Markets Run on Positive Undertone
The stockmarkets see-sawed on Friday as they took note of the rising tensions between India and Pakistan
On Episode 567 of The Core Report, financial journalist Govindraj Ethiraj talks to Arvind Chari, CIO at Q India UK as well as Sachin Gupta, Chief Ratings Officer of CARE Ratings.
SHOW NOTES
(00:00) Stories of the Day
(01:00) Markets run on positive undertone but grapple with uncertainty
(12:21) India’s forex reserves are rising
(15:18) Apple gears to move a big chunk of manufacturing from China to India
(16:34) India Inc’s balance sheets and credit profiles are in good health
(20:47) Amazon sellers are raising prices in the US
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 Monday, the 28th of April and we're coming to the end of another month, the first of this financial year. And this is Govind Rajatiraj reporting on broadcasting and streaming from Mumbai, India's financial capital. This is a holiday-shortened week.
More on that soon. Our top stories and themes:
The stock markets run on a positive undertone but grapple with uncertainty.
India's forex reserves are rising, coming close to the September peak of last year.
Apple gears to move a big chunk of manufacturing from China to India.
India's balance sheets and credit profiles are in good health. Is that good enough?
And Amazon sellers are raising prices in the United States.
Markets
The stock market seesawed on Friday as it took note of the rising tensions between India and Pakistan following a terrorist attack in Kashmir last week that killed 26 tourists from all over the country. On Friday, it opened with an early high of 80,131 and then fell to a low of 78,606 and was down about 1,500 points in intraday deals. It finally recouped its losses and ended with a loss of 589 points to close at 79,213.
That's Friday once again. The NSE Nifty was down 207 points to 24,039 and moved roughly in the same way. If you were to look at last week as a whole, then the indices still were positive, rising 660 points.
That's for the Sensex and the Nifty rising about 187 points. The broader indices were down on Friday. The BSE mid cap and small cap indices were both down about 2% each.
The coming week, rather than this week, is a holiday shortened one. Like I said, Thursday is a holiday as it's May 1st and Maharashtra day where all the exchanges are headquartered as well. Geopolitical developments on the Indian border will be on the radar of traders and India's response is likely to be specific and surgical over time going by experts and markets are going by that interpretation as well.
On the tariff front, there's nothing new to report as such except that higher prices are now kicking in within the US, even as cargo movements across the world in many cases have come to a grinding halt. And that includes India. The representative of a government export association from Tirupur told me last week they were unable to have constructive negotiations as both sides were in a wait and watch freeze mode.
A 10% duty on goods imported into the US including from countries like India is already now in force. Foreign portfolio investors are, however, buying steadily into India at this point and are likely to continue from all indications. On Wall Street, the S&P 500 rose on Friday and other indices like the Nasdaq composite and the Dow Jones were all higher, though the week overall for Wall Street was good with the S&P 500 rising close to 5%, the Nasdaq close to 7% and the Dow about 2.5%. Now, there is not much correlation between Wall Street and India right now and even if funds were to flow out of Wall Street, India may not be a direct beneficiary since it would potentially and otherwise attract other pools of capital aimed at emerging markets in general or India in specific.
But to get a sense on how portfolio investors were looking at India at this time and the sense of these larger pools of capital and where they could go, I reached out to Arvind Chari, Chief Investment Officer at Q India UK, an affiliate of Quantum Advisors in India. Arvind is based in London and I began by asking him how he was looking at or seeing things right now.
INTERVIEW TRANSCRIPT
Arvind Chari: A lot of things have happened going as you realise the market is buzzing, too many things are changing and it looks like it is fundamental reset of, some may call it global world order, some may call it global geopolitics, but I'm focussing on investments and I think there is a very clear reset in the way global investing happens and it will lead to rebalancing and we will see aspects of that play out. And the reason I made that comment is investment as Manmohan Singh very famously said in July 1991 after his budget speech, investment is an act of faith.
People make investments on a basis of faith and trust and if you look at the US, has been the largest economy, has the largest markets both in equity, bonds and in private capital and the reason people invest in the US, because there is democratic order, there is rule of law, there are institutions both in the financial as well as in the legal setup, investors find it trustworthy and they know that making those large investments into the US and the other markets will ensure that their investments are always taken care of and then there are rules and regulations to support it and I think some part of that has impacted, not for everyone, but if you're a Canadian investor or if you're a European investor, given what has happened on a geopolitics basis or against the countries in terms of tariffs or security, it is a fundamental reset and these are large investor pools. So I'll just give you data on it. As of June 2024, this was the last time the US treasury released that data, foreign investors owned about 31 trillion dollars in the US, in public markets.
