Markets Hit Highs For 5th Consecutive Session
The markets resumed their roll and hit lifetime highs for the fifth straight session on Wednesday
On Episode 397 of The Core Report, financial journalist Govindraj Ethiraj talks to Devendra Kumar Pant, chief economist of India Ratings & Research.
SHOW NOTES
(00:00) Stories Of The Day
(01:00) Markets hit highs for 5th consecutive session, more mutual funds switch to cash
(03:52) Global stocks are not enthused by China’s bold stimulus moves
(04:51) India needs FDI in manufacturing, says ADB
(05:57) India is finishing up with a strong monsoon, how good was it, economically? The 100 hour concept
(13:54) Hyundai’s Rs 24,000 crore IPO is revving up. What will it do to the market?
(16:18) An Italian bank raids a German bank and hell breaks loose
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 Thursday, the 26th of September and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
Our top stories & themes for the day:
Markets hit highs for 5th consecutive session, more mutual funds switch to cash.
Global stocks are not enthused by China’s bold stimulus moves.
India needs FDI in manufacturing, says ADB.
India is finishing up with a strong monsoon, how good was it, economically. The 100 hour concept.
Hyundai’s Rs 24,000 crore IPO is revving up. What will it do to the market ?
An Italian Bank Raids a German Bank And Hell Breaks Loose
Markets
The markets resumed their roll and hit lifetime highs for the fifth straight session on Wednesday.
While the financials largely set the pace, interestingly the small cap stocks fell again seemingly confirming the growing view that most institutional investors are switching to large cap stocks.
The day itself began on a somewhat tepid note with the indices quoting lower but only turning around in the last hour of trade, a pattern we have seen before.
What that means is that a weak start does not necessarily mean a weak end.
The converse could hold true too.
So the Nifty has hit new highs in every session since the 50 basis point rate cut by the US Federal Reserve last week which has opened up, as we said earlier, some fresh taps and pipelines of capital flows.
The BSE Sensex was up 255.83 points to close at 85,169.87. The index scaled a record high of 85,247.42 during intraday trade.
The Nifty50 touched an all-time high of 26,032.80 before closing Wednesday’s session up 63.75 points at 26,004.15
Cash Goes Up
Indian equity mutual funds cash holding relative to their asset size rose to a 5-year high at the end of August, Reuters is reporting.
The reasons could be many but broadly could be ascribed to increased caution and the desire to wait longer for well priced buying opportunities.
Morningstar data says active equity funds in India with a fund value of at least $1 billion held an average of 5.39% of their portfolios in cash as of end-August, their highest levels in five years.
Could valuations be one reason ?
Well, most people seem to agree.
The forward price-to-earnings (P/E) ratio for MSCI India's large-cap index is at 22.8 times, an 18.6% premium to the 10-year average, while the MSCI India mid-cap index is trading at a 67.7% premium and the small-cap index at about 40% premium to their respective 10-year averages.
The problem, if you want to call it that, is clearly in the small cap and mid cap space.
It is also this space that could see corrections which in some ways must be welcomed because a consistent rise is always worrisome as we have discussed before on The Core Report.
Corrections also provide the holders of cash to come in and start buying.
On the other hand, if everyone holds on to their cash, then the markets start to stagnate in some ways or move sideways which might be a nicer way to put it.
Oil Dropped
Oil prices are sliding again, despite the heightened tensions in the middle east as demand worries outstrip risk perceptions.
Brent crude was quoting overnight under $74 at $73.71.
China Stimulus
I asked myself this question the day before.
Will China’s stimulus be a game changer of sorts and reverse the bearishness in and on the economy we have been seeing.
Well, the problem as they say is that it's tough to revive with stimulus measures when the fundamentals are weak or need much longer to find their footing.
Like China’s troubled real estate market.
Stocks globally struggled on Wednesday to maintain momentum fuelled by China's monetary stimulus measures, with crude oil retreating and the dollar under pressure, Reuters said.
European stocks were broadly steady and oil and gas shares (.SXEP)
led the losses, falling 0.5% on concerns China's stimulus plans would not do enough to boost demand.
