Markets Wait For Election Cues In The Absence Of Others
The markets are steady for now, waiting presumably for the Maharashtra election results
On Episode 438 of The Core Report, financial journalist Govindraj Ethiraj talks to Aditi Nayar, chief economist at ICRA as well as Peeyush Dalmia, Senior Partner at McKinsey & Company
(00:00) The Take
(04:21) Markets wait for election cues in the absence of others
(07:55) Rating agency ICRA projects lower growth for 2024-25
(16:54) Is a global crude oil glut coming?
(20:06) India needs insurance but Indians are not buying as much
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
—
Good morning, it's Wednesday, the 21st of November and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take
I have been approached by several life insurance agents over the years and on almost all occasions have found it tough to buy a pure term cover which is a stripped down pure insurance cover that provides for the family on my death.
I am not alone as I find several people wary of life insurance unless there is something tied to it, like a home loan cover, which is that you have taken a home loan but in the case of your untimely demise, the insurance will take care of the rest of the loan.
There are other products, like Unit Linked Insurance Plans or ULIPs which are linked to stockmarkets and offer capital appreciation. which have done better but insurance remains a problem. And this applies to general insurance, distinct as products but also displaying many similarities from a consumer behaviour and usage point of view.
Not surprisingly, a new McKinsey study says that the industry’s penetration rate has slipped from 4.2 percent in 2022 to 4 percent in
2023 indicating that progress has not been at par with India’s economic growth.
On the other hand, while insurance achieved a robust CAGR of over 17% in New Business Premium (NBP) the top five private life insurance companies in India have experienced tepid net profit growth of under 2% CAGR over the past five years.
One reason is costs are rising faster than incomes, which is also unlike other segments of the financial services industry, including banking and asset management.
Moreover, the report says the growth in premiums for general insurers has been predominantly driven by increased hiring, with little to no improvement in productivity among top players.
On the other hand, the report says the government could potentially save about $10 billion annually by expanding insurance penetration to encompass underserved populations and events.
Mckinsey also says that comprehensive life insurance coverage could assist the government in alleviating the burden of providing ex-gratia benefits to families affected by the loss of life or livelihood due to accidents, unforeseen events.
Targeted intervention programmes for crop insurance could
contribute to minimising crop losses, reducing loan defaults, and improving yield.
Creation of natural disaster insurance pools with mandatory coverage for ecologically sensitive areas could minimise financial losses for small and medium-size enterprises caused by catastrophic
events.
This is not a new argument in itself but interesting to serve as a reminder.
Interestingly, it's also about what we think of as insurance and do not.
McKinsey says some 70% of customers spend over Rs 25,000 annually on purchasing or repairing appliances, yet only 40% have any form of insurance coverage.
On the other hand, Peeyush Dalmia and one of the authors of the report tells me insurance is better communicated and thus sold while we are at retail stores, like a Croma while buying a refrigerator or even a smartphone.
Similarly with homes, there is so much to insure in homes which we may not.
So maybe one lesson in this is the fact that there is diminishing person to person contact in selling a product that takes some convincing and explanation.
Insurance was never an easy sell but that only underscores its importance. Selling it profitably without promising the earth and the moon is as important as the lives or homes it covers.
The top stories and themes.
Markets wait for election cues in the absence of others.
Rating agency ICRA projects lower growth for 2024-25.
India needs insurance but Indians are not buying as much.
Is a global crude oil glut coming ?
The Markets Fresh Cues
Wednesday was a market holiday because of voting in the state of Maharashtra for local elections and that obviously includes Mumbai city.
And yes I did go out and vote on Wednesday morning..
Meanwhile, the markets on Tuesday were up, after a while, with the Sensex closing up 239 points at 77,578 and the Nifty closing up 64 points at 23,518.
All in all, the markets are steady for now, waiting presumably for the Maharashtra election results which have some political ramifications but little or no economic ramifications, except that states like Maharashtra have stretched out further in terms of voter friendly schemes which will affect their balance sheets which have other downstream challenges.
Meanwhile, more on the September quarter earnings.
