Markets Search For Footing Even As Wall Street Hits Highs

Could Wall Street’s Friday performance act as a beacon

14 Oct 2024 6:00 AM IST

| 14 Oct 2024 6:00 AM ISTReading Time:

Markets Search For Footing Even As Wall Street Hits Highs

On Episode 409 of The Core Report, financial journalist Govindraj Ethiraj talks to Jay Kothari, senior vice president at DSP Mutual Fund as well as Amit Prothi, director general of the Coalition for Disaster Resilient Infrastructure (CDRI).

SHOW NOTES

(00:00) The Take

(04:41) Markets search for footing even as Wall Street hits highs

(06:57) FIIs sell close to $8 billion in 9 sessions. The China fear factor

(14:19) Banks get ready for climate & disaster resilience

(24:40) Noel Tata takes over as head of Tata Trusts

(25:41) Air fares are falling in peak season

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 Monday, the 14th of October and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.

The Take:

In 1930 Colgate Palmolive listed on Wall Street, more than 100 years after its founding as a starch, soap and candle business in New York city.

In 1937, a decade before independence, the company arrived in India with its Colgate dental cream.

I usually think of Colgate whenever someone asks me about India-US economic relations as I was at a recent and small gathering of leading communications professionals from around the world over.

The specific question was about the impact of a Trump or Harris presidency. I really struggled to think of what could change dramatically.

For instance, what could change for an all American corporation like Colgate who has been in India for close to a century now and with public shareholding for close to 50 years ?

So why pose this question ?

Well, there is a new angle. And that is the iconic motorcycle brand Harley Davidson, a midwest-based company that is younger by almost 100 years as compared to Colgate Palmolive.

Presidential candidate Donald Trump raised the issue of India’s high tariffs on Harley Davidson bikes last week in an interview on Fox News.

Actually he raised the same issue in the context of Harley in 2017 as well, referring to the 100% tariff levels, though both India and Indonesia had similar tariffs.

Trump’s point now is that America should slap reciprocal taxes on countries like India.

Could that happen ?

The interesting thing is that Harley, like many other auto giants, have over time accepted the fact that the best route to the India market is to have local manufacturing or assembly which it set up in 2010 before launching its range of bikes.

Around 2019, however it said it was shutting shop because of lower than anticipated volumes and of course high tariffs.

Exactly a year later, it returned, this time in partnership with Indian two wheeler giant Hero Motors.

The strategy this time: smaller sized bikes, local partner and of course more affordable price, for example, the X-440 range which is made in Neemrana, Rajasthan and sells for Rs around Rs 2.4 lakh.

Harley’s path is somewhat similar to Ford who of course has entered and exited India for three times, the last time being the latest entry last month.

For Trump, there is political mileage in aligning with a brand like Harley which is an all-American though actually and obviously not as large as a car brand like Ford or General Motors. GM has also exited India after a not so happy run incidentally.

But Harley’s own actions are more practical and pragmatic as the latest moves show, including its desire to return to the Indian market, just about the largest two wheeler market in the world as it crosses China.

On the other hand, India’s policy has been consistent and focussed on encouraging local manufacture and job creation, except for a brief interlude earlier this year when it looked like policy makers would cave in to Elon Musk’s charms and allow imports of Teslas without a local plant.

There is still some heartburn incidentally among other, global car makers on India’s EV policy and it would be interesting to see how it evolves if Trump were to be elected and Elon Musk starts playing a role in Government, even if distant, as has been suggested.

But that is a discussion for another day.

The bottomline is that self interest will drive if not all economic policy for both countries.

India’s automotive market is amongst the most competitive, open and fair and in some ways a benchmark in a globalised world.

In 1999, in amazingly prescient observation, then Ford CEO Jack Nasser said he saw Ford as a local manufacturer and exporter and wanted to harness India’s brainpower in IT.

Moreover he was against imports and quoted the example of countries like New Zealand where imports had killed the local car industry.

It struck me later that automotive leaders like him were also against imports because they were now vested and invested in India.

Harley Davidson seems to have concluded similarly as has Ford in its subsequent avatar.

Maybe Trump’s new avatar, if he were to be elected next month, would view things a little more pragmatically as well and in India’s favour.