17 was public equities and 14 was in debt. That's a sizable amount of money that is invested in US public markets and if you add private investments, so the global private capital is about 13 trillion and the estimate is that about 60 percent of that 13 trillion is invested in the US and if you assume a lot of that is foreign investors investing in the US, private equity, venture capital, real estate and infrastructure segments, these are sizable investments invested into the US and the reason we said there's a reset and rebalance is geopolitics and the way countries think about each other or whether corporations think about each other or investors think about each other may have changed, especially for a few countries that I mentioned and they will think about what do I need to do, do I need to have so many investments and in general, especially in the last 15 years, given US's outperformance against Europe and other advanced economies, both in economic sense and in the market sense and it was of course driven by MAC 7 as we call that the tech boom. So global investors are over allocated to the US and if I look at one metric, the MSCI all country world index, which is the country weightings of different countries in the MSCI world index, US used to be about 40-45% 15 years back, it is now closer to 65-70%. So it just shows outperformance, which means investors who are passively invested or use that as a benchmark are also over allocated to the US and this will all get to a rethink in terms of do we need so much investment in the US, is it at risk, not from a market perspective but from a fundamental perspective of risk of my assets being impounded or my assets being taken away or will my homes or my real estate assets will be honoured. So there will be a reset like that and of course then there is a financial market aspect saying that if the US actually goes and installs all these tariffs on the world, will it have an impact on the economy and will it go into recession and we are seeing some of it play out.
So this is the reset and rebalance that I'm talking about and this is where we are in terms of what investors are thinking and whatever little conversations that I've had with some of these global institutional investors, they are thinking about this, whether they've acted on it or not is a different question but they are definitely thinking about A, should we have so much allocation to US, is that changing from a reset perspective or from a market perspective and then what do we do with that money, like where do we go and invest that money.
Govindraj Ethiraj: And people like Chris Wood who clearly said that they want to sell America, I mean not all of it I'm sure and invest more in India and have increased their India weight in recent weeks. How are you seeing investors, all of this doesn't mean a flood of money or a fresh flood will come into India but what are the underlying signals if so?
Arvind Chari: India should be a very very clear beneficiary of this. A, because India has large markets. India's economy and the public markets and the bond markets are large enough to absorb a lot of that capital which is as allocations are moving away from the US for example.
And second is from a geopolitical perspective, India is kind of a friendly country, India is not a threat to any nation. India also has the same aspects of democracy and rule of law and institutions and the legal setup which will ensure that investor capital, investors can invest with faith and ensure that the capital is always protected from rules and regulations. So that being the case that India should see reasonably large flows.
So if I just go back to the number, if the total amount of investments into the US is say about 40 trillion and even if 10 percent of that comes out of the US, that's 4 trillion dollars. And if India is able to get 5 percent of that 4 trillion that comes out of the US, that's 200 billion dollars. That is sizable in terms of size.
Now whether it happens next year or three years or five years, we don't know. Whether it happens itself is we don't know because most of the money might just go back to home countries. So Europeans will take it back to Europe, Japanese will take it back to Japan, Canadians will take it back to Canada and maybe keep it there till the end they're able to see what happens in the way the world is changing.
But I'm pretty sure some of it will get reallocated, emerging markets might get a reallocation. It's a general tendency that a dollar is going to depreciate when emerging markets tend to do well at that period. So you will see those allocations as India will clearly be a very very big beneficiary.
Technically as I said the number, like this is my math number and it's an arithmetic back of the envelope number, but it is sizable for both public markets in India, equities and bonds and in private infrastructure real estate. Have we seen that yet? No.
It hasn't been in any meaningful manner. Maybe some of the flows that we're seeing are just allocations to emerging markets increasing and India is getting a share. I don't think we are getting any large India dedicated mandates or people are thinking.
But I believe that will happen as money goes back and people rethink global portfolios and the fact that India is already a very large part of the global economy, 4-5% weight in global market cap and investors are under allocated. As I've told you in our last talk, global investors are less than 1% allocated to India on their overall portfolio basis. So that has to change.
That has to increase and maybe we have one more very big tailwind for India in terms of a global reset and a global rebalancing of portfolios.
Govindraj Ethiraj: So we've also encountered a new local geopolitical risk. We had a deadly terrorist attack in India following which there is some question about whether there could be an escalation. Either way, how would the market see this in your sense at this point?
Arvind Chari: It felt like yesterday's move that we saw the market is already making some risk premium adjustment to an event and because we don't know what the Indian response is going to be and we can only go by past history like Kargil was one episode and then post 2008 was a very different way that India reacted to this. There was a lot of covert and a lot of at the geopolitical level, we seem to have done something and then we had Uri and that surgical strikes and what happened in 2019. So the market is going to price it accordingly in terms of what could be the actual impact.
