The Markets Are Now Down 10% From Their Peak
This was the magic correction figure, a 10% fall from peak at which point investors would start revisiting stocks
On Episode 434 of The Core Report, financial journalist Govindraj Ethiraj talks to Gautam Trivedi, Co-Founder & Managing Partner at Nepean Capital as well as Garima Kapoor, Economist And Executive Vice President at Elara Securities
(00:00) Stories Of The Day
(01:00) The markets are now down 10% from their peak
(04:25) Oil at 45 and what that means
(06:21) Foreign institutional investors are not the only ones selling heavily. What is driving the selling and could it turn?
(16:41) Decoding India’s multiple economic headwinds; slowest Government spending in several years and potential trade shocks in a Trump presidency
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].
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Good morning, it's Thursday, the 14th of November and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
Friday, Nov 15 is a holiday.
And that brings us to the top stories and themes
The markets are now down 10% from their peak.
Oil @ 45 and what that means
Foreign institutional investors are not the only ones selling heavily. What is driving the selling and could it turn ?
Decoding India’s multiple economic headwinds; slowest Government spending in several years and potential trade shocks in a Trump presidency.
Markets
This was the magic correction figure, a 10% fall from peak at which point investors would start relooking and revisiting stocks.
Will that happen, well it is possible but we don’t obviously know for sure right now though things might change in January.
We have some interesting insights coming your way with two of our guests Gautam Trivedi of Napean Capital and Garima Kapoor of Elara Securities.
Before that, the Nifty now down 10% from its 52-week high of 26,277.
The Sensex has meanwhile lost over 8,000 points from its peak as slowing earnings have led to most institutional and smart investors taking out profits.
Reuters said the Nifty’s biggest slide in nearly six weeks is 10.34% below the record high it hit on Sept. 27, confirming the 50-member index is in a technical correction.
As Gautam Trivedi who joins us shortly points out that some in the top 1200 stocks or so by market capitalization, 700 stocks have fallen by 20% already and another 400 have fallen by 30%.
Of course, once the market starts falling the bear calls also start rising.
Macquarie India’s head of equities told CNBC TV18 he expected the Nifty to fall another 10% in the next three to six months, despite the benchmark index already correcting 10% from its record high levels of 26,277 on September 27.
Which of course would mean 20% from peak, if I interpreted his arithmetic correctly. Which would also mean that the benchmarks would align with the broader market, as illustrated by Napean’s Gautam Trivedi.
The Macquarie analyst said, importantly, that the post Covid19 euphoria is now behind and the markets are now more normal.
"It is not only just earnings that are disappointing, our valuations are definitely very high. And you cannot always be a cheerleader to the markets, waving pom-poms and dancing just because the market is going up," he said.
Meanwhile in the markets on Wednesday, the BSE Sensex and NSE Nifty50 lost ground for the fifth day.
The BSE Sensex closed at 77,690.95, down 984.23 points or 1.25 percent from its previous close, trading within a range of 78,690.02-77,533.30 or basically another day of gyrations and fluctuations..
The NSE Nifty50 settled at 23,559.05, down 324.40 points or 1.36 per cent from its previous close, moving within a range of 23,873.60-23,509.60.
The broader markets settled in the red, with Nifty Smallcap100 and Nifty Midcap100 falling 2.96 per cent and 2.64 per cent, respectively.
Elsewhere, we did celebrate India’s overtaking China on the MSCI Emerging Market Investible Market Index but that has now reversed again.
At the end of October, China’s weight in the key EM gauge stood at 24.72 per cent, up from 21.58 per cent at the end of August. India’s weightage during this period has slipped to 20.42 per cent from 22.27 per cent, Business Standard pointed out.
The change in the pecking order comes amid a sharp rally in China equities fuelled by aggressive stimulus measures by Beijing to support the economy.
Elsewhere, the rupee steadied after falling consistently in recent days and closed at 84.37 as compared to its previous closing of 84.39.
On Tuesday it hit an all time low of 84.41.
Oil At $45
This might sound surprising but is not in the realm of possibility and of course is not the first time it is being discussed, at least in the last 3-4 months, war tensions notwithstanding.
Oil prices may see a drastic fall in the event that oil alliance OPEC+ unwinds its existing output cuts, said market watchers who are predicting a bearish year ahead for crude, CNBC reported quoting analysts saying that
“There is more fear about 2025′s oil prices than there has been since years — any year I can remember, since the Arab Spring.