And that brings us to the top stories and themes for the day:

Markets search for footing even as Wall Street hits highs

FIIs sell close to $8 billion in 9 sessions. The China fear factor

Banks get ready for climate & disaster resilience

Noel Tata takes over as head of Tata Trusts.

Air fares are falling in peak season.

Markets Footing

Last week was interesting as it was quite evident that the stock markets were struggling to find a firm footing.

One word for that is consolidation after the BSE Sensex today closed at 81,381.36, down 230.05 points or 0.28 per cent, while the NSE Nifty50 ended at 24,964.25, down 34.20 points or 0.14 per cent.

In the broader markets, the BSE MidCap and SmallCap indices did well, ending in the positive with gains of around 0.44 per cent each.

Both the Nifty and Sensex are down around 5% from the record high hit on September 27 and have lost out in 8 of 10 sessions.

Foreign institutional investors sold Indian shares for the last nine sessions, offloading $7.8 billion worth of stocks, as they directed flows to China after it announced bumper stimulus measures, Reuters reported.

The China factor

A slew of brokerages have reduced their India weightage and increased it for China as they raced to catch the latest rally in China following the stimulus measures which at this point looked like it was running out of steam.

The numbers tell some part of the story, with FIIs having sold close to $8 billion worth of Indian stocks in barely two weeks.

Not surprisingly because like Jeffries and CLSA, among others, have indicated they had increased their weightage for China and reduced for India.

While all brokerages stand by India’s longer term story, no one is clearly sticking their necks out on the current market, given of course their discomfort with valuations here versus valuations in China.

This does present a fresh perspective to flows though, given that the assumption was India was pulling flows regardless of China at least to some extent.

That does not seem the case now though some fund managers have said while there is and will be some rotation, both markets will draw separate strands of flows.

I reached out to Jay Kothari, Lead Investment Strategist and Global Head of International Business at DSP Mutual Fund and began by asking him how he was seeing the CHina factor play out from a FPI vantage point.

INTERVIEW TRANSCRIPT

Jay Kothari: In terms of what's happened over the past couple of weeks is that in the run-up to the expectation of the NDRC press conference and what will come out of that and the huge stimulus which was expected from China, a lot of kind of market participants tried to start building that and in the run-up to that there was a lot of kind of flow which went to China and only to realize on the day the announcement of the NDRC came through that it was slightly underwhelming than what markets were expecting.

So it was more an expectation built up which led to this entire flow into China and even now with the Ministry of Finance kind of giving out the announcement tomorrow which is 12th of October, the expectation is that the package will be close to $550 billion so that's the bare minimum which should come which is 3% of GDP. Anything underwhelming, you know, markets will correct. Anything better than that or close to a trillion dollars, that'll be very positive.

So I think I wouldn't worry too much in terms of that this is going to be a do or die situation. This was investors who are underweight on China, they're just building up the gap or bridging the gap. Usually what they tend to do is that they will kind of invest if there's a clarity in terms of economic policy and earnings.

If there's any kind of disappointment that probably momentum can stop at least what has got built over the last couple of weeks.

Govindraj Ethiraj: Right and how does India stack up in this? I mean the reason they seem to be saying they are now underweight in India is because obviously of valuations, not because there's anything wrong with the structural story.

Jay Kothari: Absolutely and I completely agree with that because what's happened is that India has seen a relentless amount of flows over the past two years, disproportionate flows coming in, plus it has outperformed China, has underperformed and has not seen flows. So that's why you know this entire shift which you've seen flows coming to China so you know since August 2023 till now whatever outflows you had seen in China maybe 50% is bridged with the 15-16 billion dollars China has brought over the past couple of weeks and half of this has gone from India. So you know we've 11 billion dollars in flow by FPIs at the end of September, now almost 6 billion dollars has moved out in the past couple of days.

Probably that entire thing has gone into rotation and most importantly that rotation is within the Asia cohort which gives your senses that you know they have nothing else to sell so they're selling India and just kind of shifting weights but you know once that settles probably you know we'll be back to normal.

Govindraj Ethiraj: Right and when you say normal what is the next three months or so looking from both the domestic flows and one is the flows which is the supply side but the other is the demand side and how companies will perform and whether or not fund managers will deploy as much as maybe they could or would.

