23,085.95.
The Nifty Smallcap100, and Nifty Midcap100 indices ended down by over 4 per cent each.
Perhaps a good thing, as analyst G Chokkalingam told us yesterday is to focus on buying opportunities.
And the perception of valuations. Which can of course vary.
Lets get a contra view in.
Moneycontrol quotes Kotak Institutional Equities' Sanjeev Prasad saying the valuations for many stocks and sectors are absurd.
According to the Kotak report, the run-up in the stocks is a result of the lack of fear and the focus on greed (of returns) among retail investors that have pushed valuations to absurd levels in several cases.
Moreover, it says the sky-high valuations are primarily resultant of the price-agnostic buying from non-institutional investors and ‘forced’ buying of domestic institutional investors for the past 2-3 years.
Nor is it expecting FPIs to jump in in a hurry.
As a result, the recent sharp correction in the Indian market and stocks does not change the brokerage's cautious outlook on the market, as valuations remain frothy.
There is also a low scope for earnings upgrades, noted Prasad, as a result of fairly aggressive earnings, profitability and volume assumptions across sectors.
"Investors were willing to give any multiple for stocks irrespective of the business models and fundamentals, use exotic valuation methodologies and multiples and believe any random narrative about sectors and stocks," said the Kotak report, adding, "It is possible that retail investors may show some of their usual chutzpah and buy stocks aggressively (buy on dips has been the common mantra so far), but that would be really comical."
To conclude, the large cap universe might hold out better says Kotak while small, mid cap and narrative stocks could bleed seeing further correction.
This is an interesting term, narrative stocks.
Kotak also says some narrative stocks have a further way to fall, based on their true valuations. "Many of them have corrected sharply in the past 3-6 months, but most are trading at absolutely ludicrous valuations," said the report.
Inflation Is Down
Inflation as predicted for December 2024 has eased off, coming down to 5.2% lower than that in November at 5.5%.
Within this, urban inflation was much lower at 4.6% compared with rural 5.8% as the latter has greater weight for food products.
Food inflation is also coming down gradually with the winter crop easing prices, now at 8.4% after being high at 9% in Nov and 9.5% in October.
Inflation has been above 5% in the food bucket for cereals, meat, eggs, oils, fruits and vegetables.
The inflation rate for spices turned negative while that of pulses was benign at 3.8%.
The high base effect did moderate inflation for pulses.
The Rupee Slides Again
The Indian rupee has as predicted gone past 86 per U.S. dollar for the first time ever on Monday.
This comes after a strong U.S. jobs report that compounded the pressure from weak inflows and higher hedging activity.
The rupee declined 0.4% to a lifetime low of 86.3900 per dollar, tracking the weakness in Asian currencies, Reuters reported, adding that this followed an overall picture of U.S. economic resilience.
Action In The Oil Space
And now our energy segment is brought to you by IEW.
Oil prices have now crossed $81 a barrel, the highest in four months, thanks now to wider U.S. sanctions on Russian oil and the expected effects on exports to top buyers India and China.
Brent crude futures rose $1.68, or 2.1%, to $81.44 a barrel by 0858 GMT after hitting the highest level since Aug. 27 at $81.49.
Crude oil prices have risen almost 7% since January 8 and jumped after the new US sanctions on Russian oil which affect two oil producers and some 183 ships.
Goldman Sachs had estimated that these ships represented some 25% of Russian oil exports
India is however not expecting any disruption to Russian oil supply in the next two months as US-sanctioned tankers are allowed to discharge crude until March, a senior government official told Reuters on Monday.
India will allow Russian oil cargoes booked before Jan. 10 to discharge at ports, the source told reporters on condition of anonymity.
The big expectation of course is discounts now.
Sources told Reuters that Russia could offer deeper discounts for crude exports to India to meet the $60 a barrel price cap to continue exports. The cap was imposed by the Group of Seven countries in 2022 to curb Russian oil revenue used to fund the Ukraine war.
Meanwhile, Bloomberg reported that Three tankers carrying more than 2 million barrels of Russian oil were floating in waters off eastern China after they were sanctioned.
So what is driving oil prices up right now and what are the overall demand and supply trends looking like right now as we go into 2025.
I reached out to Viktor Katona, head of oil analysis at energy research firm Kpler, now based out of Dubai and began by asking him why prices were rising so suddenly right now before asking him about the outlook.
