Markets In Steep Fall On US Interest Rate Fears
Foreign institutional investors are selling again, after appearing to have consistent buying in the first weeks of December
On Episode 461 of The Core Report, financial journalist Govindraj Ethiraj talks to Anshuman Magazine, Chairman & CEO (India, South East Asia, Middle East & Africa) at CBRE as well as Tarun Pathak, Research Director at Counterpoint Research.
(00:00) Stories of the Day
(01:00) Markets in steep fall on US interest rate fears
(02:30) The Reliance stock is now in negative territory for 2024
(04:54) Rupee hits fresh low, oil prices slide
(06:27) Data centre investments could cross $100 billion by 2027. What’s driving it?
(18:01) Why AI embedded smartphones are yet to catch fancy and overall trends
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].
—
Good morning, it's Wednesday, the 18th of December and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The top stories and themes
Markets in steep fall on US interest rate fears.
Rupee hits fresh low, oil prices slide
The Reliance stock is now in negative territory for 2024.
Data centre investments could cross $100 billion by 2027. What’s driving it ?
Why AI embedded smartphones are yet to catch fancy and overall trends.
Markets Fall
Foreign institutional investors are selling again, after appearing to have consistent buying in the first weeks of December.
One reason being offered is India’s widening trade deficit, numbers of which were revealed yesterday and showed that the trade deficit had hit a record $38 billion.
This was also helped by record gold imports at close to $15 billion which is unlikely to continue at this pace in December.
Nevertheless, the stockmarkets are also expecting that the US Federal Reserve will limit its rate cuts in anticipation of higher inflation under the incoming Donald Trump administration.
One reason being the promise to raise import tariffs which will raise prices of products across the board.
The BSE Sensex and NSE Nifty 50 were down 1 per cent each, weighed by selling across the counters.
The 30-share Sensex fell 1,064.12 points to end Tuesday's trading session at 80,684.45 while the NSE Nifty50 ended down by 332.25 points to settle at 24,336.
The broader markets behaved similarly, with the Nifty Midcap100, and Nifty Smallcap100 indices ending lower by 0.57 per cent, and 0.68 per cent, respectively.
The markets are still holding out for a Santa rally which will most likely be driven by local factors if so as the prospects of a larger FII driven rally have receded somewhat.
The good news is that Christmas is still a few days away.
Reliance Stocks
In all the news of the markets, sometimes the big stocks get missed out and moreover, not everyone for various reasons reports on them.
The Economic Times is reporting that Reliance Industries stock is on track to end the year with negative returns.
This marks the first time in nearly a decade that the Mukesh Ambani-led company has experienced such a decline, ET says.
RIL's market capitalization has dropped by over Rs 4.4 lakh crore since its peak in July, with shares falling nearly 21% from their highest point of Rs 1,608.95.
From 2022, Reliance’s returns have been falling and this year will be a turning point as it goes into the negative, thanks also to slowing earnings.
Historically, RIL’s growth was driven by capital expenditure (capex) in refining and chemicals or margin cycles.
However, RR and Telecom now account for about 50% of RIL’s EBITDA and are expected to drive nearly all EBITDA growth in the next three years.
The ET says analysts have grown more cautious, citing slower growth, rising real estate costs, and the capital expenditure needed to sustain expansion, particularly in retail.
Analysts have also pointed out, including those The Core has spoken to, the rapid rise of quick commerce companies which has added pressure on revenues and margins, especially in the retail sector.
Reliance Retail (RR) has had to close 1,185 stores and faced sluggish revenue growth despite increasing foot traffic, ET says.
I cannot vouch for this number but it is clear that they have been shutting stores across categories of retail over the last year
Recent figures I could find show Reliance Retail with over 19,000 stores, including electronics. Store closures are part of normal churn so the number may not be that high
Could Reliance Retail’s problems be linked to competition from Quick Commerce. Possibly, but that can’t be the only reason.
The other likelihood is obviously slowing demand to the extent that Reliance’s fortunes are affected by it.
And that is quite likely putting pressure on the stock.
Rupee Lifetime
The Indian rupee hit a fresh lifetime low on Tuesday, thanks to concerns over the record trade deficit and fresh selling by foreign institutional investors.
The rupee hit a low of 84.93 against the U.S. dollar, before closing at 84.8950, down 0.04% on the day, Reuters reported.
Foreign banks were spotted bidding for dollars, likely on behalf of custodial clients, while the Reserve Bank of India likely intervened via state-run banks to keep a lid on the local unit's decline, traders told Reuters.
