The Markets Crack 2,223 Points And Could Fall Further
How insulated are Indian markets from global ones at this point, given the counter balancing effect of domestic flows
On Episode 356 of The Core Report, financial journalist Govindraj Ethiraj talks to Deepak Shenoy, Founder of Capitalmind, a Sebi registered portfolio manager as well as Abid Hassan, CEO of Sensibull.
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SHOW NOTES
(00:00) The Take: Jobs and Youth
(03:14) The Markets Crack 2,223 points and could fall further
(04:57) Japanese stocks sees highest fall since 1987
(06:06) Oil prices slide and so does gold.
(07:33) Will Indian markets follow global cues all the way down or delink?
(27:34) Indigo finally launches business class
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 the 6th of August and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take: There is one thing that links the stock markets crash, the massive unrest in Bangladesh leading to the unseating of Prime Minister Sheikh Hasina and riots in England.
Its jobs and youth, or restless youth, in that order.
Lets recap from Friday when job growth in the United States slowed more than expected and the unemployment rate went upto 4.3%, the highest since 2021.
In Bangladesh, protests erupted last month after a High Court ruling in June reinstated the 30% quota in government jobs for family members of freedom fighters of the 1971 Bangladesh Liberation War.
The move was seen as discriminatory.
And riots in England last week. Violence on the streets as youth protests against immigrants. The reasons for this may not be only jobs but it has a role. In many countries, immigration leads to job insecurity for locals.
Two years ago, students stormed and occupied the President’s House in Colombo in a move similar to the storming of Sheikh Khasina’s home in Dhaka yesterday.
Sri Lankan students were protesting mismanagement of the economy, among other things.
In India, the Government is now effectively throwing the kitchen sink when it comes to jobs, from incentives for manufacturing to incentives for hiring to nudges for internships.
A state like Karnataka tried to reserve both blue and white collar jobs for locals, a move that backfired and had to be shelved, but only for now.
Youth unemployment is high world over, including in India. I hesitate to quote figures because figures are contested and debates tend to then focus on the accuracy of the figures than what they represent.
Meanwhile, frustrations are rising. The manifestations of this frustration will vary from country to country, from voting in ballot boxes to outright violence as in Bangladesh or Sri Lanka.
There is no silver bullet for solving job challenges in this complex economy.
We can’t be a China but we can’t be a not China either.
And to be sure we are trying both approaches, including that heavy public spending led to employment generation.
But our needs are greater
The solution often lies in looking at the problem bottom up and working on the plumbing of policy to ensure businesses feel encouraged and motivated to set up or expand their capacities.
While industry can rightfully focus on being lean and mean, it cannot run from the larger problem of disaffected youth or socio-economic stress.
And that perhaps is the moral of the story. If the solution does not belong to everyone, then the problem will belong to everyone.
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Markets Boil
The good news, if you want it, at least for Monday trade, is that Indian markets fell less than their Asian counterparts.
Which brings us to a slightly larger question on how insulated are Indian markets from global ones at this point, given the counter balancing effect of domestic flows?
We will touch upon that shortly in a longish conversation that follows.
The BSE Sensex and the NSE Nifty, fell sharply on Monday to end in the red, in tandem with losses among global peers.
The Sensex was down 2,222.5 points or 2.74 percent at 78,768.42.
The index plunged nearly 3 per cent to hit the day's low of 78,296 on Monday.
The Nifty50 also tumbled 662 points or 2.68 per cent to settle at 24,055.6.
The fear index, India VIX, ended at 20.37 points, up 42.23 per cent, indicating massive volatility in the markets.
The volatility index zoomed 61 per cent intraday to 23.15 levels, marking its largest increase since 2015.
So why is all this happening ?
Well, there is a rapid unloading of “carry trades” that started Friday and extended into Monday, with market participants trying to roll back on the popular strategy amid a dramatic global sell-off in risk assets.
So what are carry trades ?
Well quite simply carry trades are those wherein an investor borrows in a currency with low interest rates, such as the Japanese yen, and reinvests the proceeds in higher-yielding assets elsewhere.
