The Stock Markets Continue To Rise
It was the fourth consecutive and successive rise in the markets
On Episode 450 of The Core Report, financial journalist Govindraj Ethiraj talks to Vijai Mantri, Co-Founder and Chief Investment Strategist at JRL Money as well as Garima Kapoor, Economist at Executive Vice President and Elara Securities.
(00:00) Stories of the Day
(01:00) The stock markets continue to rise, albeit steadily
(02:38) Which way will liquidity flow in coming days, between Indian and global and what will influence markets?
(14:40) India’s GDP Q2 came in at 5.4%, the ball is now in the RBI’s court but will the central bank do anything and what should it?
(24:36) Temperatures this winter season could be higher and affect crops
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 5th of December and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The top stories and themes
The stockmarkets continue to rise, albeit steadily.
Which way will liquidity flow in the coming days, between Indian and global and what will influence markets ?
India’s GDP Q2 came in at 5.4%, the ball is now in the RBI’s court but will the central bank do anything and what should it do ?
Temperatures this winter season could be higher and affect crops.
Markets Stay Up
It was the fourth consecutive and successive rise in the markets and while the indices were flipping back and forth, they settled higher as opposed to the trend we saw last month and before where the selling pressure would typically lead to lower levels of closing.
The BSE Sensex was up 110.58 points or 0.14 per cent higher at 80,956.33 and the NSE Nifty50 ended at 24,467.45, up 10.30 points.
Index heavyweight HDFC Bank ended at a record high closing of Rs 1,860, after scaling its 52-week high of Rs 1,865 during intra-day trade on Wednesday. HDFC Bank alone contributed 217 points to the BSE Sensex; had it not been for HDFC Bank the markets could have ended in the negative zone.
Broader markets outperformed the benchmarks, with the Nifty Midcap100 index ending higher by 1.05 per cent. The Nifty Smallcap100 index, too, ended in the green, up 0.89 per cent.
Wall Street
Stock futures rose Wednesday as Salesforce and Marvell Technology led tech shares higher on the back of strong quarterly earnings. Futures tied to the Dow Jones Industrial Average S&P 500 futures
and Nasdaq-100 futures were all up.
Salesforce climbed 13% after the company posted fiscal third-quarter revenue that beat estimates. Chipmaker Marvell also beat earnings expectations and issued strong fourth-quarter guidance.
December has started a little more slowly compared to last month but the rally could pick up is what analysts are telling CNBC.
India of course has had a better December than November, so far that is.
Wall Street generally has good Decembers.
Which Way Will Liquidity Flow In Coming Days
The Indian equity markets are poised at an interesting point. For one they have recovered from the lows of last month, second domestic flows are looking stronger as selling by institutional investors has slowed down.
So how are the forces of demand and supply playing out right now and what lies ahead as well as how was 2024 from an overall stock theme, liquidity and valuation perspective.
I spoke with Vijai Mantri, Co - Founder and Chief Investment Strategist at Mumbai based asset manager JRL Money and began by asking him to walk us through the current demand and supply forces.
INTERVIEW TRANSCRIPT
Vijai Mantri: So, I think the importance of FII is year after year is actually going down. Actually, the sales is making it much more acute. So, for instance, today, DII and FII holding is almost identical.
The second thing to keep in mind is that in 2008, when FII sold $15 billion of Indian equities, the market corrected 60% because at that time total market cap of Indian equity was $1 trillion only. Right now, FII sold almost similar kind of money, but since the market is $5 trillion, the impact is actually coming down. And increasingly, I see the impact of FII actually going down.
As far as domestic flows are concerned, it's just not limited to mutual funds. There's NPS, there's EPFO money, which is I think 4,000 to 5,000 crores. Pretty long-term money and that money only goes into Nifty or Sensex companies.
And NPS now is part of money goes into BSE 200 stocks. So, at the top end of the market, no challenges. Inflows are pretty huge.
And many times when we look at SIP number, which is 25,000 to 26,000 crores, add NPS money, add an EPFO money, and then forget about the insurance altogether. And then we have a huge amount of asset in AIF and PMS. So, all put together, easily we get 50,000 crores of inflow on 40 to 50,000 crores of inflow on a monthly basis. So, easily we can take 4 to 5 billion dollars of foreign outgo every month.
So, weekly if they sell 1 billion dollars, absolutely no problem. And on the contrary, domestic investors are waiting for the opportunity to whenever somebody sells. So, we have seen a very mature behaviour from the retail investor.