The wider trade deficit has "reinforced the upward bias (on USD/INR) and a rise above 85 seems quite likely in the next few sessions," a trader at a private bank said.
Oil Prices Slip
Oil edged lower for a second day after Chinese economic data failed to dispel concerns about slowing consumption in the biggest crude importer.
Brent traded near $73 a barrel, following a 0.8% drop in the previous session.
Crude has fallen by around 14% this half on concerns over the outlook for next year.
India Data Centre
A strong demand for data centres across India, will lead to investments crossing the $100 billion mark in 3 years time, according to a new report by commercial real estate services and consulting firm CBRE.
The last five years, through Covid have already seen investments worth $60 billion come in.
Maharashtra and Tamil Nadu emerging as the most preferred destinations, with Mumbai alone representing close to 49% of total investments.
Mumbai is followed by Chennai, Delhi-NCR, and Bengaluru. Together, these Tier-I cities constituted about 90 per cent of the country's DC stock in the January-September 2024 period, says CBRE.
The key reasons for Mumbai and Chennai’s dominance is overall infrastructure but extending to cable landing stations and more of that shortly.
India's DC stock stood at approximately 1,255 MW (~19 million sq. ft.) as of September 2024 and is projected to grow to around 1,600 MW (~24 million sq. ft.) by the end of the year.
In 2025, an additional 475 MW of capacity is under construction, with Mumbai and Chennai expected to lead the supply additions.
Like data centres, overall commercial real estate is also being driven by the expansion of global capability centres or captive centres for multinationals, mostly for technology functions.
I reached out to Anshuman Magazine, CBRE Chairman and CEO for India and South East Asia and began by asking him what was driving the surge in investments in data centres and also how he was seeing overall trends for commercial real estate into 2025.
INTERVIEW TRANSCRIPT
Anshuman Magazine: Even when our research team was working on this, this hundred billion seemed like a big number, but it is going to happen because we are still far behind. If you look at India, can you imagine amount of data which would be consumed every day? Thanks to internet penetration, thanks to all the digitisation, I give examples to people that outside India, that in India, sometimes some people may only get one meal a day, but they have a mobile phone, you know.
And the amount of data they consume, of course, that's an exaggeration, but what I mean to say that, you know, the whole mobile penetration is so large. And there's a lot of an artificial intelligence is also accelerating all the data mining, anything to do with data, you know. And that has led to data centres coming up, and that's where you feel there'll be more investment.
And also government legislation, government has really supported the data centre industry. And as you know, most governments globally now are bringing legislation where they want the data of that country to remain in the country itself, which means in the past, you would have cloud storages beyond geographies, local geographies. That's not going to happen as much.
And when you have to then keep data within the country with all the data being generated across will mean that there's more data centres required. And this is the same case with India. And we will see, you know, this progressing quite a bit.
And 2027 is just three years away, at least for anywhere, but even for India, with our relatively low base and where we come from, this is a big, big move.
Govindraj Ethiraj: Right. So there are three kinds of areas that are of interest. So one is from an occupier point of view.
The second is from an operator's point of view. And third is investors. So we're, I guess, seeing activity at all levels right now.
But it's also seems to be the case that a lot of the data centre investment is happening in a few places. And Mumbai leads the country with almost 49% of data centre capacity. So what are the factors that's driving it to one?
I mean, it seems like power or visibility of power supply and so on are the main driving factors or is it something else?
Anshuman Magazine: Before that, if you look at Mumbai and then Chennai are the two major areas of activity for data centres is also because of fibre connectivity, undersea cables, which are coming in. So that is the number one reason. Then, of course, one of the challenges with data centres is that that requires a lot of power and the quality of power.
And although in India, as you know, power situation has improved significantly, yet many places, the kind of power data centres require, it becomes challenging for some of the cities or states to provide that. Then also you need water, right? Because they need to cool, et cetera.
And that's why, you know, it has taken some time because, you know, it is capital intensive, that the number of people who can invest also are kind of relatively limited. But the reason to answer your question is because of that. And so Mumbai and then Chennai, both are coastal cities.
Govindraj Ethiraj: When you talk to people who, let's say, want to invest in this space, and firstly, are you seeing a lot of those? And secondly, what are they looking for in terms of the kind of areas they want to invest in within data centres? And is it as lucrative as it seems, or will it continue to remain as lucrative as it seems today?
Anshuman Magazine: It will, first of all, yes, it will remain lucrative, but this is really meant for large investors. And most of the data centre investors are institutional investors because the ticket size, like I said, these are capital intensive projects. So it would be mostly large institutions will be putting money.