INTERVIEW TRASNCRIPT
Viktor Katona: Well it's definitely geopolitical risk premiums all over the place because one could assume that when the Biden administration would leave the Oval Office, they would try to leave the Oval Office with the oil prices going lower because ultimately the supply and demand fundamentals are quite negative. But effectively the Biden administration has started its tenure in 2021 with the oil price of 56 and it's finishing it up. I mean we don't even know where it's going to end.
It's going to be above 80 that's for sure. And initially it all started out with Iranian sanctions and a little bit of a tightening on that end and right now it's a fully blown Russian story. The sanctions on Russia are by far the biggest that we have seen so far.
The market is abuzz with speculation as to what might be potentially happening and effectively all of that just feeds into the insecurity. So it's a really interesting interplay between a very weak fundamental picture and a lot of geopolitical risk premium.
Govindraj Ethiraj: Right and I'll come back to that risk premium in a moment but from a pure demand and supply point of view of oil, where are we today particularly as we stand in the second week of January?
Viktor Katona: Well we stand in an environment where we look into 2025 and we know a couple of things. We know that we will have a tremendous amount of non-OPEC supply hitting the markets at different stages in 2025. So the market is going to be oversupplied which will most probably force OPEC plus to maintain the production levels that they have currently pretty much across the year.
So we know that the market is going to be oversupplied and we also know that demand is slowing down. Basically the extent of demand slowing down is also a little bit of a reflection on how aggressive Trump could be because it could be much worse. Right now we've had a relatively meagre sort of lukewarm Biden attitude towards China and even with this China has slowed down to the extent that it basically almost doesn't have growth in diesel and gasoline.
So it's basically the Chinese growth story is over. Maybe the Indian growth story could be something of a bullish momentum for oil press but beyond that there's nothing. We have stagnating Europe, stagnating North America.
Africa could be a good story but you know it always has its difficulties in growing the way that it should. So ultimately demand growth will be below a million barrels per day and pretty much this is a new reality. We are slowing down as humanity with our oil consumption.
So again demand outlook because of this there's more crude hitting the market. We actually need less crude into 2025. We'll be increasingly bearish for most of the year.
Govindraj Ethiraj: Right and to come to the geopolitical part the latest trigger of course is the increased US sanctions on Russia which is resulting in over 180 ships being sanctioned and two producers as well which in turn is affecting or likely to affect both India and China and their imports or our imports. So why is this pushing up prices to start with?
Viktor Katona: I mean it creates a huge layer of uncertainty whether the Russians can actually continue the exports that they have currently. I think that the exports that we see currently will be maintained but it will come at several caveats. Freight will become significantly more expensive because the sanctions pressure the Indian buyers or the Chinese buyers would ask for much better prices than they had in 2024.
So basically the discounts on Russian oil will effectively deepen. Everyone will be asking don't give us minus three to Brent give us minus five or give us minus six. You know the classical game.
And effectively people and trading operations would get much much more creative. Basically you've seen it in late 2024 almost every single cargo just you know went from port A into the destination port B. There was no hidden operations ship to ship transfers.
I think we're going to see a huge recovery in everything that's hidden and wants to be hidden. Ship to ship operations you know shutting off transponders spoofing your signals all of that you know beautiful interplay between the sellers and the buyers and whoever the oversight is that is going to come back again. I'm not a firm believer in this having a big impact on supply and demand balances but it will definitely create a lot of speculation and speculation is great for oil prices.
I mean of course if you want them to be higher.
Govindraj Ethiraj: Okay so for India and China you said that both countries could be in a position to get oil at lower prices. So in which case it helps these countries because their overall oil import bill will come down. And particularly let's say at a time when the dollar itself is so strong that's useful.
So I mean which sort of comes back to the same question which is that do you see India and China being able to command at least let's say in India's case more than 25 percent of imports at a lower price than what it was last year.
Viktor Katona: And particularly and a very emphatic yes considering how little have prices changed in 2024. I mean you just look at prices of euros it was you know Brent minus three dollars per barrel pretty much across the entire year. There was almost little to no change throughout the months regardless of the seasonality.
And I think now the Indian refiners finally have you know a great argument to say hey look dear Russian supplier we would be potentially even keen to buy it provided that your tanker is non-sanctioned but you need to offer us a great price. And then ultimately you know the boot is finally on the foot of the Indian buyer they can demand a much better price and they will. So I think it will happen 25 percent easy considering Russian imports have made up 40-45 percent of all of India's total seaborne imports.
I think we could even be talking about much higher figures than that.