Jay Kothari: Yeah I think there is a mix back there so in terms of the earnings incremental earnings expectations and delivery seems to be low and has been slightly disappointing. On the other hand the state election which we saw recently Haryana kind of definitely surprised on the positive side from a ruling government standpoint and in terms of the Maharashtra and Jharkhand elections which will come through in the next couple of months that will have probably a positive momentum. Apart from that maybe the tax cuts from the US despite all what's happening will give that positive fillip in terms of you know what RBI does and in terms of the tax collection remains all right as far as India is concerned.

Capex is slightly again underwhelming so therefore I mentioned it's a mixed bag so going forward I think the focus should be on the domestic assets which kind of continue. They've been relentless you know YTD we've seen 40 billion dollars of which is a mix of mutual funds and insurance companies of which 30 billion dollars is mutual funds 10 billion dollars insurance and I don't see any reason why this SIP which is a structural story to continue so I think that will continue and plus the slew of IPOs which are coming which is probably a supply which is kind of meeting with the demand which you know we are continuing to see some mutual funds and insurance companies.

Govindraj Ethiraj: But these are really big IPOs with of course Hyundai leading the pack does that worry at all?

Jay Kothari: I think this would worry if the supply was exceeding far exceeding demand so you know I was reading somewhere that in a single day you saw 15 filings of IPO I think it was today or yesterday I don't know maybe probably yesterday you know there have been 14 the month so which tells you that there is definitely a euphoria building up in terms of expectations and a lot of kind of companies are coming through but in terms of demand and supply I think it is kind of matching at least at the moment.

Govindraj Ethiraj: From a foreign portfolio investor outlook in terms of as you talk to them I mean what is the thing that would interest them or what is the thing that they will find interesting in again the next three to six months?

Jay Kothari: No I think they will they will continue to look at valuations earnings anything got to do with you know policy politics in terms of continuity and more importantly you know the corporate kind of vote so we've heard about the rural slowdown last last few years now that's kind of at the cusp of turning so if that momentum continues so it's going to be you know the framework growth earnings valuations of growth probably continues to chug along well earnings is something which is a mixed bag after a few years of positives and valuations if now the relative valuation start looking slightly more normalized because mind you just a few months back if you asked me this question China was trading at eight times now it's trading at close to 11 times so you know dynamics have changed so it's more of relative attractiveness and if we are able to kind of sustain earnings I think India is in our all right spot of course you will see those odd corrections because a few stocks and sectors are expensive so it needs to kind of course correct and more importantly if you have anything less than maybe 6 to 12 months of investment horizon that makes you vulnerable if you have anything got to do with more than three years of investment horizon I think it's a no-brainer over the next five to seven years India is here to stay.

Govindraj Ethiraj: Good note to end on thank you so much Jay great to talk to you.

Jay Kothari: Thank you, thanks Govind, thank you.

Preparing For Disaster Resilience

The Reserve Bank of India (RBI) last week announced the setting up of a data repository to monitor climate related risks.

The repository is named Reserve Bank – Climate Risk Information System (RB-CRIS) which will include a web-based directory and a data portal forming climate related data sets.

The web-based directory will list various data sources, like meteorological, geospatial, etc. which will be publicly accessible in the RBI website,” RBI Governor Shaktikanta Das said while announcing the monetary policy while the second part will be a data portal comprising of datasets (processed data in standardised formats).”

The second part will be available to regulated entities, presumably like banks, in a phased manner, the RBI said.

The larger point of course is that the banking and financial system should increasingly use data and evidence to protect their loans to projects which could face climate risk challenges.

“Such an assessment requires, among other things, high quality data relating to local climate scenarios, climate forecasts, and emissions,” the Governor had said.

For example, it would be important to understand the impact of heavy rainfall in coming years on major real estate projects in terms of timely execution and delivery.

Or a running airport where operations could come to a halt and equipment damaged because of extreme weather conditions, of the like we are already seeing around the world and in India.

The Reserve Bank of India (RBI) deputy governor M Rajeshwar Rao had also said recently that climate change had the potential to create shocks to monetary stability, growth, financial stability, and the safety and soundness of regulated entities.