“You could get down to $30 or $40 a barrel if OPEC unwound and didn’t have any kind of real agreement to rein in production. They’ve seen their market share really dwindle through the years,” they added.
A decline to $40 a barrel would mean around a 40% erasure of current crude prices.
Global benchmark Brent is currently trading at $72 a barrel.
Given that oil demand growth next year probably won’t be much more than 1 million barrels a day, a full unwinding of OPEC+ supply cuts in 2025 would “undoubtedly see a very steep slide in crude prices, possibly toward $40 a barrel,” Henning Gloystein, head of energy, climate and resources at Eurasia Group, told CNBC.
To me, this once again poses the question of how the US will benefit from drilling more oil, as per Donald Trump’s campaign promise, assuming of course the oil majors want to drill more oil.
Another analyst said that should OPEC+ unwind cuts without regard to demand, it would “effectively amount to a price war over market share that could send oil to lows not seen since Covid, CNBC said.
What might actually happen is of course a gradual unwinding early next year, compared to a full scale and immediate one, the analysts told CNBC.
Looking At The Market In Context
So what is really happening in the markets and what are the intertwining forces of slowing earnings, supply of funds into the market and smart investors.
How can we look at quarterly earnings in context, including with three years ago and what is the story the numbers are telling us.
What is keeping markets where they are and when they could turn.
I am joined by Gautam Trivedi, Managing Partner of private equity fund Napean Capital.
INTERVIEW TRANSCRIPT
Gautam Trivedi: Yeah, so let's look at where the market peaked. On the 26th of September, we saw the market, the nifty-fifty that is, benchmark index, peak at about 26,216. And that's been about roughly six weeks since then.
So the total amount of money that's been sold by foreigners since then actually is $15.5 billion. Now, if I look at this in the big scheme of things, foreign portfolio investors, FBIs own roughly about a trillion dollars worth of India's 5.7 trillion in total market cap. So that's about 17%.
Now, if they've sold $15 billion, we're looking at only 1.5% of their total holdings. So the absolute amount isn't really that big. That's one.
Over the past six weeks, we've seen domestic mutual funds almost matching the buying. So what that means is that even though the domestic mutual funds matched the quantum of selling that came through from foreign portfolio investors, the market fell as much as 8.5% or 9% over this period. So that tells you there's a third factor at work, which is basically the high net worth and family office pool of capital, which has also been selling into the market.
Otherwise, if the selling and the buying are almost matching, you can't have such a big fall in the market. So I think that's where we are with respect to foreign flows.
Govindraj Ethiraj: So you're also saying in some ways that the smart investors are selling into this market?
Gautam Trivedi: They are selling into the market. They have been actually selling for the past several months. I know some of the funds that are sitting on as much as 30% to 40% cash, and they've been sitting, unfortunately, for a longer time, and in the hope that correction would happen earlier.
But clearly, that correction has taken longer, but it's finally happened.
Govindraj Ethiraj: So what does that say, then, about the institutional investors who are buying at this time, while, let's say, the smarter investors are selling? Because it seems to me that then there is one class of institutional investors who may not be acting in the best interest of their own investors.
Gautam Trivedi: You make a fair point, Govind, but the fact is that look at the quantum of money that's coming in month after month. We've seen 44 consecutive months of positive inflows into domestic mutual funds. And that number only seems to be going up every month.
So we got the numbers yesterday only for the month of October, which were a staggering 41,000 crores. So that money is still coming in uninterrupted. 25,000 crores of that were the SIP numbers, which, again, was a new record.
So I think given the flows that are coming into domestic mutual funds, their ability to stay in cash for too long is very limited. Hence, they have to If I was in their shoes or if I had flexibility to stay more in cash, I would do so. But I don't think they have that luxury, unfortunately.
Govindraj Ethiraj: So if you were to think about now the Indian market, we've always been saying or have been saying for some time that markets are a slave to earnings, or the rise in the market is a slave to earnings. Now, if the earnings are declining, as we've been now starkly seeing in recent weeks, where does that leave investors who want to take a more, let's say, rational call, valuations and stocks?
Gautam Trivedi: So, you know, you make another valid point with respect to earnings of the market following earnings. But what we've seen over the past 12 to 15 months clearly is the fact that it's not earnings that's actually driving up the market, it's fund flows. Now, what's driving the fund flows?