Next few years, it will be lucrative because, again, when any investment has large requirements of capital, one end, of course, is a risk. The flip side is your competition is less also, right? Because everybody can't deploy that kind of money.
So it will, and the demand is quite high. So it will remain lucrative.
Govindraj Ethiraj: If you were to look at the broader commercial real estate segment and the investments coming in, how are you seeing trends as we go to the end of 2024 and into 2025?
Anshuman Magazine: The trend is really beyond my expectations also. We knew that the office market is doing well in India, but even if you look at last year, the absorption India, the top 10 cities is about what's about 64.8 million, almost 65 million square feet last year. And although there are a couple of weeks left before end of the year, and a lot of, you know, we only get to know the final number, you know, early January or sometime late in January.
So not early because all the transactions being completed just to get the whole thing done. But we're expecting that this year that number will be surpassed. And if you had asked me beginning of 24, already there was a jump like in 23, that number was the highest number ever.
When I said almost 65 million square feet. And I knew the market is going to sustain mostly, but wasn't sure that we will cross it this year. So that has happened.
And as of today, where we stand, 25 is expected to at least sustain that momentum. So the office market is India's office market would be one of the best in the world right now. Just the volume of space take up.
And especially for the size of our country, I'm not talking to the population, size of our real estate market, size of our economy. For that, we would be one of the highest in the world. Of course, US is a much larger real estate market.
So I'm not coming to America, but leaving America aside, if you look at APAC, you look at most of Europe, India would be one of the top markets for office space in the world.
Govindraj Ethiraj: And if I were to try and link that to data centres, would you say that data centre growth is driven by growth in IT and IT linked consumption that is data? Or is it also to do with the, let's say how people like the big tech companies or the users of data are expanding their own presence in India?
Anshuman Magazine: If you look at all the top tech companies in India, they are expanding. Now, what is, we were talking about office earlier, what is driving that office growth right now are of course that India is an offshore, well-established offshore outsourcing centre for the world. Besides all the software development, what happens and all technology, et cetera, it is a tech hub of the world.
It's really the GCCs, the Google Capability Centres that are expanding because they have a track record of several years where they have proven the positive impact on the global balance sheets of these corporates by offshoring to India. So they are now expanding even more so that all the top tech firms, all the GCCs, all the other business process outsourcing companies are of course their data is also ballooning and that is having a direct impact on data centres. Besides, like you rightly said, the consumer data and whatever else is happening in the country.
Govindraj Ethiraj: Last question. So how are any big 2025 trends that you're seeing, Anshuman?
Anshuman Magazine: Well, I would be happy more than a trend is that if our office demand sustains for next year, that itself will be great for the, A, it'll be a great reflection of the economy, but also for the real estate sector. Residential, which is the largest part of the real estate market, has done well. We have to see will that sustain because in certain markets, the prices have gone up significantly.
The market, the sales have been very good. I expect at least in most markets, the residential market will kind of sustain to better depending on which geography because the market trends are different. There are certain markets, like I mentioned, the prices have gone up too high.
In others, it has been a reasonable increase. So if the residential sustains next year, which it is expected to so far because the interest rates have not gone up, there's also a lot of things at play. As you know, the whole global discussion right now is how to reduce inflation while inflation, sorry, how to reduce interest and keep inflation under control.
So if there is interest rate movement downwards, that will have a positive impact on the residential market and overall business. So in 25, there will be more activity. So besides, I'm just thinking, you asked me the trends, for me, those sustaining the growth should be the big what you call objective.
But also you will see activity in healthcare, in education sector, in senior living, student housing. During COVID, especially the student housing and the senior living impacted quite a bit. And I do expect that to start reviving as we go forward.
Govindraj Ethiraj: Supplement to the last question. So what's the most exciting market in India in 2025 likely to be? Very difficult to put in.
Anshuman Magazine: Hyderabad certainly stands out for the last couple of years because Hyderabad really shot up. It used to be good old days, Mumbai, number one, NCR and Bangalore. Then Bangalore became number two, then Mumbai became so.
So beyond these three markets, Hyderabad certainly shot up. So after Bangalore, which is the number one office market, Hyderabad became number two, not NCR, not Mumbai. So I think Hyderabad stands out.
Although it has seen a lot of growth, we'd have to see what will happen. Can it sustain? Pune is another market which has seen good activity.
And really besides these two, of course, there's Chennai, there's Calcutta, there are many cities. But the larger part of real estate and as you know, our economy will still, the game would be in Mumbai and larger Mumbai area, NCR and Bangalore. They still remain the larger, the places where the most activity will still continue.
Govindraj Ethiraj: All right, Anshuman, thank you so much for joining me.