That could also include Indian equities.
The trading strategy has been hugely popular in recent years.
So the moment the yen became stronger, as it is right now, global investors are unwinding their positions and getting out of Yen which funded their investments.
So the big news on Monday was the fall in Japanese stocks, with the Nikkei 225 and Topix dropping over 12%.
The benchmark indexes have fallen more than 20% from their all-time highs on July 11, said CNBC.
The 12.4% loss on the Nikkei — which saw it close at 31,458.42 — was the worst day for the index since the “Black Monday” of 1987. The loss of 4,451.28 points on the index was also the largest in terms of points in its entire history, CNBC said.
The Nikkei also erased all its gains so far this year, moving into a loss position year to date.
The broad-based Topix also saw a rout as it tumbled 12.23% and closed at 2,227.15.
On Friday Japan’s Nikkei 22 and Topix fell more than 5% and 6%, respectively.
The broader Topix marked its worst day in eight years, while the Nikkei marked its worst day since March 2020.
On Wall Street, the Nasdaq and Dow Jones opened close to 5% down on Monday morning.
Treasury yields dropped on Monday, as investors flocked to traditionally safer assets amid a global stock market sell-off on concerns a U.S. recession could take hold in the near future, CNBC said.
What is clear from these events is that the Indian market is not as resilient or resistant to global cues, despite all the consistent domestic inflows that we speak of frequently.Also remember that Indian markets have a somewhat unpredictable layer in the form of a large catchment of derivatives trade. More on that shortly as well.
Oil And Gold
Gold or spot bullion fell as much as 3.2%, the biggest single day drop since early June. Other precious metals have also fallen sharply, with silver down by as much as 7.2%, Bloomberg reported.
All of which should be good news for Indian buyers who are also digesting a reduction in import duties affected in the Union Budget last month.
Meanwhile, oil prices continued to hold out against heightened geopolitical tensions by falling to a fresh seven-month low.
Brent futures were quoting below $76 a barrel, the lowest level since January. Remember, the fall in global equities, particularly the US, is triggered by concerns around a weak economy.
Some Telecom
Bharti Airtel’s net profit (attributable to owners) for the April-May quarter (Q1) of FY25 rose 158 per cent year-on-year (Y-o-Y) to Rs 4,159 crore, up from Rs 1,612 crore in the year-ago period. Sequentially, the profit more than doubled from Rs 2,071 crore in the preceding quarter.
The company attributed the rise in profits to a greater focus on cost efficiencies, a rising number of 4G and 5G users, and continued growth in business categories such as homes.
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The company said revenues of its group subsidiaries continued being impacted by the devaluation of African currencies, particularly the Nigerian Naira.
Derivatives
Even before yesterday’s fall, there has been considerable discussion around valuation, rather over valuations in the markets.
The Core Report has been speaking about the lack of sufficient concern about valuations in Indian markets, in contrast to let's say Wall Street where investors have been questioning, among other things, the companies leading the AI BOOM.
Back here, the markets are seeing unprecedented levels of participation including by youngsters borrowing to play in the derivatives market and then losing some.
The regulatory bodies, including Sebi are tightening the screws on derivative trading slowly and steadily and several steps are yet to come.
But the question also is how will the markets hold up at times like this where minor triggers could lead to major falls.
And how should investors and traders be viewing moments like this one?
To discuss this, I am joined by Deepak Shenoy, Founder of CapitalMind, a Sebi registered portfolio manager and Abid Hassan, CEO of Sensibull, a large options trading platform, both based out of Bangalore.
I began by asking Deepak about the current market conditions and the volatility implicit in the moves and what was causing the moves?