Govindraj Ethiraj: Right and as we go into you know 2025 and into February and March if let's say demand starts slowing down particularly for heating and so on are there any other trends you're seeing?
Viktor Katona: Well there's this big seasonality trend not in India but say in Russia or the suppliers and particularly this moves into March and April when you would have the first spring refinery maintenance period. India doesn't really work under the same logic that say the Russians or the Europeans would because in India mostly the refinery maintenance takes place in the monsoon period. So there's nothing happening in the spring.
Spring is still a solid consumption period not booming but it's basically stable growth from one month into another. This means that there will be a lot of crude into a period when India needs it but the other continents say be that you know Russia, the former Soviet Union, Europe, even North America no longer need that much crude which again is great because you would be awash with crude. India is still consuming, India is still a keen buyer so effectively I think everything is set for a much better period into the spring than the winter was when India was buying expensive grades for quite a lot of money and couldn't really dictate its own terms.
I think India could dictate its terms very soon as pretty much the key buyer.
Govindraj Ethiraj: All right Victor, thank you so much for joining me.
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This segment was supported by India Energy Week 2025 scheduled from February 11-14, 2025, in New Delhi and you can register for the same using the link in the show notes.
China Trade Surplus Hits Close To $1 Trillion
Chinese exporters are rushing to push product out before any new tariffs kick in in barely a week's time if it does, after Trump’s inauguration.
The overall trade surplus for China was an unprecedented $992 billion in 2024, according to a statement from the customs administration on Monday, quoted by Bloomberg adding this was 21% higher than the previous year and was driven by record exports and weak imports.
Outbound shipments for the whole of last year were worth $3.6 trillion.
Exports rose almost 11% to $336 billion in December, the second-highest month on record and behind only December 2021, when Chinese firms saw a surge of pandemic-led demand.
Exports to the US rose to the highest in more than two years in December, hitting almost $49 billion and taking the total for the year to $525 billion, Bloomberg said.
Interestingly, despite the volume going up, prices have been falling so the value is less even as deflation inside China worsens and pushes down the cost of goods, Bloomberg said.
The result is total export volumes rose 7.3% through November according to the Ministry of Transport, faster than the 5.4% rise in values.
Understanding Household Consumption Trends
There has been much discussion on the state of India’s household consumption and what is driving it.
Or more specifically, where is the slowdown and who is facing it, is the narrative for example, being hijacked by some companies who are facing pressure and are others doing fine, particularly in consumer products.
The data has also been giving out conflicting signals.
Rama Bijapurkar, author, business advisor and researcher of Indian consumer markets wrote in a column in Business Standard the last year has seen frenzied and obsessive discussions on the state of the health of Indian household consumption, with economists, stock market analysts, the media, and marketers all discussing it from their particular vantage points.
Adding to the confusion, the available data sent conflicting signals — goods and services tax (GST) collections were up, revenue growth of listed fast-moving consumer goods (FMCG) companies was disappointing, health care and telecom not bad at all, two wheelers not much to complain about, second-hand sales did better than first hand in some categories, and the divergence between the performance of companies in the same sector made average industry growth numbers meaningless.
According to her, the consumption discourse needs more honest examination of the elephants in the room, like, for example, whether private sector investment is truly slow on account of poor demand.
I reached out to her and began by asking her what drove her to write this piece and also her approach to make the consumption discussion more meaningful.
INTERVIEW TRANSCRIPT
Rama Bijapurkar: The listed company results have hijacked the discourse on consumption the idea that there is a bellwether company in the old days there was Infosys and there was HUL and between the two of them we knew exactly how the economy was doing but I think today it isn't so anymore and so this whole idea that because results of one FMCG listed company are doing badly therefore consumption is bad whereas you have so many other indicators to the contrary I mean as I say in my column GST collections are up, small second-hand smartphones are doing well, two-wheelers have nothing to complain about, healthcare has grown and also where I come from is the fact that the space for consumption has been on the supply side has been taken up by small companies who are now no longer the unorganised sector they're actually mean mean smart companies who are giving big companies around their money so holistic look at what is happening in terms of even if you must use sales data a holistic look at what's happening to sales or customer spend is warranted rather than moaning and groaning about the results of one so-called bellwether company.
Govindraj Ethiraj: If you were to look at the entire let's say the quantum of consumption so let's say it's example daily use categories still represent a large portion of it or a chunk of it and therefore also be symptomatic of what's going on on the demand side.