It's not, as we discussed earlier, it's not foreign portfolio investors. It's been domestic investors. And what's happened really is over the past about three and a half to four years is that the quantum of ownership in the equity markets as a percentage of household savings has gone from sub 3% to almost 5.5% to 6%. Now, that's also been propagated to a great extent by the advent of smartphones, 4G, as we know, Reliance Jio rolled out an all India only 4G network. We've got now a billion, over a billion people that actually have phones. We've got EKYC, we've got literally the market in your palm, you can buy and sell stocks while you're on a train, you can buy and sell stocks while you're on a beach, pretty much.
So, the financialization of the Indian equity markets really has spread over the past three to four years, and I think we'll continue to do so, or at least over the next five to seven years. So, when you see that happening, and newer people coming into the equity markets, and the fact that the evidence really is in the fact that, as we discussed, 44 consecutive months of continuous, fresh, positive inflows into the domestic mutual funds and money coming directly into the equity markets as well. So, that phenomenon really has been driving the markets.
It's not necessarily been earnings. In fact, to your point on earnings, this quarter has been probably one of the worst quarters in the past three years. So, I have some data which I wanted to share with you, which is quite perplexing.
In the last three years, we are currently looking at earnings in FY25, second quarter FY25. If you look at the same period three years ago, exactly the same period, second quarter FY22, and this was the universe of the BSE 500 stocks, sales growth in second quarter FY22 was as high as 25.7%. That's fallen down to 7.6% in the current quarter. And again, caveat here is that the current quarter, all the results haven't been declared.
Second element is the EBITDA growth. EBITDA growth was as high as 13% in the second quarter FY22. We're now down to 1.2%. And the net profit growth, that's a big one. It's gone down from 38.6% to a negative 5.3%. So, clearly earnings struggling, but we're still seeing record inflows. So, how do you marry the two? And to your point, earnings are not leading fund flows from domestic investors.
It's basically the financialization of the markets that's causing more money to come.
Govindraj Ethiraj: I'm going to come to your sort of larger outlook going maybe a month or two ahead. But before that, how are you as a fund seeing this period? And what are the kind of themes that you're looking at?
Gautam Trivedi: So, we know we are seeing a period of correction, which I think not just us, but a lot of people in the market who've been around for several decades investing in India have been waiting for. And the good news is that the more the market falls, the cheaper it becomes. And as a result, the interest both from domestic and foreign institution investors actually comes back pretty significantly.
I see that happening maybe sometime early next year when foreigners will definitely come back. Other point I want to make is specifically on the foreign portfolio investors. And again, they haven't done much until they didn't do much until September.
But after September, you saw the selling that suddenly accelerated. Of course, part of that was also caused by the rally in China. So, India became a funding market where they sold India with money to China.
The other element which I want to focus on is the fact that if you look at the domestic market back in the US, the S&P 500, for example, has next year's earnings, calendar 2025, 13% earnings growth. A lot of that, of course, is driven by the Magnificent 7. But the reality is, you know, if you have 13% earnings growth back home, would you have interest in putting money to work in an emerging market?
And that's something to think about.
Govindraj Ethiraj: That's interesting, because I was actually going to ask you that, you know, interest rates have been falling, and including by the Federal Reserve just last week. And despite that, I mean, usually when that happens, people expect more funds to flow into emerging markets, equities. So you're saying now that there is now a sort of tension between the two.
I mean, wanting to invest in emerging markets versus back home. Here's the thing.
Gautam Trivedi: If you look at the S&P 500 earnings for last quarter, and even there, the earnings haven't fully played out. As of this Monday, 84% of the S&P 500 companies had declared results. Net income grew as much as 8% year on year.
So pretty strong numbers. And this doesn't include Nvidia, which declares on November 20th. The other element is of the companies that have declared results, 51% have actually beat analysts' forecasts.
So the U.S. economy is still raging and is still pretty strong. There's a lot of expectation of what President-elect Trump will do with respect to further bringing down inflation, creating more jobs. So I don't see the U.S. stock market cooling down at any point of time in the near future. And I think that in some sense does end up becoming competitive, if I can call it that, to emerging markets, where foreign institution investors will want to walk their money.