INTERVIEW TRANSCRIPT
Deepak Shenoy: So to be honest, when I think there is a problem in the fact that we think this is volatility, this is not really volatility, we have been numbed by years of pre money sloshing around in the markets who believe that 2.8% day is volatility. I'm happy for that, and I'll come to the second point, derivatives has caused us to believe this way, because they have numbed the volatility in the market by just their sheer existence. But apart from that, beyond this, where are we? We can't take explanations like, I don't know, because no longer is that acceptable, so therefore I will have to make up stuff on the fly. But to be fair, there are lots of worries. Okay, there's an Iran and something war going on. There is a problem with Japan, because Japanese market has fallen from 25% in the last two days, and everybody's worried that it'll fall another 25% meaningfully so, because Japanese markets have kind of re had regained their high that they had in 1992 now, just a few days ago, and now they have lost that vantage point again. And of course, you have the other issues of, oh, there's going to be a recession in the US. There's going to be interest rates. You know, employment is coming down. Buffett is sold as Apple shares. This is the kind of stuff that's happening. But let me put this backdrop in very clearly, that, you know, markets have been running up. They are not supposed to only be going up, supposed to go up and down. And the longer the markets go up without going down, you have potentially this point at which markets will correct a little bit stronger and harder than you are, and they usually need an excuse to do so. Today, we getting that excuse in the form of X. 2 years ago we got that excuse in the form of Ukraine. And, you know, the war with Russia. One year ago, we got Silicon Valley Bank. Then we got something else. So every few months we get some new excuse. Sometimes those excuses work in bringing down the market, you know, substantially. Many times they just don't. Today, I think is one of those times when you got the news, you got a reaction that Japanese markets are down. This is potentially causing a worldwide liquidity crisis. It's not actually because the data doesn't seem to indicate a worldwide liquidity crisis yet. Because although people are afraid that Japanese interest rates have gone up, they are so far away from US interest rates that if there is a carry trade, that carry trade continues to thrive because of the difference in rates between the two countries. However, asset prices of and because of exchange rates. Exchange rates two years ago, of the yen versus the dollar, were about 110 yen to the US dollar. They became 160 imagine losing 50% of your currency in two years. India would freak out like crazy, but Japan didn't, because this was probably fueling the carry trade, as you may because as the currency depreciates, it makes sense to borrow in yen and deploy in any anywhere else, and then the yen depreciates. It's good for you to even cause the deposition. It is on the other side the problem. When the yen starts to appreciate, you suddenly realize that you have to pay back in yen you've just lost. If you borrowed in yen recently, you kind of have to pay a higher amount, and that's what's causing this consternation. But I don't think this is meaningful in terms of size, to bring down world markets down by so much. It's just an excuse, like I said, an excuse that the world has kind of used to kind of bring asset prices which are going down. So we are part of that story.
Govindraj Ethiraj: Okay, so I'm going to come back to you on a couple of more fundamental questions. But Abid, let me pick up with the statement that Deepak made about derivatives numbing the market in a way. How would you see it?
Abid Hassan: I'm not sure if numbing is the word I use, because the issue with derivatives, right is that people end up doing things which they can't afford to pay out of their pocket, because basically it's leverage, right? So see, I personally have been an institution which had a $300 million margin call overnight because they gambled with money which they did not have. And people had to bail them out. Now, if you ask me, like Deepak said. I personally agree with Deepak in the sense that I don't think Japan has anything to do with it. This is just something else which has been developing for years and years, because, see, nobody ever asked, what is the joy because of which market is going up so much. I mean, everybody knew what was the joy? The joy, of course, was free money. Was getting printed in Japan, us, everywhere. So basically, if you are getting free money, and this is a musical chair going on, and you don't exactly know when is the musical music stopping, people will keep on passing the share or hat or whatever it is, right? But they did that using a lot of leverage, and that leverage was provided by derivatives, right, whether it is long term swaps or whether it is just options or futures or whatever it is. So the fundamental disease which Deepak highlighted could be much better exploited by people by using derivatives. But the reverse of the argument is that when even the slightest sign. Something could go wrong. Even the smallest of the flash in the pan happens, the people who get scared the most, the people who chicken out first, are people who have leveraged. And invariably, they are the people who did whatever they are doing through a derivative. So in a all cash world was where nobody was doing nothing through leverage, and it was purely cash. The Japanese Yen carry trade would have probably been a half a percent event day. But because there are so many people who are running long term interest rate swaps or so, I'll give you a fun fact, right? I used to trade interest rate swaps in 2011 at that point of time, interest rate swaps were 60 times the world GDP. I don't want to guess how many times it is now, basically interest rate swaps are the ones which extremely large institution used to gamble between currencies. So I think the leverage to cause such a mega movement in rates and currencies was provided because of these kind of derivatives. And the sudden movements are happening because somebody is chickening out of a very large derivative trade which they could not afford in cash in the first place.