Wall Street was flat too.
But then, the S&P 500 and the Dow Jones had closed at record highs for the second straight session on Tuesday.
There is now an expectation that there will be another 50-basis point Fed rate cut at the November meeting.
India Needs FDI In Manufacturing, Says ADB
Back in the region, the Asian Development Bank (ADB) has projected strong growth for India’s economy, forecasting a 7 per cent increase in gross domestic product (GDP) for the current financial year in its September 2024 report.
These figures are higher than what, for instance, S&P said the day before.
ADB officials said India’s economy has shown remarkable resilience in the face of global geopolitical challenges and is poised for steady growth, reported the Business Standard..
Agricultural improvements will enhance rural spending, which will complement the effects of robust performance of the industry and services sectors.”
Which in turn would be helped by above average monsoons though the ADB is also projecting higher consumer inflation driven by higher food prices.
The ADB also believes that employment-linked incentives for workers and companies could boost labour demand and facilitate job creation starting in FY2025.
Like JP Morgan earlier this week, the ADB also made a case for boosting the manufacturing sector, but with increased foreign direct investment, which may bolster growth and investment.
The 100 Hours
Speaking of rains, it boils down to a 100 hour game.
More on that in a moment.
The retreat or withdrawal of the monsoon has been officially announced but in Mumbai, just to add some flavour, it was pouring like there was no tomorrow last afternoon and evening.
Hopefully this will be the last of the rains.
Yes, I would think most Mumbaikars have had enough for this season.
On a more serious note, what was the cumulative impact of the rainfall season this year on the cropping and agricultural patterns as well as economically.
I reached out to Devendra Kumar Pant, Chief Economist of India Ratings & Research based out of New Delhi and began by asking him how he was reading the sum total of the 2024 monsoon season.
He also explained the 100-hour principle.
INTERVIEW TRANSCRIPT
Devendra Kumar Pant: If you look at the monsoon data till 24th or till today, it is, or really is today, so it is still yesterday. Overall monsoon rainfall is 5% above normal compared to the normal till this date. And June it was 11% and the regions being, so now Alnino, Larnina is a common word, because still the Alnino was in withdrawal phase till 9th of July and of course that's when Larnina started and Larnina always brings more, more rates to, rates to India.
But what is more important than Alnino and Larnina is another weather pattern which is the mean sea surface temperature difference between pre-alpine gulf and Arabian sea. So we have seen some years when the Alnino pattern was, was there not great to, to strong. And we got a very strong Indian Ocean Typhoon, India still had good rates.
So this is just to, to put in perspective the Alnino and Larnina. So post-June rainfall started intensifying, we had strong rains, I think except the East India and some parts of Southern India, the monsoon rainfall has been more than normal. Now, yes, there are heavy rains in the month of early part of September and that will have some impact on the crop which are on the field, but if you look at the statements and other discussion with the ICAO scientists and others, it's a, gives an impression that it is not very strong impact or the adverse impact is not very strong.
Now, if you look at compared to the last year, the monsoon has been better and more importantly, which is going to have, give us benefit in the rest of the year is because generally we have 80 to 90% of the rainfall which we receive in that year is during June, September period. October, December, we received some rainfall in the North East, some parts of Tamil Nadu and Kerala, but rest of the country have this, these four parts. And in fact, if you look at it, it is a hundred hour of rain, which is giving us our lifeline.
Lifeline still have the agri, though maybe around 16, 17% in the GVA, but the dependence on the employment perspective. Now, what this late rains have done, yes, it has some impact on the re-harvest, but we don't have any rainfall during the Rabi season, Rabi or winter, winter season. And those crops too is they use a, the retained soil moisture after the re-harvesting is done.
So whatever the moisture the soil has, can be the kind of water storage in the region. If I look at water reservoir, 155 water reservoirs in India, and as per the bulletin, which was released on 19th of September, the rain water storage was 123% of the last year or 23% more than the last year. Or if you look at the normal, it is at 18%.
