Why FII Selling Will Keep Indian Markets Subdued
Indian markets were down on Friday, ending the week in the red, even as foreign investors continued to dump stocks
On Episode 431 of The Core Report, financial journalist Govindraj Ethiraj talks to Surendra Mehta, National Secretary of the Indian Bullion and Jewellers Association as well as Dr Rajiv Kovil, State Secretary for the Research Society for the Study of Diabetes in India (RSSDI).
(00:00) The Take
(06:17) FIIs have now pulled out $12.5 billion since October, why market overhang will continue
(08:11) The rupee hits a fresh low as strong dollar reigns
(09:50) Crude oil markets are trying to make sense of the Trump victory
(10:26) Gold prices are down, where could they go now?
(16:56) Diabetes is the highest cause of deaths in Mumbai now, what does that mean for you?
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, its Monday, the 11th of November and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take
A Marwari industrialist once explained to me why they were into multiple and diverse businesses in response to my question on whether there was a dilution in focus because there was no focus on one industry and thus core competence.
Which of course was a big theme two decades ago.
The industrialist narrowed it down to risk linked to business cycles and reward linked to opportunity.
According to him, business cycles were such that it was important to be present in multiple areas.
When textiles were down, steel might pick up and if both were down, maybe a finance business would gain traction.
The other was of course an opportunity. Every decade has seen new business opportunities, including sectors which were not open to the private sector.
Needless to add, industrialists have constantly diversified.
Hence the growing importance of conglomerates where ownership and control rests with a single individual, family or entity to which or whom the profits also flow to.
I was reminded about the larger debate on conglomerates versus core competency on reading leader of India’s opposition Rahul Gandhi’s recent column in the Indian Express which appears to attack some conglomerates for their proximity to political power and alleges the use of that clout to intimidate other, mosley's smaller businesses into submission or takeover.
“When you compete with them, you are not competing with a company, you are fighting the machinery of the Indian state, " he argues, also adding that these groups decide what Indians read and watch, they influence how Indians think and what they speak.
Today, market forces do not determine success, power relations do,” he argued
To digress a moment, the examples he uses as a contrast to the big monopolists as he termed them also seem somewhat misplaced
Many of them are `startups’ funded by overseas venture capital who are essentially trying to replicate or are trying a venture in China or the US.
And creating significant market distortions in the process, for example by driving up labour costs or causing migrations which were never sustainable.
Looking not too far back, most of those investments have already turned lemons and more will, including some of the listed ones in which case the investing public will carry the cross.
To return to conglomerates, there is another reason for their success and continuance.
Which is that they are mostly family-started, owned and mostly managed enterprises.
This is not just in India but also across Asia where family owned businesses represent more than 80% of all business.
To take some names, the Ambanis, Tatas, Birlas and Adanis are conglomerates in multiple businesses and constantly scouring for new opportunities.
Some old economies and some new.
The Tatas came back into airlines but also are now one of the key drivers of India’s semiconductor ambitions.
The Ambanis ventured into telecom, retail and then entertainment and the Adanis went from ports and cement to power, solar power and data centres.
The Birla Group recently launched a paints brand and a retail jewellery brand. The paints brand is an extension of its cement portfolio and jewellery its retail portfolio which includes garments.
The linkages are not too difficult to see.
It is also inevitable that conglomerates with multiple interests will also engage with the Government and attempt to influence policy from different quarters. Their combined bargaining power if you want to call it that will be higher than any individual business person.
And perhaps for good reason.
Mr Gandhi is obviously referring to a crossing of lines for which he has not presented any specific example or proof and nor is that the key issue here.
The larger question surrounds the importance of conglomerates.
An economy like India, driven by family owned businesses, will inevitably create more conglomerates or see the expansion of existing ones.
Such a structure works well not for the business groups in question but also for other stakeholders like lending institutions, employees and shareholders.
This is because conglomerates also have the ability to raise capital in tough times using other balance sheets and maintain general business stability.
Mr Gandhi says banks should overcome their fascination for the top 100 well-connected borrowers with their attendant NPAs and be made to discover the profit pools in lending and supporting the play-fair businesses.
No denying that but many of the the top 100 borrowers are likely to be conglomerates with some strong balance sheets within their universe too.
And while there will and have been some very bad eggs, investors also trust conglomerate management because they feel that demonstrated capability in one industry is a good reason for them to invest in the next.
One instance is Ambani's financial services foray Jio Financial where the stock is already quoting at a healthy premium to listing last year despite having any real business to show yet.
Which means this also works for the country’s economy as a whole, including for creating formal jobs.
There is a last reason for conglomerates and goes back to my conversation with the industrialist.
Which is succession.
The next generation, particularly if there are multiple inheritors, will want or demand businesses to run.
The Ambanis and Adonis have clearly demarcated businesses for the next generation, more visibly with the former, as Mukesh Ambani, Reliance Group chairman has publicly indicated.
That also presents an opportunity for fresh direction and value creation and of course continence of family business traditions, ownership and wealth.
And that brings us to the top themes and stories for the week.
FIIs have now pulled out $12.5 billion since October, why market overhang will continue
Crude oil markets are trying to make sense of the Trump victory
The rupee hits a fresh low as strong dollar reigns
Gold prices are down, where could they go now?