Govindraj Ethiraj: Got it okay. Deepak, let's come back to the Indian markets now a very fundamental question, are we insulated, or are we not insulated? Because what we saw on Monday, for example, suggests that we are not insulated because we seem to have almost moved though in a smaller margin in tandem with Asian markets and overnight or over the weekend, US markets and so on.
Deepak Shenoy: So in a risk dominated world, when you get risk, all asset correlations go to one. Okay, that's the thing. Essentially, at a point when everything looks bad, everything is going to drop, without any regard for the fact that, oh, India is insulated in terms of, oh, we are a domestic economy, etc, etc, etc,
Govindraj Ethiraj: And we've got flows coming in every month, and so,
Deepak Shenoy: I mean, let's assume that that's also at risk to a certain extent. We saw flows going out for one and a half years between 22 and 23 and the market continued to stay strong. In fact, went up because domestic inflows continued. Foreign inflows became foreign outflows. Even this year. So far, foreign investors have only been net investors into the market. Today, with the dollar declining just, I think point one or point zero, 1% or something like that, we're at a record low, yeah, as it's not been meaningful as a drop in terms of the I mean, it's very small, but it is a record. Yeah, so that also sounds unreasonable, because other currencies have actually appreciated compared to the dollar, and India is actually kind of depreciated against the dollar, which could be a sign that our equity markets are seeing outflows. But even if that is an outflow. It's not a meaningful enough outflow for, you know, for us to be worried about. So are we insulated in an extreme event? No, in possibly more normal times, I would expect that India would behave slightly differently from a Japan or a US, or anything like that, primarily because we have the growth that other countries don't necessarily. We are not facing oncoming recessions, and we don't have the kind of leverage that the US market seem to have. When I say that, I mean not just the market leverage, but I'm also talking about bank leverage. I'm talking about loans taken by individuals for, say, school you know, study loans, that is education loans or car loans, where the leverage is relatively at a higher rate. In the US, we are not at the same extent. But having said that, when you know there is an earthquake around the world, everything is going to tremor a little bit. And yet that includes India. Markets run in the short term on sentiment in the long term on more fundamentals, but sentiment is going to carry through the normal everyday narrative, while the long term means long enough for people not to care. So nobody remembers Brexit today. When Brexit happened, we lost 6% Why should Britain leaving? We were the original Brexit. India is Brexit, right? But we should be rejoicing that, you know, Britain's leaving something else. But apparently our markets went down 6% then it took over the world a few days to recognize that, oh, this is not the end of the world. And then, you know, think nobody even remembers that day. I can bet that you won't even remember
Abid Hassan: As mega shot exit. I thought nobody seeing this happening. I remember the date. I remember even the time at which I exited my shots.
Deepak Shenoy: It's interesting because, I mean, other than abhid, nobody remembers the date. I don't remember the year in which it happened. I was roughly the 2014 to 2016 kind of time, maybe 70. But the sad part about commentary like this is that we are giving a lot of importance to an event that's happening now, when we know that the events have happened in the past have almost had very little impact on our long term growth, but because narrative drives the short term. We have to sit back and analyze whether this is going to permanently no damages.
Govindraj Ethiraj: Abhidh Again, if I were to come back to the derivative side of the market and looking at the domestic market now, so at times like this, where we are either plugged in or not plugged into, what is happening globally? And that is, of course, as Deepak just spoke about affecting our markets. What is the role that derivatives and derivative traders play, or could play?
