Stock Markets Continue To Trade In Tight Range
There is a cloud hanging over the market, which is a front running investigation against one of the smaller mutual funds
On Episode 324 of The Core Report, financial journalist Govindraj Ethiraj talks to Sehul Bhatt, Director Research of CRISIL Market Intelligence and Analytics as well as Sandeep Jain, President of the Federation of Indian Micro and Small & Medium Enterprises (FISME).
Our Top Reports For Today
SHOW NOTES
(00:00) The Take
(03:24) Stories Of The Day
(04:12) Stock Markets continue to trade in tight range, await fresh global triggers
(06:23) A lithium factory catches fire in Korea even as lithium demand continues to fall
(07:47) The good and bad news of a front running investigation
(10:44) Could food inflation come down thanks to lower edible prices?
(13:39) India’s tryst with high speed trains: understanding what they mean and where they are headed
NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.
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Good morning, its Tuesday, the 25th of June and this is Govindraj Ethiraj broadcasting and streaming from and headquartered in Mumbai, India’s financial capital
The Take
Here is a quick one.
There is no sign of the markets slowing down though they are now in holding pattern till the Union Budget next month which may or may not really provide any surprises.
Like we discussed earlier, the Government is unlikely to roll out any major sops, except for income tax linked and aimed at boosting consumption and demand rather than purchases of shares.
The problem of course is that the more attractive stock markets look, the more capital they will attract from all over..for instance the over $14 billion of domestic capital since 2016, compared to around $5.4 billion of foreign investments.
An article in the Business Standard says that India’s family offices are now shifting from traditional investments in physical and tangible assets like real estate to investing in technology, healthcare, and retail stocks.
This new wave of family offices is engaging in stock market investments, including pre-IPO placements and secondary market operations.
Of course family offices or the corpus that large business families create or put aside for investments have always invested in equities.
But the proportion is rising.
In a way, some of the capital is coming back. Some founders and promoters have raised funds by selling their shares in IPOs while others have made strategic exits.
That is of course good news for them because in several IPOs, the promoters have cashed out, even if partially after a 10-20 years of running the business.
But the funds of course are more likely to go into capital markets rather than lets say new factories in the same or even different businesses.
There is of course a generational shift as well. Ketan Dalal of tax consultancy firm Katalyst Advisors told Business Standard that the exits are driven by favourable valuations and diminishing stigma associated with selling a family business that is no longer relevant to the next generation.
Many of these family offices have a corpus of Rs 250 crore and above or around $30 million.
Of course many such family offices are also investing outside the country.
There is no problem in all of this of course if there is sufficient fresh investment coming into core job creation in the country.
The answer is a little mixed I feel. While old entrepreneurs must make way for a new breed of entrepreneurs as they are, India also needs fresh capital that drives job creation, including in areas like manufacturing, small or large.
Many mid size manufacturing entrepreneurs I meet struggle to convince their children to join their businesses or even run them.
The fact that doing business is not as easy as we would like to believe it is or touted to be makes things worse. And can deter the next generation.
The constant changes in tax policy and the introduction of new clauses and rules is one deterrent for sure.
Everything of course does not boil down to tax policies but the reason many entrepreneurs themselves discourage the next generation is to avoid the friction they have faced in setting up their businesses in their days.
And our top stories and themes for the day:
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Markets, Global and Indian
There is a cloud hanging over the market. Which is a front running investigation against one of the smaller mutual funds.
The cloud is more to do with the stocks in its portfolio rather than the fund itself and details on that shortly.
Global cues were somewhat subdued and continue to be because among other things, investors are weighing NVidia’s valuations on Wall Street very carefully now.
Nvidia Corp. is the most expensive stock in the S&P 500 Index, with its shares trading for roughly 23 times the company’s projected sales over the next 12 months.
Of course India is used to much higher valuations and that’s another story.
Back home, the benchmark indices pulled back from losses in the second half of trade on Monday, June 24 to end slightly higher.