Govindraj Ethiraj: I mean, you talked about a lot of the specialised funds, including alternate investment funds and portfolio management schemes. But many of them too are by virtue of being, let's say, smart investors, would also be taking out and selling into high valued or markets which are valued highly as we've seen recently, isn't it?
Vijai Mantri: Actually, anybody who's done and sold India actually regretting any portfolio manager who took the cash call. I remember one who somebody last year took 30% cash call. Now, the challenges with that kind of strategy is that if you have 30% cash and 70% invested in equities, you always wish 30% call should go right.
And invariably, we have seen anybody who took a cash call has not played out. So, a smart manager actually is not sitting. And what a smart fund manager has done is that they have this balanced advantage fund and those kind of funds.
So, cash call they take in these kind of funds, not on the frontline funds at all.
Govindraj Ethiraj: So, how would you see that playing out right now? I mean, if we were to now come to where we are in the markets, having recovered maybe about 2 to 2.5% from the bottom, where are we?
Vijai Mantri: So, if you ask me from a valuation perspective, from an optic and from a traditional perspective, it looks a little stretched and expensive. But why it is looking stretched and is for a very simple reason that post-COVID we have seen a different kind of market. But just look at the corporate profitability in 2011.
It was 3,99,000 crore of all listed company and India's GDP was 78 lakh crore. From 78 lakh crore in 2010 COVID it become 2,10,000 crore. So, almost three-time growth.
But the corporate profit has moved from 3,99,000 to 4,55,000 only. So, we call 2010 to 20 is a lost decade of Indian equity. From that, the corporate profitability from 4,55,000 has moved to more than 15 lakh crore.
So, what we are seeing right now is a catching up of the corporate profitability of what we have seen from 2010 to 2020. So, that is one way to look at it. Second way to look at it is that we have seen the technology is making Indian economy more and more formal.
So, if you look at mobile phone and because of mobile phone, we are buying everything online, most of the things. So, earlier typical household expenses only 10%, 20% which goes to formal economy, put a large amount of spending happening with mobile phone. So, that is the reason you see huge GST collection, you see corporate profitability much better way.
If you look at just one data point, India imported 50 tonnes of gold every year and that is 7 lakh crore. And let's assume only 60% or 70% goes into manufacturing jewellery. In year 2000, the share of organised player was only 5%.
In 2024, it has become 36% and every quarter it is increasing. So, what we are seeing the spending which all of us used to do, perhaps part of that was large, not part of corporate earning, organised corporate earning. That trend is very, very visible.
And second thing with rising per capita income, the primarization of Indian economy is actually happening. I don't know whether you saw it today or not. Landsend 1,83,000 is the price today.
That is aberration. So, we have been communicating consistently to investor that we don't see any big correction in the market.
Govindraj Ethiraj: Right. And yet on the other hand, if valuations are high, which you've said they are at this point of time at least, that would obviously cause a lot of fund managers, whether it's domestic or international to keep selling. So, where does that technically leave the market then, at least again at this point of time?
Because I understand that we are constantly seeing inflows of 40 to 50,000 crores a month, which is good. But if I'm investing in the market, I'm only investing it so that someone can get out, isn't it?
Vijai Mantri: So, what is happening is that they're changing because every two, three years, there's a new hero emerges in the market. So, a couple of years back, it was FMCG is in power and all that. Now, we have pharmaceutical consumptions and all these kind of things.
So, this is what is happening. The fund manager's job is to keep changing the portfolio on the basis of what they see. So, for instance, if you look at Nifty 50s earning growth, there are 22 stocks which deliver less than 10% earning.
But there are 22 stocks which deliver more than 10% earning. So, it's just not that there's no earning growth. And there are always a pocket.
Definitely, there's a fact that in the small and mid cap, we are seeing huge challenges. But in large cap space, we don't see big challenges because we are seeing robust earning growth in certain pockets. Whatever earning growth challenges we are seeing is more on the energy and metals.
And most of them actually are input for the industry. Beyond that, we are not seeing big challenges. So, from this level, I don't think the market is a big correction.
But the return expectation has to be more reasonable going forward from these levels.
Govindraj Ethiraj: Ashish So, you talked about the hero. So, hero, obviously, for example, was consumer products or FMCG companies, which is not the case now. IT was the hero.
It lost out for a couple of years. There seems to be some slight revival in their fortunes. I'm talking about stock prices now.
Company also, maybe things are looking up a little bit, but yet not fully. What are the big heroes that you're seeing right now? And either new or old?