Tepid earnings growth in the September 2024 quarter (Q2-FY25 / Q3-CY24) is not restricted to India, according to analysts at Nomura, who suggest this has been the case with most Asia ex-Japan (AeJ) markets in the quarter gone by, in Business standard.
“The September 2024 quarter earnings season hasn’t been up to scratch with more misses than beats at the AeJ level.
However, on a weighted basis, results season is not that bad contrary to what is suggested by simple beat-miss ratio.
Large-cap index stocks, especially in MSCI China, have had a good earnings season so far,” wrote Chetan Seth, Ankit Yadav and Anshuman Agarwal of Nomura in a recent note.
Sample this.
Of the 87 Indian companies under Nomura's coverage that are also part of the MSCI indices and have at least three analyst estimates, September 2024 quarter results of 48 companies have missed forecast / estimates, while 29 beat earnings estimates and 10 reported in-line numbers.
The problem clearly is not so much with the performance which could be correcting cyclically but the expectation of non stop high growth.
Trump Tariff Will Hurt Economic Growth
Donald Trump’s proposed tariffs will dent U.S. economic growth going into 2026, said Morgan Stanley’s chief global economist Seth Carpenter quoted in CNBC.
Trump has spoken of a blanket tariff of 10% to 20% on all imports, along with extra tariffs ranging from 60% to 100% on goods imported from China as a means to extract funds from competing countries.
There is also a question of when and how swiftly these tariffs get implemented. In the event that they are enacted all at once, they could result in a “big negative shock” to the economy, Carpenter told CNBC.
Carpenter, who maintained Morgan Stanley’s base case of these tariffs being spread over 2025, said they would lead to higher inflation.
“Then into 2026, we think growth starts to come down a great deal in the U.S. because of those tariffs and some of the other policies,” he cautioned.
“Very clear, tariffs push up inflation. Very clear, tariffs are a drag on growth for the U.S., not just for the countries that the tariffs are put on,” Carpenter added.
Brokerage firm Siebert noted that if the proposed tariffs are levied, especially on top of those already imposed by the Joe Biden administration, a slew of sectors including the automobile, consumer electronics, machinery, construction and retail space would see higher inflation.
Trump’s proposed 60% tariff on Chinese goods, along with Biden’s existing 100% tariff on Chinese-made EVs, will “significantly impact” the auto industry, while a universal 10% tariff on consumer electronics’ imports would increase costs for companies such as Tesla, Microsoft and Apple, Malek said. These higher costs will likely be passed along to consumers, he added.
Should sweeping tariffs be enacted, markets could price out interest rate cuts entirely for 2025, said Ben Emons, chief investment officer and founder of FedWatch Advisors, adding that tariffs could also “restrain” growth.
GDP
Rating agency Icra on Wednesday said India's real GDP growth for the September quarter is likely to decline to 6.5 per cent due to heavy rains and weaker corporate performance.
Icra has however maintained its FY25 growth estimate at 7 per cent on expectations of a pick up in economic activity in the second half of the fiscal.
The RBI is sticking to its estimate of 7.2 per cent growth for the fiscal.
Official data for the Q2 economic activity is expected to be published on November 30.
In Q1, the GDP expansion came at 6.7 per cent.
Icra said the dip in Q2 will be due to factors like heavy rains and weak corporate margins.
Icra also feels there is much headroom for GoI's capital expenditure, which needs to expand by 52 per cent in Y-o-Y terms in H2 FY2025 to meet the budget estimate for the full year.
Of course one question that i think about is what is the normalisation phase in the economy assuming there was a slowdown because of elections and heat waves and externally limiting factors.
I reached out to ICra chief economist Aditi Nayar and began by asking her how she was computing the latest figures and the impact of external factors like heavy rains in the last quarter.
INTERVIEW TRANSCRIPT
Aditi Nayar: Weather conditions is certainly one factor that has been a bit of a seesaw as far as the economic growth is concerned and the other one is the elections that we had in the first quarter. So Q1, we saw a heatwave that had an impact on a lot of, you know, particularly retail-related sectors and we had capital expenditure of the government, both the centre and the states, contracting amidst the parliamentary elections. In Q2, we had at least the capex part turning around.