Govindraj Ethiraj: Right. And last question. So are you recommending now a more diversification of assets as opposed to, let's say, only now choosing within equities?
Gautam Trivedi: You know, I think the way to look at this is, I've been a fan of the equity markets for the past 30 years, and that's not necessarily going to change with this one correction. But my advice to people is, and we track screens across various sectors, but if you look at the top 1,200 stocks sorted by market cap, since the 26th of September, we've seen 770 stocks that have had a correction of 20% or more. 400 stocks have corrected 30% or more.
So I think it's time to start tracking some of these companies. I'm not saying they're all necessary buys, but the fact is, you'll start seeing companies that are clearly emerging as attractive, and they will be buying opportunities, I think, starting early next year. So that's what I'll keep my focus on.
Govindraj Ethiraj: Gautam, it was a pleasure talking to you.
Gautam Trivedi: Thank you so much. Thank you.
Decoding The Markets: A Macro View
Staying with decoding the markets. Lets take a more macro economic angle.
It is quite evident that Dalal Street and Wall Street have diverged in their paths which was not the case until September 27 or barely 6 weeks ago.
What are the macroeconomic factors that are driving this divergence?
And while we have spoken of corporate earnings, what are the signals that we are seeing from Government spending and the slowing of it and how much is that. The numbers will surprise you by the way.
And finally, from what we know today, what will be the impact of higher tariffs by a Trump presidency on China and other countries including of course India.
Remember, India also imports Chinese components for products like iPhones made here but then exported to the US and other countries.
I spoke with Garima Kapoor, economist and executive vice president at Elara Securities and began by asking her to speak about how and why the stock markets were moving the way they were between Wall Street and Dalal Street.
INTERVIEW TRANSCRIPT
Garima Kapoor: I think this trend of Indian markets probably being in the choppy territory started when the talks of Chinese stimulus started, so way before the result of US elections. Suppose that while outcome of Chinese policy announcement has not been very robust, the outcome of US elections has given a further thrust to rotation of money away from EM, particularly into US.
So when we were looking at the EPFR data, which we track on a weekly basis, the flow of funds into US started to gather pace nearly 5 weeks before the US election. And India in particularly, since the US election, we've seen a loss of about, since 5 weeks in particularly, a loss of about 575 million dollars flowing out of India. Now most US domicile funds, as well as European domicile funds, have been pulling money out of India.
And this partly explains what's really happening. Now why are the US markets so happy? Why, what is really that they're celebrating even before Trump has taken up the presidency officially?
Clearly in the previous term of Trump, he did execute a series of tax cuts, particularly a corporate tax cuts, and that partly flew into your bottom line that led to huge buybacks. If you look at the data of buybacks between 2017 and 2018, the increase in buybacks after tax cuts was more than 315 million US dollars. And that most of that basically translated into higher share prices.
The expectation is that this year will be similar because one of his campaign promises was reduction of corporate tax cut between 1% to 15% for domestic funds. And he's promised some other cuts, especially in terms of incomes, in terms of overtime income and otherwise. So there is a general positivity or euphoria around what he's going to start executing.
Second, he's also announced a lot of deregulation. We really do not know what that deregulation clearly means because he's not spelled that. But any regulation that helps to counter the cost pressures is always welcome and flows into the bottom line of companies.
So this partly explains what's happening to the global markets, particularly US. But in case of India, something very strikingly difficult has started in terms of earnings downgrades. One, the consumption slowdown is pretty evident from past quarter or so, or I should say, more effectively about past month.
Second is government spending, particularly on capital expenditure, has been extremely sluggish, degrowing at about 12% FYTD. I think the last time we saw such a sluggish growth was maybe more than seven or eight years ago. And third, we were anyway overvalued and probably an expensive market.
So a lot of froth in the market is probably getting corrected. Now, if I mix into all of this and we were just looking at the earnings data of NSA 200, more than 54% of the companies who have declared the results so far have given a missus on their earnings vis-a-vis what was expectation. So I think it's a combination of what's happening domestically plus what's happening globally, especially led by US election, Trump victory out of US election.
Govindraj Ethiraj: So you said government expenditure has slowed down to levels last seen seven to eight years ago. That seems pretty high. I mean, even accounting for, let's say, a pullback because of elections and all that.
What you're saying is that the rate of growth at least has gone back several years.