Rama Bijapurkar: Not really I mean I think over a period of time as India has always had a large unorganised sector market it's over half in the past we could ignore it because it was truly low quality for low price today significant chunk of everyday categories I mean I have in fact also I've just been looking so if you look at for example let's say a scotch brite sponge it's 299 rupees for a packet of kitchen sponges a bala one is about 199 the numbers are at go on amazon and look it up one has a rating of 4.4 one has a rating of 4.1 once in 5,000 units in the last month according to amazon one sold 4,000. I go into a very small so-called supermarket in a 40,000 pop strata town in Tamil Nadu I see both displayed next to each other I go to amazon I see them displayed next to each other and so it is true that for their categories their price points which is my point also about the Nesse CEO that you're talking about UHT milk which is expensive milk you're talking about chocolates you're talking about a certain kind of consumption portfolio so how does the portfolio that the Hindustan chooses to have represent consumer spend I also feel that there is intense inter-category competition so therefore people may be skimping and saving on there was a consumer quote that I loved recently where this young lady said or if not date so much for the gate or data has just Cadbury's so I mean I think I don't know what she was expecting after that just Cadbury's but cultural labels are changing so I think we just have to change the way we look at consumption and that's just the supply side argument.
Govindraj Ethiraj: So on the demand side I think why people are perhaps a little apprehensive so you're possibly right about a few companies hijacking the agenda but I think if you look at the other indicators you know one is GST numbers are more or less steady to flat and going up and down over the last year so it's not like it's a rapid linear growth which I mean it's maybe 160,000 crores 170,000 crores back to 150,000 crores and so on so that's one second is GDP numbers are slowing down and we've actually revised downwards now officially for 24-25 as well so which suggests that the overall pie in across the spectrum is not growing and has only shrunk or relatively strong so how would you look at then or how would you place your argument?
Rama Bijapurkar: Yes I agree that consumption is when GDP slows down but the point I'm making is that discussion has to go via the root of income so GDP is slowing down or even at times when it is higher than we think it is than we expected it to be the question is what is happening to household income and whose household income I mean I think we now know that and therefore I'm asking for a more nuanced argument because it's not a macro force with a magic finger like a tide that lifts everybody and tanks everybody so it is true that the top 20 percent continues to stay stable continues to get richer continues to grow its income etc etc so if you look at the drivers of consumption there is income there is employment and my point is that yes there is an overall slowdown but why are we siloizing and disconnecting the investment argument from the economic activity argument the occupation argument the income argument as a result of occupation and therefore who is consuming what and so that's another thing for me of how not to do it is how not to siloize it so for example there is a conspiracy of silence around the fact while we say 94 percent or whatever is informal etc etc the nature of occupation is a lot of owner can't work so when economic activity is vibrant everybody does well when economic activity is not everybody takes a haircut but when I start hearing economists say that there is no investment or low investment or an investment slope because they don't see demand visibility I have a big issue with it if they don't see demand visibility in India in the time that it's going to take for the capacities and so on to take off I mean where are they going to go and see demand visibility and compete we've already seen India and go overseas compete come back etc etc and it's not an either or the reason they're not investing is something else and so I'm saying let's call out the elephant in the room whatever may be the elephant in the room
Govindraj Ethiraj: So let me pick up on two more points and you talked about household income so one is that household income again yes salaries are growing and incomes are growing but not as fast as they were growing maybe two or three years ago and I'm talking about right now there are two parts to this now one is let's say if incomes are growing fast enough to match inflation which clearly people are concerned I mean maybe the evidence is more anecdotal here but it is definitely inflation is eating into consumption power the second is the propensity to spend now that is something that you know so you may have the money but you may still not spend it and therefore the outcome is the same how are you seeing these two again when you look at how similar cycles have played out in the past.