We had a high expansion from both the centre and the states as far as capital expenditure is concerned, which is expected to be a good driver of growth in this quarter and we had a pundent rainfall. The monsoon didn't kick off too well but then it ended up being quite plentiful by the time the season ended and the kharif output is projected to be quite good for a number of crops. The tailwinds that, these were the tailwinds, the headwinds really in this quarter that the heavy rainfall actually doused activity in sectors like mining, electricity, freight.
Exports didn't do well, especially on the merchandise side. For the year as a whole, our expectation is that actually the benefits of the monsoon will really be felt in the second half of the year. So rural demand should be much better once the farm cash flows from the kharif season come in.
The headroom for growth on the capital expenditure side is like as high as 52% for the centre and these two are expected to really push up growth in the second half of the year.
Govindraj Ethiraj: So I'll come to the headroom part but I'm just trying to understand, so we are in November now and heading to the end of the calendar year. Was this year so different from previous years? I mean I know that there was an impact of rains and elections and so on.
Is what I'm trying to understand because a lot of people ask me this, saying that how different was 2024 calendar at least that it can throw so many calculations off track?
Aditi Nayar: See in terms of the election impact, this was very similar to what we see every five years when the parliamentary elections happen. So we in fact did expect that there was going to be a slowdown in Q1 and that that was going to be transient and that would turn around after that and we're already seeing that underway. What ended up being a big dampener, literally speaking, was the heavy rainfall that we got in Q2 because that really had an impact on mining and if you don't get coal out of the ground you also don't end up shipping it across the country and electricity demand was feeble to say the least from the household sector and the agricultural requirement for groundwater usage was also quite low.
So these are however fairly transient factors so they should turn around after that.
Govindraj Ethiraj: Yeah, so you're saying that we have other years as well where we have rains, maybe not as high intensity as this year and though we've seen high intensity rains in previous years as well. I'm just trying to understand, Aditi, where is it normalising and is it normalising at all or was it so far at least was it such a dramatically different year?
Aditi Nayar: See when we look at our own potential GDP growth estimates, we think that India's potential GDP growth over the medium term is six and a half to seven percent. So if you're going to end up with a six and a half to six point seven percent kind of growth in H1, that's not terrible. It's within the range, right?
And even for the second half of the year, on the GVA side we're looking at the estimates coming up to about seven percent because of our estimates for how indirect taxes and subsidies will move, our GDP forecasts for Q3 and Q4 are ending the year at seven point four percent for Q4. Average we're looking at seven percent for the full year and again that's at the top end of our potential GDP growth calculations. It's not such an abnormal year at all from that point of view.
Govindraj Ethiraj: Isn't there a contradiction then in some ways?
Aditi Nayar: But this happens, right? We have base effects, we have transient impact when you have elections that prevent spending, not prevent is a very strong word, but we lead to a slowdown in spending while the model code of conduct is on and you allow for faster spending after that, which is what has happened with the government notifying that the typical kind of monthly expenditure guidelines have been relaxed a little bit because there is this huge headroom to spend and we want to spend, we want to be able to support GDP growth. So that is something that is going to be a little bit like an offsetting factor which is going to push up growth in the second half.
Govindraj Ethiraj: Got it. So the other point which you mentioned is that you're also looking at a slowdown in personal loan growth on private consumption. So how is that now stacking up in this whole thing?
Aditi Nayar: So consumption is an interesting story. Last year our view was that urban consumption was quite strong although it was uneven and rural consumption and centrepoint was not very optimistic because of last year's bad monsoon and so there's a little bit of a turnaround that we're seeing. Rural consumption we expect will be much better in the second half of this year and also the fact that reservoir levels are quite high in most of the states is giving a little bit of an insurance to farmers going ahead that at least you're not so dependent on the timeliness of the winter rainfall and the next monsoon.
So that's quite a positive factor going forward. However, we do have concerns on the fertiliser inventory. I mean that's something that we're watching out for.
