Markets’ Longest Losing Streak In 2 Years Could Continue
The stock markets rose somewhat encouragingly in the beginning but quickly gave up gains to sink quite sharply as a sell off continued
On Episode 404 of The Core Report, financial journalist Govindraj Ethiraj talks to C S Vigneshwar, the newly elected president of the Federation of Automobile Dealers Associations (FADA) as well as Nitin Jain, chairman and managing director of the Neo Group.
SHOW NOTES
(00:00) The Take
(05:00) Markets’ longest losing streak in 2 years could continue
(05:40) More global brokerages cut India weightage, increase China
(06:41) India gold prices hit record highs
(07:40) Oil prices rise, BP cuts back on renewable targets, shifts back to oil
(08:46) Car inventories at dealerships cross record 80 days
(15:10) How wealthy investors invest at times like this
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 Tuesday, the 8th of October and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take: The Fork On The Road For Ola
The problems, or at least one for Ola, the cab hailing company turned electric vehicle maker, started with a fork.
Not the kind you eat your food with but the piece of metal that joins the handlebar of a two-wheeler to the front wheel.
The oversimplification is mine.
Ola’s scooter and technology was acquired from a Dutch e-scooter company Etergo and the same technology and components were rolled out in the Indian market in August 2021.
A major exception seemed to be the battery pack which was now fixed as opposed to the removable in the original.
Automotive reviewers called the Ola S1Pro a better scooter than the original and India’s best performing, fastest and even best looking scooter.
Till the forks started to collapse soon after and complaints gathered steam in January last year. Users sharing pictures and even starting a Change.org petition against the company.
Some users pointed out, and automotive journalists I spoke to concurred, that it was quite obvious that this design was never meant for Indian roads and Ola should have done a proper recall and fixed the forks.
Instead in March it offered an optional upgrade to strengthen the fork further even while insisting the concerns were unfounded and its components were engineered under extreme conditions and built for greater loads.
If the concerns were unfounded then why change ?
Anyway, maybe I only read some of the posts but they appeared largely of the kind who were seeking the company’s help and assistance.
Nevertheless, Ola’s response was denial, obfuscation, and attack as is quite evident from the March note as well.
A trait that continues to the present day as a social media battle surfaced over the weekend between the founder of the company and a stand up comedian who posted pictures of scooters awaiting repair.
There are of course several lessons in this.
First, there is a reason why products that are inherently capable of causing harm to its users like two or four wheelers have to go through severe testing.
One of the criticisms Tata Indica faced in its early years as did Tata Nano later on was that these products were not sufficiently tested.
The satisfaction that Tata Indica was India’s first swadeshi car would not really help if the car broke down in the middle of nowhere with no easy mechanical fix.
Nor did it help that the Tata Nano was the cheapest car designed and made for India helped when it experienced multiple problems, including catching fire, mostly in 2010.
But in both these cases, Ratan Tata did not launch a personal attack and blame competitors and social media trolls for his misery. Thankfully there was no social media or trolls then.
The problem may be with a fork or a battery. But it gets compounded when clearly there are not enough repair staff to attend to the problem or service centre capacity.
That reflects inexperience and arrogance or the assumption that a two wheeler is like a mobile phone. Use and throw rather than expect a service centre to respond and repair.
Traditional automotive makers understand the cycle better, that setting up a dealership network which sells the vehicles should go along with servicing capability as new vehicles are launched.
Ola instead went for a direct to consumer approach which has evidently backfired because it now says two weeks ago it is going into multi-brand retail showrooms.
There are other problems there which I will pick up at a later date.
The bottomline is that the automotive industry is a tough industry for serious players and even the best make mistakes.
There is a shortage of EV technicians today, for all classes of EV vehicles.
In which case you should not be dumping products in the market without having proportionate and trained service staff to respond when things go wrong.
Unless you didn’t really budget for it in the first place.
And then there is the price.
Ola is now selling its S1 scooter starting at Rs 49,000. Seems fine. Except that this was earlier advertised as starting at Rs 80,000. The prices are still showing on several auto websites by the way.
