Markets Slip Down In Anticipation Of Fed Moves
The markets slipped once again as they waited for global cues
On Episode 391 of The Core Report, financial journalist Govindraj Ethiraj talks to Ajay Srivastava, founder of the Global Trade Research Initiative.
SHOW NOTES
(00:00) The Take
(04:12) Markets slip down in anticipation of Fed moves
(05:10) India overtakes China on key MSCI Index
(08:20) Why are India’s exports slipping?
Should you rent or buy?
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regards any feedback, you can drop us a message on [email protected].
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Good morning, it's Thursday, the 19th of September and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take
In a bull market everything goes, including slapping the prime minister’s name onto a category of stocks as brokerage CLSA did ahead of the general elections that started in April and ended in June this year.
I wondered then as I still do, what was CLSA thinking, as in was this the outcome of serious research or an SEO-led clickbait option ?
The stocks which the brokerage pulled together were mostly in the infrastructure space, benefiting from public spending as well stocks which were state-owned or public sector enterprises.
There was nothing wrong in that except that the bet, even if it was only optical, was on an individual and politician magically pulling all these stocks to great heights in the future.
Like nothing else mattered.
The problem is now the tide is turning.
A report just out from Bloomberg says the index of the so-called Modi stocks, CLSA’s term, has climbed only 2% as the prime minister completed his first 100 days in office after winning a third term in early June.
In contrast, consumer and software stocks have rallied 20% and 34%, respectively.
That would mean that not only was CLSA drinking the kool aid that it served to the larger world but was missing the wood for the trees at the same time.
I have no way of knowing whether the brokerage made money either way on other stocks including consumer and IT and quite possibly it did.
The administration is “turning populist on the margin,” another disappointed sounding strategist at Jefferies Financial Group Inc., wrote in a note quoted by Bloomberg adding that they expected the government could miss its target on capital spending.
Incidentally, this is not to say the Modi stocks are not doing well.
They are and are still on pace to outperform the nation’s main equity indexes for the fourth straight year.
But the index of such stocks had rallied 24% in the first five months of 2024, as the prime minister prioritised building infrastructure capacity while retaining focus on driving efficiencies at the nation’s state-run companies, says Bloomberg.
In another sign of turning tides, domestic mutual funds have apparently started cutting their exposure to companies making capital goods in each of the three months since the June 4 election result, according to a note by Motilal Oswal Financial Services Ltd, says Bloomberg.
And finally, foreign funds have also turned net sellers in sectors like utilities, cement, metals and financials in August, according to a Bloomberg Intelligence analysis.
There are a few points.
First CLSA was of course not alone in pinning their hopes on an individual-politician, perhaps they were a little more clickbaity in their proposition.
Second, while capital spend may slow down and be replaced by moves to uplift the bottom part of the population including expanded insurance schemes and other subsidies, there is nothing to say that capital spend will grind to a halt.
A breather might be a good idea.
Third, there was nothing conceptually wrong in the Government’s strategy - as a strategy - in putting their weight behind public expenditure to propel economic growth and prosperity.
No one is saying that this should be at the cost of public expenditure on education and health for instance but the larger question is how much and for how long ? Maybe a 8-10 year solid run was good but it was time now to start moderating and balancing out.
Whether that would have happened if the election results were different is anybody’s guess.
The final and renewed lesson is that stock markets are mercenary at the best of times and can change tunes overnight. Politicians also know this but somehow often seem to forget.
Meanwhile, the stock markets continue to rise. And agree or not, the Government of the day has the right to take some credit for it.
But as always, some stocks are in flavour and others are not. And the current wave may be a little different from the last one.
Perhaps CLSA will come up with a new term now, if not already.
And our top stories and themes for the day:
Markets slip down in anticipation of Fed moves
India overtakes China on key MSCI Index
Why are India’s exports slipping ?
Should you rent or buy ?
Markets Slip n Slide
The markets slipped once again as they waited for global cues, notably an interest rate cut from the Federal Reserve in the US, the size of which was anybody’s guess overnight.
While the markets might appear listless in many ways, I would still see it as a good sign since rapid rises, or descents for that matter, are more worrying than gradual ups and downs as we have been seeing in recent weeks.
Domestically, there are no major triggers on the horizon except perhaps the shifting we can see between sectors.
The BSE Sensex and NSE Nifty50 once again hit record highs and then fell back into the red on Wednesday.
The BSE Sensex fell 131 points to settle at 82,948.23. The index hit a fresh high of 83,326.38 during intra-day trade on Wednesday.
The NSE Nifty also hit a record high of 25,482.20 before ending Wednesday's session at 25,377.55, down 41 points.
India overtakes China
India has overtaken China for the first time ever in a key MSCI equities index.
India's weight in the MSCI investable large-, mid- and small-cap index has risen to 2.35%, greater than China's weight of 2.24%, Morgan Stanley said in a note on Tuesday reported by Reuters.