Vijai Mantri: Prakash If the Indian economies continue to get formalised and de-emphasise the space one could look at, the secondary space is definitely we're seeing great signs. And consumption. So, very honestly, consumption is not FMCG.
FMCG have their own challenges because how many times you're going to brush your teeth or eat maggies or how many times you're going to, you know, hair or shampoo in a day. But what is happening? Alcohol is a consumption.
Jewellery is a consumption. Travel is a consumption and certain medical product has become consumption. So, consumption scheme actually is much, much wider.
The building material products are consumption item. So, if consumption has to be seen from a traditional FMCG ways, I'm afraid that is not the way to look at and that is not the way we look at it. And many times we hear people saying rural demand, rural stress.
But the point to keep in mind is that in last couple of years, there were 3 crore houses built in rural India and Pradhan Mantri Awas Yojana. So, what the guy will do? He will pay toward his house or buy more maggies or shampoo.
So, what you see very interestingly is that the wire is, which is manufacturing companies prices gone up because we are seeing no sales there. So, that is what we keep looking. Where is the needle moving?
And very honestly, consumption is a big mega thing over the next 10-20 years. We're seeing huge mega theme in healthcare and BFSI sector. And definitely China plus one policy is actually working on ground.
So, these are 4 sectors we are looking at, at least for next couple of years and perhaps much longer.
Govindraj Ethiraj: When you say China plus one, I mean, the government itself doesn't seem so confident about China plus one. But are you referring specifically to PLI link manufacturing expansion or something else?
Vijai Mantri: Yeah, absolutely. If you look at, for instance, auto ancillary, we used to import $1 billion of auto ancillary product. Now, that number has almost become zero.
If you look at electronic items, we are getting almost self-sufficient, even if you go pharmaceutical. See, we need to keep in mind that China is light year ahead of us. So, catching up will take time, but the wind is very clearly blowing in that direction.
You talk to people, you get to hear that they are getting enquiries. And what is happening is that, for instance, Vietnam, the Foxconn is telling Vietnam to reduce electricity consumption. So, many of these tiny countries became a sort of a supply centre.
There are challenges. And for instance, last year, Mexico replaced the biggest trading partner for USA. But Mexico, most of the money is from Chinese companies.
So, in Bangladesh, you see the similar kind of thing. So, Chinese money is being... So now, where the...
You see what will happen. And when we talk about ease of doing business and all that, please keep in mind that India is not a country where they will put a red carpet in form of all the concession you wanted. Today, Vietnam, Samsung contribute 28% of Vietnam GDP.
I don't think India will allow that luxury to any company. So, doing business is like living in India is going to be very tough, but the growth is here only.
Govindraj Ethiraj: Right. Last question, Vijay. So, 2024 is coming to an end.
How do you look back at the year? And how do you contrast this year from a market's point of view? I know it's...
There are some very unusual moments when you look back in your own sort of experience and history.
Vijai Mantri: So, I think 2023-24, I think all of us said that, बड़ा पैसा नहीं वनेगा, nobody big money will be made. But market surprised all of us. You speak to any good fund manager in India, they have been extremely cautious about a small cap, but a small cap has delivered the highest return.
And even in this selling, the correction in small cap has been very minimal compared to large cap. And very interestingly, if you look at factor-based investing, the high quality, low volatility indices, actually they have done worse, which is very strange because what was considered to be the high quality in previous market cycle, perhaps will not be high quality going forward. So, we are seeing Indian market inflexion point, we are seeing Indian economic inflexion point.
And the way we need to look at the market in past, I think we need to change that mindset going forward. And we have seen every bull market, you know, knocks off few old bulls. And this market is not going to be very different.
We have to be very, very, very, we have to be really paranoid.
Govindraj Ethiraj: That's a very good note to end on. Vijay, thank you so much for joining me.
Vijai Mantri: My pleasure.
Interest Rate Cuts
GDP growth for Q2 came in at 5.4 per cent year-on-year (Y-o-Y) last week and growth during the first half of 2024-25 stands at 6 per cent, figures that have evidently surprised or should one say almost shocked the economist community.
On the other hand, inflation, thanks to food inflation, is high at 6.2%.
Overall growth for the current year would thus come in at around 6%, below the RBI’s projection for 7.2%.
Speaking of the RBI, the question many are asking is whether the central bank will cut interest rates and the next monetary policy committee or MPC meeting started yesterday and will reveal its decision on Friday or tomorrow
Whatever the decision is, it is useful to look at the background.