Garima Kapoor: The rate of growth so far this year, we have data until first half, is degrowing at 12% government capex expenditure in particularly. Now, what normally happens every election year, especially if you look at the past two election years, when this government came to power, sees an underspending or underachievement of capex target. Now, why does happen is because you start off on a weak note.
Now, normally we've seen an average underspending of five to 6% vis-a-vis the budget estimates. But this time, the slowdown has really baffled a lot of people. There were a large part of rally in good stocks in India and industrials was all led by government spending.
So, that is really making people rethink their expectation, whether this is an intent problem or it is an execution problem. Because when government came to power in the month of June 4th, they still had only lost out about a quarter in terms of momentum spending. They could have recovered well during July, August, September.
July saw recovery. August again saw some. September again saw mild recovery.
But when you start off on a very weak note, it's too difficult for you to catch up no matter what your intent is. So, you are going to see underspending no matter what. So, some of these industrial stocks and cap good stocks, particularly PSUs, are repricing this phenomena in terms of slowdown in government spending.
Govindraj Ethiraj: Right. And question. So, trade obviously is the big discussion point right now.
And incoming Trump administration is talking about a 10% tariffs on most countries, 60% on China, maybe some other tariff levels for other countries. What could this mean from an India point of view at this point, given what we know or we can potentially project?
Garima Kapoor: See, broadly, tariffs as a policy measure in the past also have taken about 8 to 12 months to execute. So, what I'm going to talk about is moving a phenomenon of, let's say, calendar year 2026 rather than calendar year 2025. Now, in case of India, it has multiple repercussions.
One is that China's presence in global supply chain, especially in terms of capital goods. And India's dependence on Chinese capital goods clearly means that the disruption that China will see, it will have its ramifications on India as well. We were looking at a data of close to four-digit HS code wherever India exports more than $100 million worldwide as an annual number.
Nearly 68% of those commodity classifications as the four-digit HS codes have seen Chinese import intensity increase. So, we are going to see a disruption even if China faces tariffs, number one. Number two, this time the tariff will not be directed only towards China but also towards countries which are pseudo-Chinese producers like Mexico, New Mexico, Cuba, Vietnam, etc.
So, the supply chains will probably see a double whammy vis-a-vis what they saw in the first presidency of Trump. The third and most importantly is that in case of India, and not to forget, we have been target of Chinese dumping for nearly two years since post-COVID Chinese recovery faltered. And we are still grappling and we are not able to come to terms with it.
All this is happening at the time when India-China rapprochement has started all over again. So, our ability to be able to use tariff on import duties against China will also have to be reflected in the light of our recent bonomy or I should say the recent warmth that the relationships are trying to gather again. So, I think from India's case, we'll have to look at an inflationary US because the region is going to pass on prices.
That means we'll have to look at a hawkish Fed. That means we're looking at probably very shallow rate cuts even in India in the backdrop of that. We're looking at a scenario that's going to disrupt supply chains and also for economies like India, particularly exports to US which have Chinese components as an important component input will also see disruption.
That partly explains why some of these solar producers or some of these energy companies have been seeing some bit of a correction because we do anticipate some bit of impact to come on India directly as well as indirectly because we import a lot of imports from China and then add value and then export to US. So, I think it's going to be a bit of a… Yeah.
No, go ahead. So, I think it's going to be a bit of a disruptive cycle, something that we've not seen in the past but I doubt that Trump will actually impose the tariffs to the extent at which he has indicated in his poll campaign, partly because remember US's dependence on critical mineral supply chain from China is very high. So, it's a trajectory that we will have to look at in the light of evolving geopolitics which are completely different now than what they were in 2017 when he came back to power last.
Govindraj Ethiraj: And just a small supplementary question to that. So, you're saying that if for example, let's say Apple makes iPhone for which it imports parts from China and then assembles them here, iPhone 16, exports them to the US, the US can capture imported component within that, for example, the Chinese imported component within that?
Garima Kapoor: See, it won't be able to capture the Chinese imported component but what would happen is that if import duties are put on China, especially on salt and mineral because China still does not produce this PCB, it does import from other countries, then the cost of those inputs in China is also going to go up. So, when we are importing out of China, we are also going to see its ramification on our onwards exports which does use Chinese inputs or intermediates.
Govindraj Ethiraj: Got it. Garima, thank you so much for joining me.
Garima Kapoor: Thank you for having me.