Abid Hassan: So I do think the derivative markets in India, the retail investors at least, okay, so I'll give you interesting facts, right? 13 out of 15 trades in India on derivatives are long call options. Okay? They are just by call options. So I have a friend, for example, who have been in the markets for 15 years as a cash investor, where I told him, look why don't you go buy a put? His response was, how can I buy a put? I don't have the asset? How can I sell something that I don't have? So he fundamentally did not understand that a person without an asset can actually buy a put right. And it is revealing, because this person went to the finest engineering college in Kerala. Was a cash investor for 15 years, and yet he did not know that he could buy a naked put. And then we looked at the data, so sensible own data, right? See, we are a platform where slightly sophisticated Janta come in, where normally nine out of 10 people lose money. Maybe in us, only seven out of 10 people lose money. It's a huge jump, right? I mean, I understand most people still lose money, but it's like three times better than the usual, right? Even in our system, 13 out of 15 trades are just by OTM call option. So essentially, the only retain play in India, the way, at least I look at it, or we are seeing from data, is that people buy in, go and buy call option, right? Put options are not. People don't buy. And the other thing, which you'll notice is the entire Prospect Theory and dispersed effect says that, in case there is a small profit, retail investors cash out early. In case there's a big thing coming, they don't ride it out. So even if I know a friend who's like long December, 23,000 puts by the truckloads, I'm pretty sure the moment he is 10% up, he likes it. Essentially, the only people who buy long, dated puts and ride it out. Crazy are people like Michael Barry and Akbar and UDOT, right? So I think the only real addition that Indian average retail investor does in terms of derivatives in the market is that they just give shorting liquidity for institutional players. And unfortunately, I feel this is going to happen again. They are all going to get burnt, and people are so the last two in 2008 derivative volume dropped by 70% and mind you, 2008 was a time when India was not even as connected as it is right now, right? We were very, very insulated. We were entirely in cash, and yet we dipped 40 to 50% in Nifty right? In 2008 when we were a cash only economy, when we had no rhyme or reason to do that, but now, see indirectly, forget about people who are employed by American companies. Right? 90% of our service revenue comes from US or Europe. If there is something seriously wrong in us, we have a direct economic hit now, compared to a liquidity or a sell off or a risk of trade coming in 2008 and that is going to be mega amplified because of the kind of leverage which is in India system, and it, by the way, everybody talks about option leverage. There's one leverage which nobody talks about in India, which is a equally worrying thing for me. It is margin funded trading. What is official margin funded trading, where brokers are letting people leverage by margin funding. The second is, I don't think anybody has that clue how much money in India, which is right now in cash equity segment, is borrowed money, whether it is a personal loan or something else, pledge or something.
Govindraj Ethiraj: So I think the Reserve Bank seems to feel that that amount is high. I mean, you know, people have taken gold loans and then. So a couple of things are clear. I think we are, at least, for this round more connected with the global market, and we are being influenced by that. We do, of course, have this strong counterbalancing effect of domestic flows. My question, of course, is now, will that offset? Will it not offset? And how are you seeing it? And within that, the way, let's say, in the last couple of days, or in general, do you feel that there could be a divergence, once again, between, let's say the more highly valued stocks that we've seen, or let's say the mid cap, small cap universe and the large cap universe.