Anshuman Magazine: Thank you. Thank you for having me.
GenAI In Phones
Many smartphone makers were embedding GenAI into their phones as a way to bring in new buyers.
That was also seen as a key trend earlier this year as AI linked applications started appearing on phones, for instance around photos and imaging.
In April, GenAI smartphone share of overall smartphone shipments will reach 11% by 2024 and 43% by 2027, Counterpoint Research had said, adding that these estimates were higher than Counterpoint’s earlier forecast in December 2023 with the anticipated entry of Apple into the segment later this year.
For instance, Gen AI-enabled smartphones were projected to cross 730 million units by 2028, more than triple the estimated volume for 2024.
However, the overall pickup has so far been lesser than perhaps anticipated, Tarun Pathak, Research Director of Counterpoint Research tells me.
I reached out to ask him about the GENAI trends and also the overall trends he was seeing into 2025 on the manufacturing and devices side.
INTERVIEW TRANSCRIPT
Tarun Pathak: In fact, we did the survey on the Gen-AI thing. So we believe that only one third of the respondents were aware of the Gen-AI as a service in terms of awareness is still growing. But I think the key thing here is use cases.
We believe that this is something that is still in the works. And if you look at it from that perspective, we believe this is going to disrupt for sure. But when and how that it will define.
So I think the way we look at it is right now, a lot of things are happening very gradually in that certain landscape, like OEMs are working in their direction. But then when it comes to disruption, it will suddenly disrupt when you have a killer app or use cases coming into picture. So I think there are two things to it.
One, from where the industry is looking at it, which is more of your, let's say, starting from the players like Google or Meta or NVIDIA, or even at certain developers who are working alongside with them. And then you have the mediums, what we call as players like OEMs that are actually looking into how we can basically bring those things to the end consumer. So if you look at the entire AI ecosystem, it starts with your services and applications.
Then it goes into enterprise domain specific, very proprietary AI models. Then you have those training and code and hubs which basically train those models, foundational models. And then on top of it, you have those datasets that are building on top of it.
Then the other thing is what you do with those datasets and everything. Obviously, you do this computing on the cloud and server infrastructure. Then obviously you have the semiconductor companies coming into picture Qualcomm MediaTek because they're building chips that are powerful enough to run these models on the devices.
And then obviously you have foundry kind of equipment, IP tools, entire value chain. You have the semi-infra companies, then you have cloud platforms, you have models and frameworks and you have apps. So the biggest value right now, I think it is more on the infra and semiconductor side of things.
That is where you will see a lot of action happening. You're seeing like what has happened with NVIDIA success story. So that is one, like if it is a $250 billion opportunity, 150 lies in that particular infra-semic.
But then there is another end of it, which is the consumer side of it. There are not a lot of practical use cases we have seen which consumers are saying, okay, here, this is something we are really looking forward to. And that's the gap that will be bridged in the next one to two years.
We have seen certain positives as well because the survey we have released on our GenAI report, although it was showing only a third of respondents are aware of GenAI, but half of the respondents who actually said they are aware, they said, we are quite familiar with the GenAI, with the GenZ leading in that familiarity thing. And if you look at from the aware users, 73% of the respondents actually tried GenAI applications on the phone. And what they believe is 66% of them believe that on-device GenAI will be super helpful for them from privacy and security perspective.
And then what they are saying is in terms of use cases right now, these writing assistants, AI writing, those kinds of things are currently very helpful to them. They are summarising text, but then there will be a lot of use cases that will be more like, let's say, image generation or photography, computational, AI agent. I think the biggest trend for the next year will be on AI agents, how those AI agents will change the entire smartphone experience and completely change it.
Because right now, until now, we believe that we used to adapt to the smartphones, like in a sense, from the personalisation perspective, the smartphones of the future will be even more personalised going forward.
Govindraj Ethiraj: Is there one example before we go that you feel we'll see in our hands literally in the next few months of what you're saying, the personalisation and AI?
Tarun Pathak: Yeah, definitely. So think of it like I am out, like for example, on my phone, there's an app and I am actually navigating certain things of my smartphones through apps on my phone. But even with me opening my phone, they will sense that I am approaching towards my home, they will switch on the lights, they will make sure like if it is obviously the summer season, they'll switch on the AC if it is connected and I do not need to do anything.
So for example, another example is developers, let's say, take an example of Uber. It's now it's already nine o'clock and every nine o'clock, Monday to Friday, I book a Uber from same place to my office. It will not even ask me, it will just give a prompt that seems like the time is here.