The larger question, to be posed, before asking if the RBI should cut interest rates, is whether such a move would help accelerate things along or should the RBI do something else, for instance focussing on increasing liquidity ?
I reached out to Garima Kapoor, Chief Economist at Exec VP and Elara Securities and began by asking her how things stood in the context of the slowing of GDP numbers that we had just seen ?
INTERVIEW TRANSCRIPT
Garima Kapoor: The number really was below, not even consensus expectation, but far below RBI's own estimate. We collect RBI was sitting at 7% for Q2. 7% was for Q2 and they had revised that number downwards to 6.7. So from 6.7, the number actually came at 5.4. There were some idiosyncratic factors that drove the number exceptionally lower, but even if I remove the impact of that, the GDP would not have been more than 6% in any case. That means we are probably staring at a significant slowdown because CAPEX is not picking up and the spending momentum is clearly slackening, not just urban, but I think rural momentum also is something that is not picked up very materially as RBI expected. Now can RBI cut rates, the billion dollar question? Remember we have the same governor who until about a couple of weeks ago in some of the public presentations and public appearances was still very concerned about headline inflation because of food and was concerned about the fact that there was no slowdown and growth was fine and probably they would just see a small patch of a probably aberration or 20-30 basis point lower.
Now for such an RBI to be able to cut rates of course becomes a question of whom do you trust and do you trust and what's the credibility of a central banker left. But that leads to the question what can the RBI do? RBI has to do something.
Remember the last policy they've already revised their stance on liquidity to neutral from accommodation. So in my estimate the best thing for them to do would be CRR cut. Now the reasons for CRR cut can be multifold.
One of course is the fact that it's a signal more than anything else. Number two when your currency is downward spiral you rather not play a lot with let's say rate cuts rather than give a signal through liquidity. Number three is your durable liquidities go to enter into a deficit zone in quarter four of the current financial year.
So it needs that purpose as well. So I would say if a central banker were to take a decision a CRR cut on 25 basis point staggered two times 15-15 days apart or a 50 basis point would be a much better policy response to the slowdown than a rate cut.
Govindraj Ethiraj: You're saying that if we were to cut interest rates at a time when the currency is also depreciating against the dollar that is a problem. So can you explain both these situations for those who perhaps may not understand?
Garima Kapoor: Sure. So currently India is overvalued on real effective exchange rate basis. So clearly one of the angles that we need to take into account is a fact that there is a downward pressure on the rupee.
Number one. Number two RBI is sitting short in the forwards market to a tune of about 60-65 billion dollars. So should RBI decide to take deliveries of those forwards then it will suck out further rupee liquidity from the banking system.
So in that context CRR cut will probably be a better measure. The third thing is that the CRR cut would help because in the current situation that we are in in the probable tightness of liquidity even if you cut interest rates by 25 basis point the banks are not going to be in any position to pass it on because they see liquidity tightness and then in the foreseeable future. So it is going to be a futile cut.
Although signalling might work the cut is not going to get passed on or transmitted as quickly as one would have imagined in a normal situation. So hence the normal action would be to first ease the liquidity in the banking system. So it becomes a signal prepared for the quarter four tightness which any of the liquidity gets strained out aggressively because of seasonal factors.
Prepare for a possible response on the currency if RBI decides to take the delivery in the forward market and fourth make sure that banks have comfortable liquidity for them to then pass on the rates as and when they have cut.
Govindraj Ethiraj: So all of this it does not seem to be addressing the problem here which is the slowdown in the economy or does it?
Garima Kapoor: See the slowdown in the economy can be looked at in two ways. One it's partly policy triggered because government spending was significantly slow it's 14% need growing April to October this year and at the same time RBI took multiple macro prudential decisions relating to credit. It started off from personal loans went into loan against property and microfinance and then probably some other new component would be under RBI's surveillance.
So in that context when your policy triggers or something that are outside the purview of the consumer who's looking to see an interest rate cut will the rate cut immediately help spur demand? Because you're trying to control the excesses in the system by reducing the excesses built in the credit economy and at the same time government is not spending. So will this spur immediate demand?
Maybe not. So it might not be a wise decision hence to right now cut. A cut is welcome of course at any given point in time but the cut would be more meaningful or productive if it is backed by a measure to ease liquidity is what I'm trying to put across especially when the slowdown is driven by multitude of factors including policy which is exogenous.
Govindraj Ethiraj: Got it. So in a macro way that interest rates do not really at least in the short to medium term determine businesses spending more or expansions or things they would do which they would because they had access to easier money or cheaper money. Like what you're saying seems to suggest that there's no direct linkage or it's a staggered linkage at best.