If it escalates into a full-blown war, there will be an impact on the markets, on all currency, bonds, interest rates and equities. But otherwise, if it's a limited escalation and it's over a period of time, I think markets will be able to deal with it. Also, what has happened is given the fact that foreign investors have been net sellers in India over the last six months, it has changed in the last 10-15 days.
But in the last six months in September, they've sold, they've been net sellers and I don't think there is much larger selling from their perspective. So unless domestic retail investors panic from this escalation and they turn to be big net sellers, for a limited escalation, we should not get a very big impact. If it gets a big one, then I think this aspect of money coming into India will take a pause, they will wait for this to play out and then make large allocations.
So we'll have to wait and watch how India responds to it. It is a live situation.
Govindraj Ethiraj: Arvind Thank you so much for joining me.
Arvind Chari: Thank you.
reported by Reuters. Reserves rose by about $8.3 billion in the last week after increasing by about $39 billion in the previous six weeks. India's foreign exchange reserves are now about $19 billion from a record high of $704.8 or about $705 billion hit in late September, which is also the point where markets had peaked. Interestingly, while markets will have to rise further to return to their September 2024 peak, it does appear that Forex reserves are closer to returning to that same peak point, though, of course, we'll have to wait and see how the next few weeks goes. But the last week was a good one for the rupee gaining about 0.8%, its best weekly rise in about five weeks, thanks to foreign portfolio inflows into Indian equities, and the rupee closed at 85 rupees 45 paise per dollar ending slightly down, that's 0.1% on the week, according to Reuters.
Reliance Industries Beat Estimates
For the fourth quarter on Friday, thanks to stronger-than-expected performance in its retail and digital businesses, as opposed to its oil-to-chemicals business.
Net profits were about Rs.19,407 crore for the quarter ended March 31, and that beat analysts' expectations of Rs.18,877 crore, according to LSEG data quoted by Reuters. Earnings before interest taxes depreciation and amortisation, or EBITDA, in oil-to-chemicals fell about 10%, thanks to a weakness in transportation fuel cracks, Reuters reported the company saying, though digital services, which also includes, rather, its telecom business, was up about 18%. Jio platforms posted a 26% rise in quarterly profit from a year earlier, thanks to tariff hikes, which all of us, or you, if you have paid or have paid in the last year.
Retail segments EBITDA also rose 14%, primarily thanks to improved efficiencies and a better product mix, according to the company. We'll have an analysis on that in a day or two. Reliance Retail and Jio have powered the company's earnings over the past two quarters, Reuters pointed out, even as energy has been hit by lower margins and weaker demand.
Chairman Mukesh Ambani said in a statement that the fiscal year 2024-25 has been a challenging one for the global business environment, with weak macroeconomic conditions and a shifting geopolitical landscape. Significant demand supply imbalances and downstream chemical markets have led to multi-year low margins. The company will invest about 75,000 crores, or close to $9 billion each, into its new energy business and petrochemical expansion. Some of these figures have been given before.
Apple Steps Up In India
Apple aims to make most of its iPhones sold in the United States in factories in India by the end of 2026, and is speeding up those plans to navigate potentially higher tariffs in China, according to a Reuters report. Apple is holding urgent talks with contract manufacturers Foxconn and Tata to achieve that goal. The report said Apple sells about 60 million iPhones in the United States annually, with about 80% of them being made in China right now.
The report also said that for iPhones, manufacturing costs in India are 5-8% higher than in China, and in some cases it goes up to 10%. Apple has already stepped up production in India and shipped about 600 tonnes of iPhones worth about $2 billion to the United States in March. So, on the tariff front, as things stand, the US administration has slapped a 26% duty on imports from India, which is much lower than the 100% which China was facing at that time, which was of course subsequently increased.
The India part has been paused for three months, or 90 days, and therefore is at 10%. Foxconn and Tata, the two main suppliers, have three factories in all, with two more being built, says the Reuters report.
A Health Scan of India Inc.
Rating agencies are in a good position to monitor corporate health because they see numbers and they track balance sheets very closely to see signs particularly of stress owing to debt, or rather lagging in debt repayments. Interestingly, India Inc.'s corporate health has been steadily improving, perhaps to the point that it actually suggests the lack of sufficient activity in the form of additional capital expenditure or risk taking. Moreover, defaults have dropped quite dramatically in recent years.
So, what is the health of India Inc. looking like right now in order to understand how poised it is, or companies are, to tackle the current economic situation? And equally, what's the outlook looking like?
I spoke with Sachin Gupta, Chief Rating Officer of Care Ratings, and I asked him about both the present health of India Inc. and how he was seeing the impact of slowing growth.