This is irrational and detrimental to the company and the industry. Because low prices means compromises along the way, including the cost of setting up a spares and service network.
The company could of course argue that investors are paying for these market entry or penetration strategies. And discounting is a cost they can bear.
That is technically correct but practically improbable as eventually the mistakes of the past will catch up with you.
Because unlike in other digital industries, your job does not end with customer acquisition.
It begins there.
The Top Stories..
Markets' longest losing streak in 2 years could continue.
More global brokerages cut India weightage, increase China
India gold prices hit record highs
Car inventories at dealerships cross a record 80 days.
Oil prices rise, BP cuts back on renewable targets, shifts back to oil
How wealthy investors invest at times like this.
Stock Markets Tilt And Wilt
The stock markets rose somewhat encouragingly in the beginning but quickly gave up gains to sink quite sharply as a sell off continued.
The indices fell for the sixth straight session on Monday, their longest losing streak in two years as concerns over middle east tensions and the extended impact weighed on the market, Reuters pointed out.
The Sensex was down 638.45 points to close at 81,050. The NSE Nifty50 fell 218 points to end at 24,795.75.
Most Nifty50 stocks were dragged down.
There are no clear global triggers apart from the main negative ones.
Chinese markets reopen today and all eyes are on them to see if they will rise further. Which is not good news for India.
Stock Brokerage CLSA, the same folks who came with the Modi stocks theme have now said they are cutting India overweight to 10% from 20% and raising China to 5% overweight, according to the ET.
According to CLSA there were three witches - oil price, new issuance (IPO boom), and retail investor appetite.
"After India's 210% outperformance of China, relative valuations are stretched. Yet strategically we argue India still offers the strongest scalable EM growth story," CLSA analysts quoted by ET said.
Last week, DBS Group also said India will underperform China for the rest of 2024 following Beijing's swathe of monetary and liquidity measures.
"India has performed strongly and we are looking at other markets. China and ASEAN could actually outperform. India is actually quite a domestic liquidity market," Joanne Siew Chin of DBS Group had said.
Gold Prices High
While stocks dipped and investors reassess their equity exposures, some quite likely started buying gold prices sending them up.
In India, gold prices hit a fresh all time high of Rs 78,700 per 10 grams on Monday thanks to strong domestic buying and also reflecting international gold price trends.
Gold had settled at Rs 78,450 per 10 grams in the previous close on Friday, the BS said, adding that silver declined Rs 200 to Rs 94,000 per kg from Rs 94,200 per kg on Friday, according to the All India Sarafa Association.
Traders attributed the gains in gold prices to an increase in the domestic demand by stockists and retailers.
Besides, the decline in equity markets also aided the rally in the precious metal as investors moved towards safe-haven assets such as gold, they added.
And then this is the festive season.
Oil Prices High
Oil prices almost touched $80 a barrel as the market waited to see if Israel would retaliate against Tehran for a missile attack last week.
Brent has risen 2.4%, after jumping the most since January 2023 last week, Bloomberg reported
Iran’s attack on Israel has raised fears over an all-out war in the Middle East.
On the other hand, there are questions about the demand outlook — especially from China, the world’s largest importer and of course excess supply.
Meanwhile, fortuitously, BP, once British Petroleum has abandoned a target to cut oil and gas output by 2030, Reuters reported.
In 2020, BP's strategy had pledged to cut output by 40% while rapidly growing renewables by 2030.
BP scaled back the target in February last year to a 25% reduction, which would leave it producing 2 million barrels per day at the end of the decade, as investors focused on near-term returns rather than the energy transition.
The London-listed company is now targeting several new investments in the Middle East and the Gulf of Mexico to boost its oil and gas output, the sources said.
Car Stocks Pile Up Further
Speaking of festive seasons, India’s automotive industry is desperately hoping this year’s festival season will come as a saviour.
Meanwhile, car sales dropped sharply by 19 per cent in September.
This has been attributed to seasonal factors such as heavy rainfall and ‘Pitru Paksha’ or ‘Sharadha’ -- a 16-day lunar period when purchasing a new product is avoided by many.
