Stock Markets Hit Fresh Highs But Financials Drag
The markets were strong again, inching closer to the 80,000 mark
On Episode 330 of The Core Report, financial journalist Govindraj Ethiraj talks to Vandana Hari, founder and CEO of Vanda Insights.
Our Top Reports For Today
SHOW NOTES
(00:00) The Take
(02:46) Stories Of The Day
(03:24) Stock Markets hit fresh highs but financials drag
(07:36) Monsoon now covers all of India ahead of time
(08:51) Oil prices are at a two month high, understanding the American factor
(16:01) How Tesla’s car sales are continuing to fall
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.
---
Good morning, it's Wednesday, the 3nd of July and this is Govindraj Ethiraj broadcasting and streaming from and headquartered in Mumbai, India’s financial capital.
The TAKE
At what point do you decide that it's not worth fighting a rising tide and instead jump into the river and float along with it.
Well, as far as small cap stocks go in the stock markets, this is evidently the time.
At least one mutual fund, Kotak Mutual Fund, whose group is also in the news for other reasons which I will come to, has succumbed finally.
Kotak Mutual Fund has written to investors saying it is resuming subscription of units in Kotak Small Cap Fund, effective July 2, 2024.
Parent Kotak Mahindra Asset Management Company (AMC) had earlier announced restrictions on lump-sum investments in its small-cap funds, as of March 4, 2024.
In the last three months that these restrictions were in place, the small cap has gone through the roof, once again, according to one calculation by cnbc tv18, almost 15%.
At this level, presumably the mutual fund managers felt it was pointless to resist and or lose out further appreciation in the market.
Kotak has the justification lined up.
It says political uncertainty around India's Elections is behind us and this has reduced market volatility, making the market more stable for small-cap stocks.
I thought that small cap stocks were untrustworthy because their valuations were high and in many cases grossly inflated also being why the Securities & Exchange Board of India asked funds to run stress tests to see if they could meet sudden redemption pressures in small cap funds.
Anyway, Kotak says it believes the earnings growth of small-caps is expected to improve, and companies are poised for robust earnings growth. As the economy continues to expand, smaller businesses are well-positioned to benefit, potentially supporting their valuations.
All this is Kotak saying it, I broadly agree that smaller businesses will grow, actually anyone and everyone will agree with that, to what extent such high valuations support this, am less sure.
And then the statutory warning. Kotak says it is important to set realistic expectations and that the returns seen recently are unlikely to continue at the same pace and may become more normalised. Hence, avoid the temptation to over-allocate based on recent performance.
So here we are in July, with all indices roaring away with no end to supply of fresh funds into the market, both domestic and international.
Be that as it may, it is never too late or early to remind ourselves that markets are for the long term.
Our top stories and themes for the day
—
Markets & More
The markets were strong again, inching closer to the 80,000 mark and the Sensex hitting a new high at 79,856.
The Sensex then ended 35 points lower at 79,441.
The NSE Nifty 50 index registered a new summit at 24,236, but eventually closed 18 points down at 24,124.
Business Standard reported that Larsen & Toubro gained nearly 3 per cent amid buzz of order win from Saudi Aramco.
We spoke yesterday of Aramco’s $25 billion gas expansion project.
The BSE Midcap and Small Cap indices did not show much change though, one being slightly down and the other slightly up.
Financial-linked indexes like banks, financial services and private banks lost 0.5%-1%. They had gained 7%-8% in June, Reuters reported, quoting analysts saying that financial and banks' recent outperformance, as compared to the benchmarks, has likely hit a pause.
How Not To Run An Investigation
The Securities & Exchange Board of India sent a notice to Hindenburg, the short selling research house, which does not sit in India nor has any affiliation here at least known to us.
Hindenburg in turn responded with a are you letter which effectively said, are you kidding me ?
US-based Hindenburg Research said it received a show cause notice from market regulator SEBI regarding its Adani Report, the firm said in a blog post on July 2.
The 46-page show cause notice was delivered on June 27, said Hindenburg.
In its blog post, HIndenberg said that the research firm was short on Adani shares 'through a deal with an investor partner who indirectly shorted Adani derivatives through a non-Indian, offshore fund structure'.
And then proceeded to name Kotak Mahindra Bank as having overseen an offshore fund structure used by the investor partner of US-based Hindenburg to short Adani stocks.
Hindenburg then questioned why Sebi failed to name Kotak bank in its observations.