Would you like to need to book an Uber to your office? I'll just say yes, and it's done. So those kind of prompts, those kind of things, we believe likely to happen.
And that will be driven by the mobile phone. Exactly. Because we do not see that interface going away unless until you have a complete disruption happening in terms of your input mechanism, which is like, let's say, XR or Metaverse that can potentially replace, but we're still a couple of decades away from that adoption.
Govindraj Ethiraj: So as we head towards the end of 2024 and 2025 promises a lot of geopolitical shifts. What does that mean for the telecom manufacturing industry and specifically smartphones.
Tarun Pathak: I think as we end the year, there have been a lot of learnings like what has happened. We had eventually seen like this buzzword which is like AI that is now shifting into reality because we have seen that option in certain things. But at the same time, I believe the key area for 2024, the key topic has been these geopolitical tensions that we have started like a couple of years back with China and US being in the middle.
What we believe that these, not only the tension, but this kind of cooperation will play a very important role in the democratisation of technology going forward because we are entering a decade where everything will be connected and that needs to be connected is basically what we call them as semiconductor. There's a chip that goes into everything. And now what we are seeing happening is these advanced countries, they're looking to localise some of these manufacturing facilities or manufacturing landscape in their own nations.
So that is where you might have seen those partnerships that are happening or the announcements from some of the companies expanding their facilities beyond their home nation. So we have seen that happening in Taiwan and OCPSNC announcing beyond Taiwan, expanding into US, different countries. We have seen a lot of these nations also announcing subsidies or even this benefits for the growth of the semiconductor ecosystem, which is again very important because if you have to localise something, you need to have some kind of activity in terms of manufacturing happening in that country.
You control the IP and everything. So I think that sets a very important 2025 for us because there has been a shift in powers as well. We have seen a new government coming into the US with President Trump coming into picture and he has been quite vocal on a lot of these things, especially with the tariffs and obviously a very key eye on keeping the key technologies close to their heart and make sure that the entire IP stays within that.
So we believe the next couple of decades, all these countries will play a very crucial role and keep a very closer eye on how to develop that leading tech that will connect everything going forward. We will be like ending a billion of devices that will be connected and people will be sharing a lot of their personal information on top of it. So that brings us to a very, very exciting chapter of this technology landscape across different nations, across geographies, across key segments, right from chip to cloud.
Everything will be super important to keep an eye on where the supply chain is moving.
Govindraj Ethiraj: Right. So specifically in iPhone production in India is going up. Many of the parts for those iPhones come from China.
The US is likely to increase tariffs on China. It's going to put tariffs on India as well, as it has promised at this point and on other countries. The tariffs on China would be much higher.
So what is all this adding up to and how will this change the dynamics of smartphone making?
Tarun Pathak: So I'll see the kind of, so first of all, there are two things. One is manufacturing and then other thing is assembly. So these are two different things.
So what we believe that in the assembly kind of things will expand gradually across the globe. China used to control a lot of it and we believe that sort of it is letting it go in a sense, because now you can see phone being assembled in countries like Indonesia, even in countries like Bangladesh, Pakistan, Latin America, India. So that is one.
The second thing is the localisation of the components. And I believe that is where the difference lies. For example, for India, I think it will be interesting, like the numbers is one part, how many iPhones are being assembled, produced in India.
That is obviously good for the trade, reducing your import bill. But at the same time, we need to see how much of those components that goes into these devices are being sourced locally. And that is where we still feel China has an edge.
And for that ecosystem to develop in certain, and not all countries will be able to do it. We believe India has an advantage. Another country I can look into is Vietnam that will be competing very closely in terms of their policies.
And that is why you can see these programmes like India Semiconductor Mission and what we have seen. There are a lot of focus on the fads, a lot of focus on like how to scale the entire semiconductor ecosystem in India and making sure the companies come here and invest, because you will be driving that the local valuation push if you attract this company. So that is where I think the larger eyes will be on rather than pure assembly of the devices that is just a 5% valuation.
Govindraj Ethiraj: So therefore, we don't know what's going to happen, let's say in two months time, and we are better off planning for the medium to long term in terms of manufacturing capacity and so on. Exactly.
Tarun Pathak: That is what like if the tariffs increase, one is like we believe that India is still in a great position, because we do have facilities that we have started in 2014 with Make in India, then PMP phase manufacturing programme, then PLI production incentives. So we have actually done quite well in terms of expanding that ecosystem. And if that thing happens, India should be in a good position in terms of localising some of the operations here in India and export it to other countries.
Govindraj Ethiraj: Tarun, thank you so much for joining me.
Tarun Pathak: Yeah, thank you. Thanks for having me.