The bigger problem so to speak is the inventory pile up which has a record 80-85 days for the dealers, which is equivalent to 790,000 vehicles worth Rs 79,000 crore.
In August, inventory levels were at 70-75 days, totalling 780,000 vehicles, valued at Rs 77,800 crore, as we have been reporting on The Core Report.
The Federation of Automobile Dealers Associations (FADA) in its monthly update on Monday said the near-term outlook for automobile retail is cautiously optimistic as both Navratri and Diwali fall in the same month.
Interestingly, the overall retail sales for September declined by 9.26 per cent, with all the other categories, except three wheelers and tractors showing a sharp decline compared to the same time last fiscal, the BS said.
I reached out to C S Vigneshwar, the newly elected president of FADA and began by asking him why dealerships were taking on more inventory even if sales were not moving.
INTERVIEW TRANSCRIPT
C S Vigneshwar: It's kind of a situation where we probably need to listen to each other, hear each other out. I'm talking about FADA and the manufacturers. We've been voicing our concern regarding the increase in inventory for the last four to five months.
We've been voicing out quite vocally from FADA because it's a source of concern. Our usual inventory is about three to four weeks but it's about 85 days right now. And the manufacturers also have their point of view which I really appreciate.
Their point of view is that this festive season, Navratri and Diwali, is going to be for about 42 days. It's probably a very condensed festive season and the manufacturers tell that we can't manufacture vehicles just for two months and we can't take up our production capacities multi-fold. So they say that this addition and slow climate inventory is to make sure that the customers are catered to, their demands are catered to, which I also empathize with.
So when you look at our situation in the last one week, when we've been speaking to our dealer partners, it's quite encouraging because the inquiries have gone up fourfold and hopefully this would translate to better conversions and then to bookings and then retails. I'm quite confident it's going to really be a bumper season but I don't know whether it is going to solve the inventory problem fully but I think most of the inventory problems should be solved by the looks of it and by the market sentiments.
Govindraj Ethiraj: So when you say bumper season, would you compare let's say the proportionate rise you see in any year or is this year likely to be any different?
C S Vigneshwar: I'll give you a run-up to it. The run-up to this year has been a long and protracted election followed by a crazy heat wave. Summer was really bad and then we've been having rains and floods all over.
So the customer has not been finding an opportunity to go out and buy. So I feel that there's going to be some pent-up demand because right now the sentiments are good, you got festivities to celebrate with your family and friends, you have decent weather, you have all the actions are already over by now. So you don't have any other reasons not to go out and buy.
So I'm thinking that apart from the pent-up demand also the very condensed festival season will help in making sure that customers walk into the showrooms and walk out with vehicles.
Govindraj Ethiraj: And is that the sense that you're getting as well I mean on ground apart from what let's say dealers are telling you or other dealers are telling you or manufacturers are telling you?
C S Vigneshwar: We have our own dealerships and we have seen our own dealerships inquiries have gone up is looking quite strong. Some brands have some leeway from the fact that some brands are carrying bookings, some brands are not carrying as many bookings so that's where the worry is. But the first seven days of this month if there is any indication I think it will be a great festival season.
Govindraj Ethiraj: So coming to the brand so clearly some models like Mahindra's latest model has seen a huge booking surge and there are other Mahindra models also doing well and there are other cars like hybrids for example which have waiting lists. But that proportion of those in contrast to the entire universe of car models is much smaller isn't it?
C S Vigneshwar: It is smaller it's not an indication of the whole industry. A small portion of it is under bookings most of them are not. It's a great time to be a customer right now because the demand seems to be slowly climbing up but the moment the demand hits its peak then you'll be seeing the discounts actually start coming down.
Right now the customer unlike in the last four years is being able to go and get some good deals and also make sure that the vehicle of the customer's choice is available. Today our inventories are flush with different colors, different suffixes, different models so the customer can actually come and choose. Let's say some time ago last few years I know that customers have walked in and they had to compromise either on the color or compromise either on the some kind of the suffix of the vehicle some you know and then they had to walk but today the customer is really king where the customer can come there and get a choice of whatever vehicle the customer wants.