On the other hand, urban consumption you know we've been bucketing it into three cohorts. So the high income, high net worth where consumption continues to be very strong. The second positive cohort has been the new entrance into the workforce particularly into the formal workforce where family incomes can suddenly change and their spending behaviour can suddenly change when you have a person that's getting a formal sector job in a low-income family.
And the third bucket which is where the stress has been is what we call middle income middle age where high inflation has a much bigger impact on spending decisions. Now inflation has continued to be quite high. We've seen two rounds of the readings on the consumption survey from the RBI which dipped.
So the May and the July rounds indicated a dip in the urban consumer confidence levels. It turned around in September but it's still below the peaks. And then of course we have this factor of personal loan growth which is expected to slow down.
And all of this put together suggests that urban consumption may not be as strong as what it was last year. And it may in aggregate slow down a little bit. However within that of course high income high net worth we do expect is going to remain a very strong bucket of consumption.
Govindraj Ethiraj: The personal consumption therefore has nothing to do or has little to do with all these other external factors like weather and elections and so on?
Aditi Nayar: Well they certainly could for some cohorts. So for instance people who work in the retail sector, there weather has an impact. You know if you're in North India we suffered a heat wave so we didn't go out very much.
We had heavy rainfall we didn't go out very much and now it's very polluted. So again we're not going out very much. So all of this has an impact on your retail footfalls.
Restaurants, anything which is out of the house service consumption which is not a necessity but discretionary spending is going to get impacted. So people in the retail sector could definitely see you know people like who work in restaurants or beauty salons, people who work on tips in addition to their monthly income. Certainly for people like that weather could be a negative factor on all of these disruptions that we've talked about could definitely be a negative factor.
Govindraj Ethiraj: Right Aditi, thank you so much for joining me.
Crude Oil Glut
There is an interesting free market scenario that will soon play out in this case oil but potentially elsewhere too.
Quite simply, Donald Trump promised that there would be more drilling for oil in a political message against the environmentalists but the fact is that the US is drilling already like never before.
Any more drilling will only create a glut and bring prices down.
President-elect Donald Trump’s vows to “frack, frack, frack” are about to collide with a global crude glut that’s set to, finally, temper record shale production, Bloomberg said.
Trump has apparently said he’ll push America’s shale companies to ramp up output – telling supporters pump prices would fall even if it meant producers “drill themselves out of business”.
But, as Bloomberg points out, his second term follows two straight years of record US output.
So far, the independent oil producers responsible for most of the shale boom over the past decade have no plans to radically alter their drilling after the election.
Diamondback Energy Inc. and Devon Energy Corp. indicated growth of 2% or less in 2025, while EOG Resources Inc. and Occidental Petroleum Corp. expect to keep activity flat. Occidental CEO Vicki Hollub has warned of “declining growth rates” in the US over the medium term.
Macquarie Group Ltd., which correctly predicted last year’s stunning growth, sees output reaching an unprecedented 13.9 million barrels a day by the end of this year, 5% above current Department of Energy estimates.
But there is oil being drilled elsewhere too.
Bloomberg says the growth in the US combined with new barrels from Guyana, Brazil and Canada, have set the stage for a massive crude glut in 2025, with the International Energy Agency warning of a 1 million barrel-a-day global supply surplus.
Macquarie sees supply outpacing demand by 2.4 million barrels a day in the first quarter, when Trump will be sworn in. And traders are already pricing in a surplus, with West Texas Intermediate retreating by more than 3% this year.
Under Biden, the US solidified its position as the world’s top oil producer, now pumping 50% more barrels each day than Saudi Arabia.
There are other capitalistic forces at work.
A $290 billion wave of mergers and acquisitions in the past two years means many of the independent producers that were driving production growth during Trump’s first time in office were bought or merged into larger entities that reined in capital spending and boosted shareholder returns.
Among the deals, Pioneer Natural Resources Co. was bought by Exxon, Endeavor Energy Resources LP was taken out by Diamondback, and CrownRock LP was acquired by Occidental.