So what it has done, it has brightened the prospects of Rabi unless, unless we don't have any adverse weather pattern, say for example, extreme heatwave conditions as we had seen during May and June in this kind of country. But if we don't see those kinds of extreme heat conditions, we will have better prospects even for your Rabi. Another point is, if you look at the cropping pattern, both pulses and paddy is showing higher, showing this year compared to the normal area.
So that is also a positive side for the economy.
Govindraj Ethiraj: Right. Okay. So let me pick up one of the points that you made.
So agriculture impact you're saying is neutral to positive. If you were to now look at broad economic impact, I mean, where it translates into let's say consumption, more agricultural income, how are you seeing that?
Devendra Kumar Pant: If you look at, and along with this, maybe along with Basmati rice, both you have to clap it. So when I say neutral, neutral is from the Kharif production. But if you like, look at last 10 odd years, what we had seen earlier, the Kharif agriculture, I'm saying agriculture, it's on the grade, it's on the food.
Overall agriculture during Kharif used to be higher than Rabi, but now Rabi is higher than the Kharif. So if the Rabi estimates better, then the farmer income is going to increase. P, what we are still struggling with?
And there are different views. We have monetary policy 15 days down the line. Six wise men will look, debate for a couple of days and then decide how the monetary policy should be in the next, at least next two months.
So it is basically looking at a year, year and a half. The food inflation is one thing which has remained very sticky. So is it that your food inflation is going to decline?
What kind of impact it is going to have? Because that will have your overall inflation going. And why inflation is very important?
Because if you look at our consumption, right, the response of consumption to overall GDP, also to the income, is very strong. And that strength is building over time. So if I look at 1952 to 2044, right, whatever is strength, the strength in this century is 10% higher than that period.
So that is strong. But what happens is we have to look at the real income. Now you have the real income going up, you will have the consumption going up.
Now real income can go up by many different composition. One is your nominal wage growth goes up, your inflation remains same, you will have a higher real income. Your nominal wage growth remains same, this means no impact on the balance sheet of government, corporates or any other economic agent.
Nominal wage growth remains same, but the inflation goes down by half a percentage. Now that will have a very strong impact on your overall consumption. So a better agriculture means 50% of the workforce.
Unfortunately, we don't have census after 2011 and we're still looking at those numbers and I'm not going to go back debate why they didn't have, all of us know because that was a COVID impacted year. Your 50% of the labor force is likely to see a better income growth in the fiscal year 25. Our estimate is compared to 1.4% agriculture growth in fiscal year 23-24. The agriculture workforce value addition growth in fiscal year 24-25 is likely to be 1% and it may surpass. And that will have the impact on your consumption demand, on the government, in terms of taxes, because possibly farm demand will increase, the industrial growth will increase and that will have an impact on the government balance sheet also.
Govindraj Ethiraj: Right. Okay. Devendra, we've run out of time. Thank you so much for joining me.
Devendra Kumar Pant: Thank you.
Hyundai IPO All Set
Hyundai, India’s second largest car maker after Maruti Suzuki will raise around $3 billion or Rs 24,000 crore, valuing the company at around $18 billion, or around Rs 1.5 lakh crore.
This would overtake the Rs 21,008 crore public issue of LIC, launched in May 2022, as India’s largest IPO.
What a $3 billion IPO will do to Indian markets is anybody’s guess though I would cross my fingers, for the market and for the IPO, given the sheer volume of offers that have hit the market this year.
Nevertheless this is an important signal, inasmuch as a MNC is listing in India after a while as I could see and we surely have not seen anything like this jumbo offering.
A local listing also reflects a tighter lock in with the domestic market and the confidence to grow it independently of the parent.
So only the Japanese via Suzuki and now Hyundai will have listed entities in India in the auto manufacturing space.
The Hyundai IPO will be an offer for sale (OFS) of up to 142 million shares, or a 17.5% stake, by its South Korean parent Hyundai Motor Company.
India is the third-biggest revenue generator globally for Hyundai after the U.S. and South Korea, and it has already invested $5 billion in the country with commitments to pump in another $4 billion over the next decade, the ET reported.