Govindraj Ethiraj: Right and last question so how are you seeing the post festive season as in do you feel that the inventories that have been gathering or climbing for the last many months would start evening out and are you optimistic at all on that score?
C S Vigneshwar: I'm optimistic that the inventory is going to come down. I don't know exactly how much it'll come down by but it'll definitely come down and there's also as an industry the manufacturers all of us need to work together for a healthy dealer ecosystem. The manufacturers also clearly realize this and they appreciate it.
They also know that they can't you know keep sending vehicles and dispatching vehicles to us endlessly. There's a limit to it and I think we are already reaching the limit but this limit coincides with the high season that's what the industry also has planned apparently and it'll be great to not only sell more vehicles but also see our inventories come down during the season.
Govindraj Ethiraj: Right Mr. Vigneshwar, thank you so much for joining me.
C S Vigneshwar: Thank you so much.
How Do The Wealthy Invest?
When markets give up several thousand points in a week and panic starts to set in, it is a good time for reflection.
It's not easy but important and perhaps also the only time that it could happen.
And perhaps one good place or person to pose this question to is a wealth manager who manages billions of dollars but most for very high network individuals, the kind who don’t lose sleep when markets fall over 4% in a week but at the same time want to see their wealth growing over time.
I reached out to Nitin Jain, founder of the NEO Group, a wealth management company that advises or manages about $3.5 billion of assets and began by asking him how he viewed markets, on behalf of his clients, as a long term investor, at this time?
INTERVIEW TRANSCRIPT
Nitin Jain: Obviously, we're in a very, very positive cycle, very positive economic cycle, and that's getting reflected in all kinds of prices across asset classes. Of course, the most talked about is equity markets. I think the kind of run that we have had in stock markets for the last three, four years is one of the five largest bull markets that I have seen in 25, 30 years of my career.
So that also is driven by the fact that the last four, five years, the earnings growth has been sort of bull market without any fundamental basis or purely on speculation or purely on liquidity. Just to give you a number, in 2020, if I'm not mistaken, the Nifty earnings was close to around 410 or 420. So that 410, 420 is most likely going to be more like 1150 to 1200 this year, above 25.
So there's 3x jump in the fundamental earnings of the index, and that is also reflected in the rise in the index value. But there are pockets, I must caution, there are pockets of exuberance that are getting created in the equity market particularly, especially in the small and mid-cap segment. I think the primary markets have been very, very strong.
So I do think at this point, we should be slightly more watchful on the equity markets. I think over the next 5-10 years, the difference in returns for high-quality companies versus not so good, I think will be significant. So that's one red flag for me right now, as you speak.
The second market, which has become very interesting right now is the credit market. And the credit market, obviously, we have had a lost decade, frankly, from 2010 to 2020, if you think about it. Most of the lending institutions, particularly the banks, were nearly struggling for the first half of the decade.
2012, 30, 2019, 20, I think we were practically in a credit crisis in one form or the other. First, the banks went through their own NPS IPM that we had, and so on and so forth. But what that has led to, and I should also add the IPC code coming into play, the bankruptcy code coming into play, what that has led to is that the credit markets have struggled dramatically.
Corporate leverage has come down, and the credit culture has. So as a combination of these two or three factors, what has happened is we are probably living in rather more benign credit environments that we have. What that translates into is very good risk-adjusted opportunities from a supplier.
So I think the credit market is a very, very interesting and a very strong market as we see it right now. Real estate, again, I think is something fascinating, something very fascinating happening in real estate. I think it's become very, very market-led.
And strangely enough, if you go back and hear the narrative in the last seven, eight years, it was always about more affordable real estate going better. I'm talking about the residential. But what has happened is, strangely, the luxury market has taken.
So actually, right now, if you see all the developers, all the builders, they're all trying to create the higher end of the segment, particularly in the big metros, because that's where the demand is really taken. In fact, probably it's a wealth effect of stock market, which people are making a lot of money in stock markets, and that wealth creation is now starting to go into real estate. So that looks like a very strong market, more so in the higher end of the segment.