Ultimately, though, oil prices could be the biggest obstacle to US growth, according to Raoul LeBlanc, vice president for North American unconventionals at S&P Global Commodity Insights.
“At $70, shale independents can both grow and generate free cash flow,” he said. “But at $60 they have to make a choice — and we believe they’ll choose cash for the shareholders.”
And finally, Brent crude is presently quoting under $74 a barrel, so no real change in the last few days.
Insurance Slowing Down
A new McKinsey study as we just discussed earlier says that the industry’s penetration rate has slipped from 4.2 percent in 2022 to 4 percent in 2023 indicating that progress has not been at par with India’s economic growth.
On the other hand, while insurance achieved a robust CAGR of over 17% in New Business Premium (NBP) the top five private life insurance companies in India have experienced tepid net profit growth of under 2% CAGR over the past five years.
One reason is costs are rising faster than incomes, which is also unlike other segments of the financial services industry, including banking and asset management.
Which means the productivity is lower.
On the other hand, the report says the government could potentially save about $10 billion annually by expanding insurance penetration to encompass underserved populations and events.
I reached out to Mckinsey partner and report author Peeyush Dalmia and began by asking him why insurance in India was not growing as much as we would expect.
INTERVIEW TRANSCRIPT
Peeyush Dalmia: Gopin, thank you for having me, first of all. Think about the Indian insurance market. I think one thing that is common, and it's common across India, I guess, for every category, that there is growth everywhere.
Every single category that we can think about, whether it's life insurance more broadly, within general insurance, of course, you have multiple categories. All those categories are growing roughly anywhere between 12 to 15% as a growth, if you take the last five to 10 years across all categories. Having said that, I think the other thing which is common across both the life as well as the general insurance industry is that the productivity has not grown.
I think both sets of industries have seen cost actually grow faster than premium. Potentially, this is one of the few industries where the top five players, and I'm not even talking about industry more broadly, but the at-scale top five players have seen cost grow faster than premium, which effectively means that the productivity gain has not been there. The industry has not found operating leverage yet.
So growth, absolutely, yes. Operating leverage at this state, we don't see over the last four or five years.
Govindraj Ethiraj: So from a consumer behaviour point of view, is that because people are not willing to pay more than a certain amount, or there are not that kind of flexible schemes offered, again, on life as well as general?
Peeyush Dalmia: You know, I think it's a great question that you ask. And on the life side, in fact, when you disaggregate the growth, all the growth has come because of ticket size increase. Actually, the volumes have been constant.
So we've seen the 10, 12% growth. It's predominantly been driven by ticket size as such. In fact, the number of policies in force have been flat to marginally declining.
And the number of policies sold in a year, if you look at the last four to five years, again, has been flat as well. So the consumer willingness to pay, you know, the ticket size increase suggests that the same set of consumers are willing to pay, but we've not been able to drive penetration, predominantly because distribution has not sort of really innovated itself across both the life and the general insurance industry today. The other point, we've also not seen innovation from a product perspective, partly driven by adding regulation, but partly driven by adding the manufacturers themselves, actually not sort of, you know, thinking out of the box.
Just as an example, and this is more from a regulatory perspective, India does not allow value-added services for insurance companies. And that again sort of restricts what an insurance company is able to do from a product innovation perspective.
Govindraj Ethiraj: What's a value-added service in this context?
Peeyush Dalmia: A value-added service is, you know, something that you can offer beyond the core insurance product itself. You know, just to take a simple example, if I go and basically sort of insure your home, today where the penetration is incredibly small, the home has a whole set of appliances, you know, within that as well. Can I sort of, you know, pitch you that I'm going to take care of repairs and services for those appliances as well, beyond offering the core insurance itself.
And that just makes a product more exhaustive and appealing from a consumer perspective, vis-a-vis just talking about a plain insurance product as I go and have a conversation with the consumer. Several countries do allow value-added services for insurance companies to be able to offer.
Govindraj Ethiraj: And staying on life, you talked about the plateauing or the flattening of the market in volume terms, and the growth only coming in through ticket size. How is that, or how does that compare with other markets, whether it's the Western markets or other markets in Asia?