The BSE Sensex ended with a gain of 131 points to end at 77,341 levels, while the NSE Nifty50 ended at 23,538, up 37 points.
The BSE MidCap, and SmallCap indices closed with gains of 0.37 percent and 0.27 percent, respectively.
The Nifty 50 index has traded in a 450 point range in the past ten sessions in the absence of any major domestic triggers, analysts told Reuters.
Meanwhile, back on Wall Street, CNBC has pointed out that Wall Street’s climb to record highs has come with conspicuously little volatility.
The S&P 500 has gone 377 days without a 2.05% sell-off. That’s the longest stretch for the benchmark since the great financial crisis, according to FactSet data compiled by CNBC.
The index hasn’t experienced a gain of at least 2.15% in that time either.
Year to date, the S&P 500 is up more than 14%.
And oil prices are still high relatively so, as the focus is now on high summer demand in the backdrop of continued geopolitical tensions.
Brent crude was quoting around $85.46 a barrel on Monday and was up 3% last week for their second consecutive weekly gains, CNBC reported.
Lithium Factory Fire
Multiple powerful explosions set a lithium battery factory on fire in South Korea on Monday, killing 22 workers, most of them Chinese nationals, as it burned out of control for nearly six hours, fire officials said in a Reuters report.
The blaze ripped through a factory run by primary battery manufacturer Aricell in Hwaseong, an industrial cluster southwest of the capital Seoul. It was eventually largely extinguished.
Amazingly, the news comes on the heels of a report in Bloomberg which spoke of lithium industry watchers hit by the realisation prices have fallen again this month, with inventories piling up as electric vehicle demand signals stay gloomy.
Spot prices of lithium carbonate in China have slid to the lowest since August 2021 and the most-active futures on the Guangzhou exchange have lost 12% so far this month.
The declines follow a plunge of more than 80% in 2023 due to a glut and slowing demand growth. Although prices stabilised earlier this year, the supply-chain is still working to clear inventories, with customers holding off purchases.
The bearish sentiment has also been wreaking havoc on the stock prices of producers, including Albemarle and Piedmont Lithium Inc, Bloomberg reported.
Mutual Fund Raided
Market regulator Securities & Exchange Board of India is investigating Quant Mutual Fund, a domestic mutual fund with around Rs 90,000 crore or around $11 billion in assets under management for front running.
The story, first reported on website MoneyControl, also spoke of raids by Sebi in the fund’s Mumbai headquarters and Hyderabad premises of suspected beneficiaries.
According to the Economic Times, a dealer from a Quant entity or a broking firm through which the fund deals is suspected to have made advance trades based on privileged information.
The last time something similar happened involved Axis Mutual Fund in which Sebi barred the fund's dealer and 20 other entities from the securities market impounded wrongful gains worth Rs 30.55 crore.
The fund will surely see redemption flows from both large and small investors.
But the growth of Quant is quite amazing.
The ET says Quant Mutual Funds’ total assets were just Rs 23,956 crore as on May 31, 2023 or around $3 billion, almost tripled in a year.
In 2019, it barely had $25 million.
It's done well too, with many schemes returning more than 60 and 70% annualised in the last year.
The worrying aspect is that as of March 2024, there are 14 companies in which Quant MF is the only fund house that has a stake, even as all other asset management companies (AMCs) chose to stay away, said the MoneyControl.
These companies are: Century Enka, Jash Engineering, Vishnu Prakash R Punglia, Rossell India, Lancer Container Lines, HP Adhesives, Prime Securities, Best Agrolife, Heubach Colorants India, Primo Chemicals, Sasken Technologies, NACL Industries, Ashapura Minechem, and Nahar Spinning Mills.
In terms of the value of the stake, the largest exposure of the fund house is in Century Enka, in which it owns 17.20 lakh shares valued at Rs 103.66 crore.
This is not to say that there is something wrong in the stocks or the companies behind them.
It's just a little unusual and of course reflects the overall frenzy in the small and mid cap universe in the last two years or so.