Very interesting times, but very, very positive.
Govindraj Ethiraj: Right. So you said stocks, credit and real estate. Do you have any overseas, international exposure as well?
Nitin Jain: It's still a very small part of our client portfolios. But I think, thank you for pointing that out. It is becoming a very strong theme.
Most people, most of our clients are not talking to us about how they can diversify into dollar assets. And partially, it was done by investing in gold and some of the funds in India that were launched in the last seven, eight years. But now people are actually looking at gift as a very viable option to invest.
Sure. We're seeing a lot of interest, particularly in US equities. So I think US equities particularly, even within US equities, I would say the tech part of US equities is getting a lot of interest.
Govindraj Ethiraj: Right. So if you were to, let's say, rewind three or four years ago, and then look at the kind of allocation you would have done, I know this fund was started later, but say, if you would have done a certain allocation, and that allocation today has reached this point where clearly equities have done much better, as you said, then perhaps imagine, real estate has also done well. And there are other opportunities, which are more, let's say, balanced, defensive, and so on.
So, but if you were to build the same portfolio today, and starting from scratch, would you build it the same way or differently for the next five years?
Nitin Jain: Not change dramatically, but for sure, I think the allocation to equity might come down. You know, I have spent a large part of my life trying to explain to people why they should increase their allocations to equity. For the first time, I think I have to be at the other end, but everybody was talking to me saying, why not go 100% equity?
And I think remaining more balanced is, I think, the long-term key to being successful in managing. I've never seen this kind of euphoria and bullishness that even people who are new to markets are experiencing right now. And I would probably be more like, equate on equities, very heavy on credit, as I said earlier.
I would not be very allocated to real estate from an investing perspective, because one, I think it's a very industry with the kind of cost of capital for most of the developers. I think returns eventually won't turn out to be as exciting as they look. It's opportunistically, we will look at some of those things.
So going forward, what has happened is, in the last three years, we have had a major bull run in the public market. And strangely enough, we have had a nuclear victor in public markets. Just imagine, in public markets, including the SME, IPO, et cetera, people are raising thousands of crores so easily.
But young companies, which are doing very well, and the entrepreneurs, who will be opportunistic, suddenly you're finding, at least a couple of months later, you're finding that there's hardly any money going to them. And that was the after effect of the 2020-21, before the Nykaas of the world, Zomatoes and that, because they had raised Byjus. There was so much money that was raised and lost in that phase, or didn't perform to the best of expectations when the IPO happened.
Suddenly that market had pulled off dramatically. So I do think the private equity market right now, or the private markets in general, have become much cheaper than the public markets. So there should be some tactical allocation that I would like to make from these markets, the private markets, even within it.
Govindraj Ethiraj: Right. So if you were to look at, let's say, the habits of well-to-do investors and all that you've seen, what would you say are the two or three good lessons that you would like to share from them, or from this set of class of investors, for those who are perhaps not so, let's say, wealthy, and yet would like to adopt a similar strategy?
Nitin Jain: More than a principle, I would say a couple of philosophies that I have learned from Zomatoes very, very successfully. One, always focus on the upside as well as the downside. I think most investors actually focus a lot more on the possibility of the loss than the possibility of the profit.
And size your bets, size your investments accordingly. But I think not investing in opportunities that you're convinced about and you see great outcomes because of fear of loss, I think is a sure shot way of not making enough wealth for yourself. So taking risk in a calculated way in an opportunity that you see, I think that is one thing that I found as a common theme across all the successful investors that I've come across.
And the second is the element of I think not getting carried away in a bull market like this, sticking to your asset allocation, sticking to your mix of fixed income, credit, real estate, gold, and equities. Even when everybody in the world is out there, why do you invest in fixed income? Those are the two takeaways that I have had in a meaningful way from the interaction with my clients.
Govindraj Ethiraj: Right. That's very useful, Nitin. Thank you so much for joining me.
Nitin Jain: It was completely a pleasure.
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