“Climate-related events adversely impact the credit quality and loan-repayment capabilities of the borrowers,” Rao had said in July. “They can wipe out the assets created from institutional finance, thereby impacting the health of financial institutions.”

The RBI is working towards framing a comprehensive ESG policy he had said with various moving parts within that.

I reached out to Amit Prothi, urban planning expert and Director General of the Coalition for Disaster Resilient Infrastructure (CDRI), a India-head quartered partnership of national Governments, along with multilateral development banks, the private sector and educational institutions to promote resilience of new and existing infrastructure systems.

I began by asking Amit how he was reading the RBI’s latest announcement.

INTERVIEW TRANSCRIPT

Amit Prothi: Govind, thank you very much for having me, first of all. I know we've had some conversations about the topic of risk and the need for data to be in the public domain. You may recall we had actually launched something on the risk to infrastructure sectors called Giri with the intention that if one can start to provide information which is consistent, reliable, in a location where everybody trusts, it can then lead to other brands.

You can branch out and do other things with reliable data. And I think for me, the first thing of what RBI is doing is if they become the repository of data, they become the ones who are essentially saying what we are sharing is reliable data on risk, on climate parameters, then one can at least start as an investor as somebody who wants to understand their portfolio of assets and what risks they may be facing. You can go and say, okay, that becomes a starting point.

What are the data sources that RBI is telling us are acceptable? I think what that will lead to then is if I'm an investor and I need to understand more fine-grained, if I may have a manufacturing unit in a location, I may be investing in an infrastructure, I can go and say, okay, RBI is giving me this data. There is a data set behind it that I can access, which is more proprietary.

It may be something I can access. And then you can ask your private sector partners, because end of the day, the private sector will come in, take what RBI is putting out as sources of data and start coming up with reliable tools that are dependent on that data. It creates a market for tools and solutions.

The starting point for those are at the same place, which is again, the RBI's source of the platform that they're creating. There's a lot of opportunity, but I'll stop there.

Govindraj Ethiraj: And data will be, I guess, a gap for anyone who's in the climate risk mitigation, climate risk addressing ecosystem. If you look at some of the successes or let's say examples from elsewhere, including elsewhere in the world, what's your sense about how far we've come in terms of capturing data and then using that data to better arm ourselves or prepare ourselves, whether it's governments or private sector and so on?

Amit Prothi: Yeah, so I think it's always a struggle where on one end, you need to have data. On the other hand, you need to know how to use that data. Those are the two parts of this equation.

On the data side, reliable data, consistently updated data, data that is easily understandable, easily accessible. You are confident it's coming from the right sources. That's the data side of it.

Then you need to be able to interpret that data. And I think that's where we have seen, even the Giri model that we put out, it is a lovely data set, but then using it is where now we are spending time trying to train people, build capacity, share how you can use it, come up with use cases. I'll give you an example.

The FEMA, the Federal Emergency Management Authority in the US, agency in the US, puts out something called flood maps. They've been doing that for a long time. They're only sharing that data, and that's a reliable set of flood maps.

Now there's a whole insurance industry that uses those maps. When you're purchasing a house in the US, you're actually being asked to look at, are you located in that flood plain according to FEMA's maps? And that determines your insurance premiums, or you may not have insurance.

How do you interpret and use that data that requires a lot more effort? And I think that's one of the spaces for CDRI, actually. We are starting to think about how do we get to develop some capacity building initiatives for the financial sector to start to use the data sets that will be put out by RBI, start to interpret climate change is, to some extent, an uncertain science.

So how do you look at those data sets in a way that you can be more, your decision-making can be better?

Govindraj Ethiraj: Let me ask you a slightly forward question here. If you were to look at your own work, let's say, for example, in airports and other infrastructure areas, where do you think lies maybe the more immediate need? Or in terms of priority, where do you feel data needs to start flowing fast or first?

Amit Prothi: So because our work is in the infrastructure sector, and because we're still young as an organization focused on three sectors, I'll say all three sectors, right? Power, telecommunication, and transportation. When you look at climate risk to infrastructure, this is where our global database of risk points that the power sector is actually one of the most vulnerable to climate change.