"India will continue to gain share due to market outperformance, new issuances and liquidity improvements," analysts led by Jonathan Garner of Morgan Stanley said.
India's nominal gross domestic product growth rate is running in the low teens, more than thrice the economic growth in China, generating a "profound divergence in earnings growth environment", according to the brokerage.
China's weight on the index had peaked in early 2021.
Analysts believe India's rising weightage in the MSCI indexes will bring additional inflows.
India is among the best-performing markets this year globally, with its benchmark indexes NSE Nifty 50 and S&P BSE Sensex up 17% and 15%, respectively.
On the other hand, China's Shanghai Composite index is down about 9% this year amid concerns over the economy and the property sector.
More Rice Curbs To Go
The Government has embarked on several moves in the agricultural space, for instance raising import duties on edible oils to protect domestic farmers and on the other hand opening up exports for basmati rice and onions for example which were curbed last year or 2023.
Rice is looking at a strong crop this year.
And now, the Government may ease curbs on non-basmati rice exports, India’s food secretary said on Wednesday, as rice inventories in the world's biggest exporter of the grain have jumped.
Last week, the government removed a floor price for basmati rice exports
Food Secretary Sanjeev Chopra told reporters the government was considering raising domestic sugar sale prices and ethanol prices, Reuters reported.
China Steel Falls
China’s steel production has now fallen by more than 10% from a year earlier in August thanks to low prices and slowing demand.
Many mills have shut furnaces in China as they faced increasing losses with their production, Bloomberg reported adding that production of crude steel was down 10.4% from a year earlier to 77.9 million tons, according to the National Bureau of Statistics.
That’s the weakest August for any year since 2017, and deepens this year’s overall decline. Total volumes for the first 8 months of the year were 3.3% lower at 691.4 million tons.
The time frame is worth noting.
China’s steel demand is falling after more than 20 years of consistent growth, including in urbanisation and construction. China’s real estate sector is badly hit and under pressure.
Why Are Exports Falling?
India’s merchandise exports contracted 9.3 per cent to $34.7 billion in August thanks to soft global demand and logistics challenges.
Imports, on the other hand, rose 3.3 per cent to $64.4 billion during the month, leading to a trade deficit of $29.65 billion, a 10-month high.
The high import numbers were driven by gold whose imports were up three times to more than $10 billion in August, thanks to rising demand and of course lower import duties which have kicked in at 6% versus the earlier 15%.
So what is happening with exports if we break it down and what is the outlook ahead ?
I reached out to Ajay Srivastava, Founder of the Global Trade Research Initiative, a think tank focussed on trade and began by asking him how he was seeing trade trends right now.
INTERVIEW TRANSCRIPT
Ajay Srivastava: Yesterday the data was released and we searched for one key which explains most of the trends is this. Let's focus on petroleum exports from India. So the August data says that our merchandise exports are down by 9.3 percent but if we discount the petroleum exports the remaining exports are down or up by half percent. So the decline in petroleum exports is 37.5 percent. So petroleum is a substantial quantity exports for India and its tangible decline in August by 37.5 percent it pulls down the other categories and so without petroleum our merchandise exports are down by 9.3 percent but with petroleum they are down by 9.3 percent and without petroleum they are down by just half percent and the interesting thing about this is the petroleum prices they're almost similar almost same in August 24 and August 23 the two periods are comparing. Why this is happening? So one explanation could be that you know we export plenty of petroleum products to Europe and because of Red Sea crisis that ships are taking longer route via the Cape of that increase the freight and the change which this is doing to our exports is that the low value and high volume exports they may lose the competitiveness and ultimately they may lose the market and I guess that's what is happening with the petroleum products but this time we are watching this trend and we should be careful in seeing this trend repeating itself in other sectors which are other sectors where volumes are high but values are low but all these most of these leather intensive export sector textiles, garments, leather shoes, handicrafts everything will come into these categories and the next few months we have to be watchful about these exports to basically Europe if this crisis persists and I don't get any sense that the crisis is loosening anytime soon. So petroleum exports are down because of Red Sea crisis and they are pulling the overall India's export trade data without petroleum exports we are just just doing fine.
Govindraj Ethiraj: Okay so that's good to hear anything on the import side I mean clearly we've been importing a lot of gold.