Hyundai is more of a SUV company in India with eight SUVs in its portfolio of 13 cars with a 19% share of India's total SUV sales, the ET said, quoting IPO papers.
Hyundai’s EPS will be around Rs 75, which is very close to the annualised EPS of Rs 72 per share in the nine-month FY24 period. If Hyundai was to be valued at the same forward multiple as Maruti Suzuki — 26x FY25 EPS — it should imply a valuation of around Rs 1,950, ET has reported,m adding the free cash flows at Hyundai are stronger compared to Maruti Suzuki.
If the 142mn share sale by Hyundai is priced at ₹2,000 per share, it will mean the IPO could raise as much as ₹28,000 crore, much higher than the ₹21,000 crore of the LIC IPO.
HAMIL's revenue from exports rose 83% to Rs 14,120.92 crore in the last three years, despite geopolitical uncertainties, while revenue from operations in the local market rose 39% to Rs 33,274.83 in the same period.
As much as 23.4% of the company's total revenue came from the sale of vehicles and parts overseas in FY23. In volume terms, exports accounted for about 21% of total vehicle sales in that fiscal year.
Some of the money raised will likely be used to enhance capacity to over 1 million units across its facilities in Tamil Nadu and Maharashtra and develop new products, including affordable electric vehicles over the next decade.
The Italians Launch A Raid On Germans
The European Union seems like a well-knit financial union and seems to be acting in concert on a host of economic and business issues.
That has changed.
There is much consternation in Germany after an Italian bank UniCredit launched a takeover attempt on Commerzbank.
The reaction it has provoked seems to be akin to a ICICI Bank or HDFC Bank being acquired by a foreign bank, like a Chinese one for example.
And then imagine the Prime Minister Modi and the Finance Minister Sitharaman stepping into the fray saying they opposed this takeover.
Well, this is exactly what is happening in Germany
German Chancellor Olaf Scholz and his government rallied to the bank’s defence after UniCredit moved to create a banking major with nearly $1.5 trillion in assets, the WSJ reported.
So the deal is like this.
UniCredit is seeking to double its take to around 21% and already has around 9% which it bought earlier this month in a somewhat unanticipated move after the German Govt itself sold stock it was holding thanks to its bailout for equity deal after the 2008 financial crisis.
The German Government’s stake is down to 12%.
UniCredit is Italy’s second biggest bank while Commerzbank is the third largest by assets in Germany.
Combined, they would have ranked 10th in Europe at the end of last year with around €1.3 trillion—or about $1.45 trillion—in assets, according to S&P Global Market Intelligence data.
The biggest, HSBC, had around €2.6 trillion in assets at the time.
Speaking in New York, Chancellor Scholz said “unfriendly attacks, hostile takeovers” weren’t good for banks.
A spokeswoman for the finance ministry said Germany’s government “supports Commerzbank’s strategy of independence,” adding: “We do not support a takeover. We have informed UniCredit of this.”
The negative reaction has come from politicians and union leaders who were upset with the likelihood of giving up financial clout to Italy and depriving smaller German businesses of funding, the WSJ said.
As things stand, the European Central Bank which regulates major European lenders, has to approve any purchase of a bank stake of 10% or more.
UniCredit said Monday it had submitted filings to buy up to 29.9% of Commerzbank and had bought financial instruments to cap any possible losses on its shareholding.
The Italian bank already has a big German operation, which it bought before the financial crisis and centres on the southern region of Bavaria.
Germany has said it wouldn’t sell any more of the bank’s stock “for the time being,” in what was seen as a warning to UniCredit to back off.
Commerzbank shares, in contrast, trade at a big discount to the underlying value of its assets, giving it a market capitalization of less than $21 billion.
A Commerzbank spokeswoman said the lender would weigh up its options in the interests of investors, customers and employees.
National interests have long hobbled the EU’s attempt to knit together banking systems in its 27 member states, holding back the continent’s economy. In Spain, BBVA is attempting to buy smaller rival Sabadell despite objections from the Spanish government.