Telecommunication is most vulnerable to climate change. Then you start getting into the issues of what are the locations, places that are most impacted by changing hydrometeorological conditions. So flooding in cities, coastal wind cyclones, et cetera.

So there is a link between the changing hazard patterns because of climate change and the infrastructure types that are most vulnerable to those changing patterns. And power, telecommunication are two that are coming up very highly on the risk profile because of climate change risks. There's all sorts of other risks, but because of climate change risks, these two sectors are quite vulnerable.

Govindraj Ethiraj: Right. And last question. So as this database gets constructed, is there any area that you feel bodies like the Reserve Bank, which is a financial regulatory body, need to maybe stay focused on or highlight more?

Amit Prothi: I would love to see the whole discussion going towards incentivizing adaptation. So once you have reliable data and once you're able to do some scenario analysis to understand your risk, there would be an opportunity to think about how do you incentivize adapting to those risks? Because again, it's not that everything is a disaster.

Understanding your risk is also an opportunity. You could be at the front end of new technology. You could be on the front end of new solutions if you're actually starting from a point of saying, I need to understand my risk because if I understand it, I can then do something about it.

And this will be a financial instruments to incentivize what we call adaptation measures would be wonderful to see actually.

Govindraj Ethiraj: Right. That's a good note to end on. Amit, thank you so much for joining me.

Amit Prothi: Thank you so much, Govind. Always a pleasure.

Industrial Contraction

India's industrial output contracted for the first time in nearly two years, partly hurt by weak mining activity and lower electricity generation, Reuters reported government data on Friday saying.

Industrial output fell 0.1% year-on-year in August, contrary to economists' expectations of 1.2% growth in a Reuters poll.

The index had previously registered a contraction in October 2022, when it fell 4.1%.

Industrial output grew 4.7% in July.

Manufacturing output rose 1% year-on-year, while electricity generation fell 3.7% and mining activity fell 4.3%, the data showed.

"The marginal contraction in August 2024 is not alarming, as it largely reflects the temporary dousing of mining output, electricity demand and retail footfalls by the heavier than normal rains," said Aditi Nayar, economist at ICRA.

Noel Tata Takes Over

Notel Tata, the late Ratan Tata’s half brother was appointed on Friday as the head of Tata Trusts, the philanthropic arm of India's Tata group which has indirect but firm control over the $165 billion conglomerate.

Tata Trusts said Noel Tata, 67, will be its new chairman after the death this week of Ratan Tata, one of India's best-known corporate titans. The decision followed "many old-timers" in the group wanting him to lead the venture, said one Tata executive quoted by Reuters.

Tata Trusts owns 66% of Tata Sons, giving it veto power but also reflecting the societal ownership and philosophy of founder Jamsetji Tata.

Tata Sons is headed by N Chandrasekharan, earlier CEO of TCS.

Noel is currently chairman of Trent and vice chairman of Tata Steel and was seen as the face of Tata Group’s retail expansion including brands like West Side and Croma.

Tata Sons owns 30 firms including brands like Jaguar Land Rover and Tetley Tea apart from homegrown Tata Consultancy Services, Taj Hotels and Air India

Air Fares Drop

Average airfares on many domestic routes have dropped 20-25 per cent compared to the year-ago period, according to an analysis quoted by Business Standard.

The reasons attributed are increased capacity and a recent fall in oil prices are considered to be among the factors for the fall in air ticket prices.

Of course, oil prices are headed back up as we speak and that could change things down the line.

The larger question is of course demand and how strong that will be through and beyond the festive season, something India’s marketers are watching very closely.

The airfare drop analysis is attributed to travel portal ixigo and focuses on domestic routes.

According to this analysis, the maximum decline of average airfare is 38 percent for a Bengaluru-Kolkata flight to Rs 6,319 this year from Rs 10,195 last year, as per the analysis.

The average airfare for Mumbai-Delhi flight has dropped 34 per cent to Rs 5,762 from Rs 8,788. Similarly, there is a 34 percent decrease in ticket prices on Delhi-Udaipur route to Rs 7,469 from Rs 11,296.

Last year’s surge could also be because of sudden capacity drops which have adjusted now.

Select routes have seen jumps of course, as always, like a 34% rise on Ahmedabad-Delhi route and 33 per cent on Mumbai-Dehradun route.