Ajay Srivastava: So you must have seen that this budget we have government has reduced the import duties on gold and silver from 15 to 6 percent and on platinum to 5.5 percent you know this was a demand for long cut the duty from 15 to 12 percent if not 12 percent then 13 percent but suddenly government had to cut duties from 15 to 6 percent it's not out of any charity but out of I think compulsion because we negotiated India, UAE, FTA and plenty of gold at concessional duty gold and silver started coming from Dubai under that FTA it was wreaking havoc on the gold and silver economy because in May this year about 87 percent of silver came from Dubai and everything from gift city route so 15 percent for normal people the import route for other countries for it was it was five percent for gold and eight percent for silver so this was a big arbitrage and some about eight nine firms they took huge advantage of this they set up their firms in Dubai and they started trading heavily and to prevent that I think government it's not written anywhere it's not talked anywhere but my sense is that government to prevent that government was forced to bring down the duties from 15 to 6 percent on gold and silver and the second step government took is duties are today seven eight percent under UAE SEPA but it's a progressive reduction which means in three four years time the duties on gold and silver will become zero under the FTA and government cannot bring the duties at zero level because we'll need to rise in imports and forest issues all these things so government is talking to the UAE authorities for review of this India UAE SEPA so that what is the gold and silver story but to answer to your question you know we reduce the duties after 15 to 6 percent was a bonanza people who were accustomed to higher duties of 15 percent they started they thought this is the end of the world type of situation and you can see the August figures you know 104 percent jump compared to last August and and then silver 727 percent jump compared to last August and most of the imports earlier they were coming from Dubai but now department of commerce has not released the product and country mix data it's very broad data the release so that data will be there after two months then we can talk more over that.
Govindraj Ethiraj: Right so just to come back on exports if you were to take away oil or other oil exports and petroleum product exports rather and you said that the other sectors are doing all right what's the outlook for the next three months or three to six months looking like given everything else including the challenges on the Red Sea
Ajay Srivastava: to answer this I want to look at how we have fared during April to August because that trend may be replicating to a great extent so during April to August we see the positive export growth in pharmaceuticals, organic chemicals, engineering goods, electronics of course is growing at a very steep pace of 22 percent riding on the smartphone exports and then non-agricultural allied commodities we see the exports of meat and spices rising, fruits and vegetables are rising, cereal preparations are rising so all these exports they account for about 60 percent of India's exports in merchandise and they are rising but I should also talk about the exports which are registering the negative growth their iron ore, leather, ceramics, gem set jewelry and it's very strange when imports of gold and silver are rising our exports are coming down and of course petroleum products that we discussed in agriculture products rice is down because of course we put the export restrictions we now only remove it, marine products are down, oil mills are down so this is the situation that about 60 percent exports are doing positive 40 percent negative and as World Bank, IMF everybody's saying situation will be tough but the world will be able to sail through efforts of China and India they're naming two countries only so let's keep our fingers crossed
Govindraj Ethiraj: Speaking of which I mean iron ore I can expect or imagine because China is now producing less steel they import most of our iron ore and that will slow down why is leather slowing down going
Ajay Srivastava: my sense you know I have been studying this textile and leather sector for the past at least three months and very deeply to understand why we are not doing well so we release a report on textiles and not on leather right and we in my sense I should be talking about textiles not about leather because I should not generalize it you know many of our own acts of commissions they're holding the progress of the sector we talked about those issues in detail for example 70 percent of the garments sold in the international markets they are synthetics non-cotton our share in those fast fashion garments or sports garments is very less why because we are not competitive in making synthetic Bangladesh also is not so they allow free imports but when we allow imports we put thousand conditions which is to fill I mean my heart cried when I looked at specific conditions how you have to match centimeter by centimeter hook by hook chain by chain that's how the customs conditions dgft conditions so they have to look de novo to set these sectors free of course there is a competition from low-cost countries like Bangladesh Cambodia Vietnam all those but what we don't discuss is our act of commission we should focus more they are in our control and the earlier we knock them out the better for the sectors
Govindraj Ethiraj: Mr Srivastava, thank you so much for joining me
Ajay Srivastava: thank you very much. thank you.
Should You Rent Vs Buy?
A new report says that rental values in key micro-markets of the top 7 cities have gone up to a significant 72% in the last three years while capital values saw lower growth.
So which means for the house you owned, you have been earning higher rents while the price of the house itself would not have appreciated much or less.
Which seems fine and the higher rents also followed the post Covid return to base, whichever it was.
Bangalore, Pune, Kolkata and Chennai saw rentals rise more than the capital values, says Anarock Research, a real estate consulting firm.
Bangalore’s Sarjapur road saw monthly rentals rise 67% in this period, while capital values rose 54%.
On the other hand, micro markets in NCR, MMR and Hyderabad saw capital values appreciate more than rental values.
The moral of the story, if there is one, is to look at a 10 year period and then see what you would have paid out in rent versus buying the same house.
So if you rented the outgo could be almost 70% of the value of the house according to one calculation by Anarock.
So instead if you financed the same house with a loan which you could get lets say at a 9.5% interest rate and pay out the instalments over the same 10 years after putting 20% down, it might work out better and of course you have the proverbial roof over your head.
But then, would we know where we could be in 10 years time, as in which city and doing what ?
That’s where the matter becomes more tricky.
No one said this was an easy debate.