Rama Bijapurkar: So I would look at consumption with the question of with who and not a question of what not what is being bought but who is buying we are finding that rich India continues to buy everybody is saying that so rich India continues to buy in fact rich India is underserved in fact if you've been on the Christmas break holiday you know how hard it is to get to scourge it up even if you want to because supply is constrained I can't get enough there are not enough business class seats coming back from anywhere so I think that part of it is okay it's underserved at the moment you are right that there is inflation that is precisely the discussion we should have that people say this means the middle class is in trouble I have a problem with that because a lot of the so-called middle class is not actually the middle class middle class by definition has to start with a reasonable surplus income of about 30 percent because that's what gives stability it gives them ability to invest back and so on so a lot of the consumption and if you take let's say 20 percent slabs or quintiles a lot of the consumption we've seen this historically in the middle 20 percent the surpluses are so fragile that the minute you have an increase on any count those surpluses people are forced to make inter-category choices so they were never middle class to begin with so I the overall argument that when GDP slows down economic activity means economic activity is slow it means incomes are slow it therefore means that there will be tough spending choices I take that it is tougher with the middle who we designated as the middle class whereas they're not and I think the upper class is doing well so you will find some guys singing all the way to the bank and some guys not the same Nestle chairman in his speech said that the rich are buying like it's going up a style or something like that he said but the incremental consumption that you get in good times from the middle of the consumer base by way of income upgrading to occasional indulgences is not happening
Govindraj Ethiraj: And that is because I mean just to go back to where we started
Rama Bijapurkar: because they have fragile surpluses and those fragile surpluses are wiped out the minute you have inflation
Govindraj Ethiraj: I mean the way we should look at or define middle class is when any family has 30 percent surplus income left at the end of the year
Rama Bijapurkar: yeah at the end of every month I mean routine expense I'm also saying there has to be resilience resilience means you fall off and you come back up resilience comes when you have an occupation not when you're an owner can't work out of anything when you have a profession a calling a patient right and that tells you the quality of how you earn so if you are wondering casual labourer in good times you can sort of do well enough you will see that in the occupational definitions but if you are a plumber carpenter an electrician you have work to do if you have some kind of professional qualification forget about a regular job if you have heart may come as they call it even if times are bad you can bounce back so we're looking at resilience we're looking at surplus income we're looking at reasonable levels of skills and education to qualify you to be able to earn a decent living right and that's how you get intergenerational progress that's how you get them reinvesting in their lives and that's what gives stability to a country and a society a genuine middle class so middle class is not income between x and y broaden x and y and you will keep increasing the number of middle class we can say that when we are selling India but I think we shouldn't smoke our own dope
Govindraj Ethiraj: So you talked about the rich being underserved and I think you've given some good illustrations I mean I could add let's say you know five-star hotel rooms in resorts in India or even for that matter in city and what price we are forced to pay for it can one survive or how many people could survive by only serving the rich which is underserved in your estimation and can markets exist like that.
Rama Bijapurkar: You know you'll be surprised at how many companies do not go below serving the top 20 percent I mean I think there are a handful as I have also been saying for a while and in my book as well that there is a handful some of the handful are again beginning to question the pain of the mass markets because the pain of the mass markets is also small competitors that is is the issue if you talk about the stock market I think it is of the rich for the rich by the rich of companies barring a handful that do not serve anybody but the rich so if 50 percent of India's household income is with the rich and you know we can't say K shape on the one hand and not go through with the implications on that I think people are saying and to put it politely that why should I kiss the frog when I can kiss the prince you know the frog will eventually turn into a prince but I can kiss the prince the only point is that mass markets like time and tide don't wait for you and that's why the small businesses have actually started doing so well because they now have access to so many of the ingredients that earlier were not available to you didn't have access to media you didn't have access to markets but now you have marketplaces you have media you have you can instal you look at the number of guys and instal this so bloody damn good right so even the root end is not safe in fact I was thinking yesterday that perhaps the big companies are better off serving the mass markets because that's why they can build scale they can build predictability you know they can hold prices when it's needed and those are the guys that's what they might win so on an attractiveness competitiveness scale I think there are real choices to be made but yes if you think that you are serving 50 percent of the GDP of the fifth largest economy in the world on track to the third I think you can build a pretty nice business thank you very much even if you look at our total private final expenditure and if you look the turnovers of many of our top consumer facing companies there's enough room.
Govindraj Ethiraj: Right in your column you said that CEO should kick court economists rather than the other way around what did you mean?
Rama Bijapurkar: I absolutely love the Nestle CEO I think he's a very sensible person and I think that when I go on to conference when I go into webinars and so on where there are senior economists who are quoting CEOs I'm thinking this is not right because this CEO is talking about to is giving a press release a conference on the one percent growth of the categories that he serves compared to what he served last year and so when that becomes received wisdom for economists about the state of health of the economy I think the Nestle chairman would also agree with me that it's much more comforting and reassuring if there is a de novo analysis ground up by economists which chairman of companies look at and decide to predict their future rather than the other way around because it makes me nervous.
Govindraj Ethiraj: Good note to end on. Rama thank you so much for speaking with me
Rama Bijapurkar: Thank you, Govind