INTERVIEW TRANSCRIPT
Sachin Gupta: Yeah. So, if you see the credit quality of corporate India has been on an upswing for at least the last three, four years. One of the ratios that we often look at is something called a credit ratio, which is the number of upgrades to the number of downgrades.
So, that ratio for the nearest six month period was more than two, it was 2.35. So, at an overall portfolio level, we upgraded 2.35 companies for every downgrade that we did. And this ratio ever since pandemic, obviously during the pandemic, the ratio went down. But post pandemic, it's been consistently in the range of one and a half to two and a half or so.
So, that very basically reflects that, you know, credit profile is improving. So, that is kind of an indicative thing. But there are actually a few clear structural things which have happened in corporate India, which has led to this improvement.
And one of the biggest one I would say is the IBC, you know, because of which the cost of default for a corporate has become very high so that, you know, the corporates try their best, especially the promoters to not let the company go into default, because once the default happens, their access to debt funding or even equity funding is extremely restricted. So, they try their best, which is very different than how it used to be earlier, when the corporates would typically, you know, try and see if they can get some hackers, some leeway from the banks, and then they will, you know, try and delay payments, etc. So, now, the credit culture in the country is significantly better.
So, that's what we've seen. I mean, if I were to share one more matrix, typically, for an investment gate, I mean, there are about 12,000 investment-grade companies in India, as we speak, at least I'm talking about the large four rating agencies, what they rate, right? 12,000 companies.
Roughly till about four or five years back, every year, there would be more than 100 companies which would default out of these, right? So, 12,100 loans, mostly from banks, some of them could be bonds as well. Some of them could be high profile, like your ILFS and the one and all that, but I'm just saying at an aggregate level, about 100, 120 companies would default, right?
Overall portfolio of about 12,000 companies, roughly about 1%. But now, if you see the last three, four years, the period I'm talking about, that number is, I mean, either in low single digits, high single digits or low double digits, basically about 8, 12, 15, that kind of a number, across again, four rating agencies, so that the default numbers is actually now almost one-tenth in terms of number of companies. And again, the defaults which are happening now are smallish, lowly rated entities.
So, the investment grade starts from triple B minus and above, right? So, triple B minus, triple B, A, double A, triple A, and so on. So, now we are having defaults mostly from triple B category, which is the right thing, you know, which means the weaker ones in the overall portfolio, they are kind of getting hit.
So, the point I'm trying to make is that on an overall level, the credit quality of Indian corporations is really strong, reflected by, as I said, lower number of defaults, higher credit ratio. Also, the other key parameter, how we look at it is the leverage. So, right, so typical, either debt to EBITDA or debt to equity, if you look at this data across the last 10 years, there has been a significant improvement.
So, you know, debt to EBITDA for the top 1000 companies was, you know, ballpark around three, now it is about 1.5, 1.6. So, we can see material improvement. So, the corporates are kind of having more, I would say, prudent financial norms and therefore, yeah.
Govindraj Ethiraj: So, you said that a few years ago, the default rate was 1%?
Sachin Gupta: 0.1% or so. So, I'm saying about 12,000 companies and the total defaults would be about, say, 10, 12 or so.
Prices Are Rising In America
Amazon merchants are hiking prices for everything from diaper bags to refrigerator magnets to charm necklaces and other top-selling items as they confront higher import costs, according to a report in CNBC. E-commerce software company Smart Scout tracked about 930 products on Amazon that have seen increased prices since April 9th with an average jump of 29% in categories including clothing, jewellery, household items, office supplies, electronics, and toys. An Amazon spokesperson, however, told CNBC that the claim was sensationalised and said the research covers a tiny fraction of items in their store and according to their view of the research, fewer than 1% of items saw an increase in price.
The point is that even if Amazon is able to say today that prices have not risen, it's only a matter of time before they do online and offline or the distributors and the platforms are going to be eating a lot of those price increases. Amazon's third-party marketplace accounts for about 60% of the company's online sales and many merchants are based in China or rely on the world's second-largest economy to source and assemble their products, according to that CNBC report. Sellers are, of course, now faced with the challenge of either raising prices or eating that extra cost.
The CNBC report also points out that it is an existential threat for many sellers who subsist on razor-thin margins and have for the last several years dealt with rising costs on Amazon tied to storage, fulfilment, shipping, and advertising fees, along with pricing pressure from increased competition. Amazon CEO Andy Jassy told CNBC earlier this month that the company was going to try and do everything they can to keep prices low for shoppers, including renegotiating terms with some of its suppliers, but he did acknowledge that some third-party sellers would need to pass that cost of tariffs on to consumers.