Peeyush Dalmia: Most emerging markets see volume growth as well, because the penetration basing sort of, you know, goes up as you sort of, you know, evolve. The Western markets, of course, basically sort of, you know, end up seeing more price growth and less volume growth. Anyways, I think for them, the overall growth rates are low single digit, and half of it is driven by volume, half driven by price.
Across all industries, the growth is double digit. What's surprising is that all of that, particularly the life insurance industry, comes from ticket size today.
Govindraj Ethiraj: Then let me ask you the question which I maybe should have asked earlier, which is what's the penetration like in India in life first, when you compare with these markets?
Peeyush Dalmia: There's a simple answer and there's a complex answer to that. I think the simple answer is that on life in particular, the penetration is equal to developed markets and much higher than sort of most Western markets. And the penetration though has come down a bit over the last four to five years, predominantly because a number of policies have remained exactly the same.
Having said that, I think the more complicated answer is that when you unpeel the onion, a lot of the penetration is driven by savings and investment products, even in life insurance. If you look at the core protection, I think that's a very small percentage of Indian life insurance industry today. The metric that we use, we typically use some are short to GDP, which basically says how much actually is the money that is going towards protection.
And that proportion in India today is roughly about one eighth to one tenth of what you see in other markets, the developed markets.
Govindraj Ethiraj: You also said in your report that if the government expands coverage of insurance, that will also bring down its own cost of paying out ex-cashier and so on in, I guess when accidents happen and things like that. Can you elaborate on that and how you came to that figure?
Peeyush Dalmia: See, I think we looked at sort of all events where the government basically sort of ends up paying a certain quantum of money, ends up sort of expending a certain quantum of money either to rebuild property or to take care of lives, etc. And those events clearly sort of are only increasing I think as we sort of move forward. I think the insurance penetration in that context, and we said, even if you get to an average of where emerging markets are across different product categories, say home for example, if you get to a 30, 40% penetration on home insurance, what is the quantum of money that will be saved for the government in the event of a catastrophic event?
And that number comes out to be about $10 billion annually.
Govindraj Ethiraj: Just to switch to general for a moment now, one interesting thing I saw in your report was appliances. I'm guessing that people are also more aware but when you buy online or even if you go today, at least in metros, you go to a store like a Chroma and then people bundle everything and sell it to you. So is that what is growing the market?
And also therefore, is there greater potential than perhaps there was in the past?
Peeyush Dalmia: There is significant potential there. I think whether that is growing the market, I think it's a very small portion of the market today. And hence that's not necessarily the big driver for growth.
But again, we use that as an example to illustrate the nature of service offering that can be made available and that can be useful to a consumer perspective. To your question, by the way, I think surprisingly when people buy online, the attachment rates of insurance is almost close to about one-tenth of when they buy offline because insurance still continues to be a product that is sold and not bought. Even the most aware customer actually does not buy the extended warranty or the insurance cover associated with the product, even for very expensive products as such.
But when they go buy offline, the sales representative actually explains to them or sells them the product and that's when they buy. So there is a significant room for awareness in the Indian market across several categories and even the most aware digitally savvy customer today does not end up buying insurance by himself or herself.
Govindraj Ethiraj: Right, last question. So when you look at the insurance landscape in this country and that includes health and hospitalisation and so on as well, where do you feel the major effort needs to go in? Is it on, for example, innovation by companies?
Is it regulation? Is it more consumer awareness, which is self-awareness or something else?
Peeyush Dalmia: It has to be a combination of all. I'll give you the example of the mutual fund industry, which I think has done incredibly well in the mutual fund campaign, which has created awareness more broadly amongst the consumers. There is potentially something similar that can be done for the insurance industry as well.
The mutual fund industry sets aside a certain percentage of profits every year. My understanding is about a percent odd that goes into that consumer awareness. I think the regulation and the innovation by the companies go hand in hand.
I think it has to sort of happen together along with the consumer awareness for the penetration to increase.
Govindraj Ethiraj: Thank you so much for joining me.
Peeyush Dalmia: Thank you, Govind. Thank you, pleasure.