In some ways this fund appears to behave like how many smaller investors do or perhaps it's the other way around.
The larger context is this.
A front running investigation suggests that there was some or suspected malfeasance in the functioning of the market.
I actually see it the other way round.
It tells me that the market regulator is reasonably responsive and alert, even if this is the outcome of a whistle blower operation.
Front running happens in all markets and more so quite obviously in bull markets.
It's tough to catch as is the larger phenomenon of insider trading.
Crackdowns like this however reflect well on the markets ability to self correct and regulate which should give investors comfort rather than a cause to panic.
Even if the mutual fund in question faces unwinding, the industry at large is definitely safer and investors ought to remember that like stocks, mutual funds should also be examined closely before investing in them.
Fighting Inflation And Food Price Rises
The government has again imposed the stock holding limit on wheat with immediate effect to bring down prices and check hoarding.
It also assured that it is open to exploring all other options to bring down prices, including a review of the import duty, the Business Standard reported.
Right now, there is a 40 per cent import duty on wheat, while the effective duty is almost 44 per cent due to cesses and surcharges.
The decision to re-impose the stock limit that ended in March 2024 was taken even though wheat production in FY24 is expected to be over 112 million tonnes.
Addressing a press conference, food secretary Sanjeev Chopra said that there is no wheat shortage in the country, and the Centre has adequate reserves to meet all requirements.
Elsewhere, Reuters reported that India has bought a record 500,000 metric tons of sunflower oil for June delivery, as competition between leading suppliers Russia and Ukraine made it cheaper than soy oil and palm oil, two leading buyers and a customs official told Reuters.
India on an average bought 250,000 tons of sunflower oil every month in the last marketing year, mostly from Black Sea region.
Sunoil usually holds a premium of more than $100 per ton over soy oil and palm oil, Rajesh Patel, managing partner at edible oil trader and broker GGN Research, said.
The industry will need time to refine and distribute the 500,000 tons of sunflower oil imported in June, which will reduce imports in July, the Hyderabad based buyer said.
India buys palm oil mainly from Indonesia, Malaysia and Thailand, while it imports soy oil from Argentina, Brazil, and the United States.
Low edible oil prices have been keeping food inflation lower than what it could be.
To give you a sense of contrast.
Inflation in oils and fats is around a negative 6.7% while vegetables are at 27% and pulses which include dals are around 17% as of the latest figures.
Among other macro news...
India's current account balance logged a surplus in the January-March quarter, largely due to higher service exports and private transfer receipts, the central bank said on Monday.
The current account surplus stood at $5.7 billion, or 0.6 percent of the GDP, in the fourth quarter of the fiscal year 2023-24, compared with a deficit of $8.7 billion or 1 percent of the GDP in the preceding quarter, the Reserve Bank of India (RBI) said in a statement.
The deficit stood at $1.3 billion or 0.2 per cent of GDP in the same quarter a year earlier.
For the full fiscal year, the deficit moderated to $23.2 billion, or 0.7 per cent of the GDP, from $67 billion, or 2 percent of the GDP, last year on the back of a lower merchandise trade deficit.
How Fast Are India’s Fast Trains?
We have all heard of the Vande Bharat trains which can run at a top speed of 160 kmph on some sectors.
Running fast is not easy in India as tracks are old and also slowed down by multiple trains serving multiple destinations along the way for millions of Indians for whom trains are the only affordable and practical means of longer distance travel.
Fast trains can also speed up the economy as both goods and people reach their destinations faster.
This is work in progress.
To get a sense on where India's high speed ambitions are presently, I spoke with Sudhanshu Mani, a former Indian Railways officer who is considered the mastermind behind the Vande Bharata Express train.
Mani envisioned a self-propelled train that could run at a speed of 180 km and would cost half the price of the imported semi-high speed trains.
I reached out to Mani, who served as General Manager at Indian Railways' Integral Coach Factory from Aug 2016 to Dec 2018 and began by asking him to define what high speed meant in the Indian context and where we were going in terms of projects and plans across India ?