Garima Kapoor: It's a staggered linkage. So our monetary policy takes about two to three quarters for the transmission to play through the economy and given that India is in perfect among the economy given that relatively high presence of cash still in the economy although we're getting digitised it probably transmits with a lag. Now having said that also remember there is a part of portfolio especially your portfolio which is linked to your policy rate because you do have an external benchmark related portfolios for banks.
That portfolio gets repriced immediately. So at best that portfolio is sitting at 35 to 40 percent of a total loan book but when we talk about businesses desire to invest remember in a backdrop when economy is slowing and the demand is weakening it is the business outlook that will drive greater optimism for capex rather than rate cuts.
Govindraj Ethiraj: And clearly we are not seeing enough of that. So one is consumer demand which you say has been throttled to some extent by the reserve bank itself tightening risk weightages on non-bank finance companies for example. I mean that's one part of the demand pie.
The other is companies who are also sitting on so much cash that they may not need so much money to borrow and therefore the interest rate doesn't really matter beyond a point. So what is then maybe the trigger that the economy could use to let's say get a leg up or a kick up at this point of time. I mean it's not that it's not growing but to grow faster.
Garima Kapoor: See the immediate kick-up would be government starts to increase its momentum of spending which we already see. So there may be the numbers that will come out end of this month will show you the things that picked up. The order awarding activity of the government is also picked up.
You've seen that in defence and particularly when 22,000 foreign world indigenisation orders were approved last evening. Number three would be basically to accelerate the space of revenue spending because government revenue spending tends to be this biggest bucket that drives the economy. And number four to some extent would be I think RBI taking somewhat a little less aggressive stance and some of the rules or the I should say provisions that they made for example project financing draft guidelines were out which indicated there could be a significant increase in cost for the project financers.
Now if RBI were to review that guidelines instead of basically imposing the proposing range of about two percent or three percent it could tone it down to about one percent or one and a half percent depending upon the size of the project. So I think both ways is the best way to work. I think policy rate decisions particularly lower interest rates will start to work very effectively so as and when the liquidating the system normalises.
Govindraj Ethiraj: Right and that comes back to your original point as well. Garima thank you so much for joining me.
Garima Kapoor: Thank you Govind. Thank you for having me.
Temperatures
India is likely to see above-average temperatures during the winter season, the Government’s weather bureau said earlier this week, raising concerns about the yields of crops such as wheat and rapeseed, Reuters reported.
India is expected to experience above-normal minimum and maximum temperatures from December to February, with fewer "cold wave days expected", the India Meteorological Department said in a statement.
So winter-sown crops such as wheat, rapeseed, and chickpea are planted from October to December and need cold weather during their growth and maturity stages for optimal yields.
Lower production could force India, also the world's largest wheat producer after China, to import the staple to ensure affordable supplies and also to increase imports of pulses and edible oils.
So far India has avoided importing wheat despite high prices.
Hot and unseasonably warm weather hit India's wheat output in 2022 and 2023, leading to a sharp drawdown in state reserves.
Wheat prices hit a record 32,000 rupees per metric ton in Delhi last week, up from 25,000 rupees in April and far above the government-fixed minimum support price of 22,750 rupees for last season's crop.
To bring down prices by boosting supplies, India plans to sell 2.5 million metric tons of wheat from its state reserves to bulk consumers such as flour millers and biscuit makers.
Meanwhile, a Deputy Governor of the RBI, M Rajeshwar Rao said on Wed that climate change has a bearing on both price and financial stability and there is a need for a regulatory response to mitigate risks arising out of it.
The impact on the financial system and economy arising from climate change is dependent on the extent of their exposures to these risks and mitigation measures that are in place, he said. Pointing out that the dilemma and challenge faced by the regulators is to not only put in place an enabling ecosystem from a prudential perspective, but also act as an enabler and facilitator for orderly and sustainable development of the financial system and economy.
Hence, the mitigation of climate change risks not only requires individual sectoral response from regulators, but also inter-regulatory coordination, he said.
Rao said the RBI has been proactive to mitigate the climate change risks that may impact the financial system. The central bank has set up a dedicated group within banks to assess climate change risks and foster a robust ecosystem for sustainable finance.
Additionally, the RBI has conducted a survey on climate risk and sustainable finance, covering 34 scheduled commercial banks. Following this, the RBI released a discussion paper on climate risk and sustainable finance, along with a framework on green deposits.