Deepak Shenoy: So typically, the mid and small caps take it on their chin when the nifty gets like a pimple also, right? So you get a problem in the mid and small caps. But that's the nature of the game. It is that, relatively speaking, the Midland small caps have a lot more of the investors that want to a flee get taken in by, you know, WhatsApp, Doomsday conspiracies and stuff like that, not saying they're always wrong, because Sunday, they will be a doomsday perhaps, and it may be useful in some circumstances to have exited early than later. But in general, I feel that the universe of the market universe is currently almost entirely effective. It's not like the large caps are down 1% and the mid caps around five. It's the large caps around 2.8 the mid caps around 3.5 it's not like there's a meaningful amount of difference. This is, like, you know, widespread across the board, kind of a little bit of a panic, kind of a run. But when I say panic, I also don't mean of the kind that was in 1987 when stock fell 22% for Japan, where the stocks fell 13% today, it's a small kind of a run on it. I feel here valuations, wise, fundamentals wise, India is in a relatively good shape, even compared to Japan, where situations are different, fundamentals, compared to the US, where recession is oncoming, there is not that much leverage, other than what Abid mentioned, where people were borrowing money to do F&O, and also borrowing money from the banks and then also getting subsequent leverage from the markets. Some of these excesses have existed for a long time. They come, people get wiped out, and then it kind of reaches a lull, where then new players take time to build up the confidence to be able to do this. Usually speaking, we haven't seen massive drop in markets purely based on F&O based leverage. It will usually accompany a bunch of other things. It's like, you know, if you put oil on a slide, it takes something to push you onto that slide, but the oil make sure you slide faster, right? So your future options part is that oil, if you may. But I mean, at this point, I don't think the markets are in such bad shape that you should think that it's Doomsday, per se. I could be wrong. Who knows.
Govindraj Ethiraj: Got it, okay. Last point, Abid, to you. So how should people be looking at the derivatives market at this point? I mean, you know, I mean people for everything that happens. I mean, they'll always be the counter, right? People say, Oh, maybe this is a good time to get in because I was waiting for such a fall. I don't think there is any good time to get into derivative market for anybody.
Abid Hassan: I think people should stay away from it unless, see, the thing is this, right? If you ask me, he can I beat Max First up in order, circuit around spar, it is very obvious to me that I can't beat the guy. And yet, when you ask somebody on the streets in JP, Razor key dude, do you think you can outperform an FII who has $1 billion in research, who employed all the guys from IIT Delhi, computer science toppers for their quant department, and who does not even code in Python, but he writes code in assembly level, and his server is sitting next to the NSE ka rack inside NSE building, connected by a copper wire, where he is even measuring the micro seconds between the data entry at his input port and exit port. Then this guy is like, Yeah, I think I can beat that guy. What are you even smoking? Right? So I don't think realistically, unless somebody is really, really dedicating six to seven hours of his day in practice, introspection, trading, etc, in derivatives, I don't think if somebody say things market is half an hour in out, that's just flushing money down the FIAs toilet, right? So I don't think anybody should think of that. I think if there is something which everybody should do right now, that is, they should seriously consider two things. One is build an Indian government bond portfolio. Indian G SEC yield was at seven and a half percent. I was doing so many stuff, asking people, boys, please buy some g-sec 100 a half person, seven and a half percent. Nobody. Percent. Nobody listened to it. Everybody was partying in nifty. There's something else which could have been done. I don't know if it's still a good trade. US government bonds were at 460 just four months back or five months back. Now there are 380 even otherwise, if you are fairly you know well off, it's not a bad idea to consider parking some of your money inside a US, government backed asset, purely, if not for it on, just for diversification, right? So I think if there is something huge coming, people should think of two things, government bonds, in local currency and in the reserve currency of the world. No derivatives, no nothing.
Govindraj Ethiraj: Deepak and Abid. Thank you so much for joining me.
Deepak Shenoy: Thanks so much
Abid Hassan: Anytime.
Indigo Launches Business Class, Finally
An announcement most frequent fliers and business travellers have been eagerly looking forward to.
Budget airline IndiGo has said finally that it will introduce business class seats from mid-November on twelve domestic routes.
So far Indigo has been a no-frills carrier all-economy cabin all through.
Business standard reported that Indigo will open business class booking from August 6 for travel from 14 November and fares start at Rs 18,018.
IndiGo will also launch "Bluchip' loyalty program, which will start around September.
The airline will launch its business class tickets on 12 routes, starting with Delhi-Mumbai. It will also serve the cities of Bengaluru, Chennai, Kolkata and Hyderabad within a year after the initial launch.