“While SEBI seemingly tied itself in knots to claim jurisdiction over us, its notice conspicuously failed to name the party that has an actual tie to India: Kotak Bank, one of India’s largest banks and brokerage firms founded by Uday Kotak, which created and oversaw the offshore fund structure used by our investor partner to bet against Adani. Instead, it simply named the K-India Opportunities fund and masked the 'Kotak' name with the acronym 'KMIL',” Hindenburg said.
Kotak Mahindra group responded swiftly - a move which also stabilised Kotak Bank’s slipping stock price, by telling, among others, Moneycontrol that Hindenburg was never a client of the two entities associated with K- India Opportunities Fund (KIOF) and Kotak Mahindra International Limited (KMIL) and that the fund was not aware that Hindenburg was a partner of any of its investors.
On January 24, 2023, Hindenburg Research published a report accusing Adani group companies of stock manipulation and accounting fraud, ahead of a proposed Rs 20,000 crore share sale by Adani Enterprises. The conglomerate termed the report as malicious and baseless.
Adani of course has been given a series of clean chits in India by the Supreme Court.
The Adani Group has also accused Hindenberg of all kinds of conspiracies through Hindenburg has steadfastly maintained it was always a short seller and its path to short selling was to blow apart balance sheets of companies it found wanting as it has done for other companies in the US and elsewhere as well.
Sebi’s letter to Hindenburg is strange of course and is obviously more to demonstrate that it is doing its job by sending notices to one and all.
The optics are quite unfortunate actually.
Sebi to its credit has moved on trying to bring in or induce greater transparency of the overseas shell companies that invest in Indian entities, like the ones in Adani.
Perhaps that is the best outcome that could emerge from this case.
Monsoons Are In Good Speed
India's 2024 monsoon rains have now covered the entire country on Tuesday, six days ahead of the usual time of arrival, Reuters quoted the Indian Meteorological Department or IMD saying, adding that although rain totals are still 7% below average so far this season.
In a typical year, rains hit the southwestern coastal state of Kerala around June 1 and then begin its move northwards to cover the entire country by July 8.
They usually hit Mumbai in the second week of June.
The rains are important for cropping and more importantly for overall economic sentiment.
Oil Prices Rise Again
Crude oil is now trading near a two-month high thanks to an escalation in tensions in the Middle East and concerns over the rapid start to the Atlantic hurricane season, Bloomberg reported.
Brent crude traded near $87 a barrel after rising Monday. In the Americas, Hurricane Beryl is intensifying as it churns through the Caribbean, threatening flooding rains and storm surge.
Bloomberg quoted experts saying it’s unlikely the storm will hit US oil operations in the Gulf of Mexico but there’s still a chance of disruption later this week. Such a severe storm this early in the year may portend a serious hurricane season to come, which could halt offshore production or even disrupt refinery operations in the Gulf Coast and subsequently drive up prices at the pump.
To get a sense on the overall supply dynamics on oil supplies and how the market was looking right now and in coming months, I reached out to Vandana Hari, Founder of Singapore-based energy intelligence firm Vanda Insights.
---
Tesla’s Car Sales Continue To Fall
Tesla’s vehicle sales slid for a second straight quarter this year, as the world’s largest electric-vehicle maker contends with lukewarm demand for its cars and intensifying competition from rivals, the WSJ reported.
The company said it delivered around 444,000 vehicles globally in the three-month period, a 4.8% decline from the same quarter a year ago. Analysts had expected Tesla to deliver 436,000 units, according to FactSet.
Tesla is no longer growing as rapidly as it had in recent years thanks also to the fact that there is stiff competition from the Chinese including brands like BYD.
Moreover, demand has fallen short of initial expectations despite falling prices and a spurt of low-interest and lease deals.
According to the WSJ, Tesla’s fleet of vehicles is ageing, with its most popular vehicle, the Model Y SUV, now approaching five-years-old—a time when traditional car companies usually make major design changes to boost demand.
The company is ramping up production of an updated Model 3 sedan.
China is where Tesla is taking a real beating, with sales declining 24% compared with last year, while the broader market reported a bump in deliveries amid a rush of discounts and government subsidies.
Tesla’s chief rival for the title of top EV seller, BYD, posted sales of 426,039 EVs in the second quarter, a 21% increase over the same period last year.
Tesla's stock has lost a quarter of its value this year, making it one of the worst performers on the S&P 500, despite Musk's forecast in April that Tesla would be able to increase sales this year. He has slashed costs including through mass layoffs that gutted Tesla's supercharging team, Reuters said.
Tesla sales have been especially weak in Europe, with sales down 36% in May, due to waning EV subsidies and poor demand from fleet operators, who accounted for nearly half its sales in the region last year.