Diabetes is the highest cause of deaths in Mumbai now, what does that mean for you?
Market Flows Last Week
Indian markets were down on Friday, ending the week in the red, even as foreign investors continued to dump stocks over, among other things, concerns over slowing corporate earnings.
The markets have now posted losses for the fifth week and the Nifty is down around 8% from the record high it hit on Sept. 27.
Foreign investors have now pulled out close to $13 billion since October and have been net sellers in all 29 sessions from Sept. 27 to Nov. 8.
FIIs are withdrawing mainly to invest in China, drawn by Beijing's stimulus measures and the stock market's relatively attractive valuations, Reuters reported.
Incidentally, many other markets like Indonesia, Malaysia, S Korea, Taiwan and Thailand have also seen FII outflows in November, but the amounts are smaller in contrast to India..
On Friday, the Sensex fell 55.47 points to close at 79,486.32, while the Nifty 50 fell 51.15 points to 24,148.20.
Elsewhere, almost quietly, because all attention was on the US elections and Donald Trump’s victory, the Federal Reserve on Thursday cut interest rates by 25 basis points, but indicated a cautious approach to further cuts.
The markets, as we have been saying, have been pricing in a Trump victory for several months now but the extent of the win was most likely a surprise.
While there will be bullishness on Wall Street for some time, it is unlikely to spread to India as the overhang of weak results will take some time to overcome.
And a pure supply-led spike in prices seems unlikely because any rise would trigger selling particularly by institutional investors.
Rupee A Fresh Low
With FII selling unabated in November too, the rupee weakened to a record low on Friday and logged its worst weekly fall since May, Reuters reported.
The rupee is also under pressure from a stronger dollar which has only strengthened since the Trump victory.
The rupee closed little changed at 84.3750 against the dollar, after declining to 84.38 late in the session, eclipsing its previous all-time low of 84.3775 hit on Thursday.
Inflation To Jump
We discussed the sharp rises in tomato, onion and potato prices last week, leading to higher costs of food items for households.
Not surprisingly, consumer price inflation for October or last month is now projected higher at a 14-month high of 5.81% in October primarily due to a spike in vegetable and edible oil prices, a Reuters poll of 52 economists has predicted.
This will be the highest since August 2023 if so and inflation rose to 5.49% in September, higher than forecast.
Food prices, which make up nearly half of the inflation basket, have shot up in the last month.
The government's move to raise import taxes on edible oils by 20 percentage points in mid-September also likely helped to drive prices up faster, further straining household budgets, Reuters said.
Oil Searches
Oil prices fell after Chinese stimulus measures disappointed speculators, but not enough to jolt prices from the narrowest trading band since July, Bloomberg reported.
OIl is presently trading at just under $74 or at $73.87.
Investors are in wait-and-see mode to see if Donald Trump’s election victory will lead to peace in the middle east and Russia Ukraine wars..
“Crude oil is trying to figure out if Trump is good or bad for crude oil, with volatility elevated until a central theme comes along and establishes a trend,” said Robert Yawger, director of the energy futures division at Mizuho Securities USA.
“It is increasingly looking like the early driver is going to be the Chinese who demand destruction.”
Crude is still under pressure by OPEC+ delaying its planned output hikes by a month
Gold Falls
Gold prices fell at the end of a volatile week’s trading, as investors assessed the path ahead for US rates and the implications of Donald Trump’s election victory.
Bullion fell by as much as 1% Friday, on track for its biggest weekly decline since May, Bloomberg reported.
Gold gained on Thursday, after the Fed cut rates by a quarter point, even as Chair Jerome Powell said he didn’t rule “out or in” a further cut in December, noting recent indicators suggested the economy was still expanding solidly.
UBS strategists told Bloomberg gold will likely see support as a hedge against the inflationary pressures of higher US government borrowing, arguing the price fall the day after the election was “surprising and oversized.”
Gold is up around 32% this year with gains powered by heightened geopolitical and economic risks, driving purchases from both central banks and investors.
Spot gold fell 0.8% to $2,686.50 and was down 1.8% this week. Silver prices too have fallen, on course for a second weekly drop Bloomberg said.
So what is the outlook for gold prices in general and back home where demand has slowed in the festival season because of higher prices but we still have the wedding season ahead.
I spoke with Surendra J Mehta, National Secretary of the Indian Bullion and Jewellers Association and began by asking him how he was seeing the recent fall in gold prices.
INTERVIEW TRANSCRIPT
Surendra Mehta: The gold prices have been falling because, first of all, nobody expected, at least the gold industry never expected that Trump could win. Everyone thought that this is going to continue, the US will continue to be in debt for years together now if the other government is elected. As soon as Trump won and he gave his first comment, so he said that he is going to cut the corporate taxes and he's going to ensure that the US is out of debt track, which is 36 trillion on worst by way of, you know, he says they have a lot of oil and gas reserve and he can clear the debt through oil and gas.
That is the reason why, you know, the gold market started falling because it is also a known fact that he would not like the geopolitical tension to continue. The gold market now expects he would ensure that all the tensions between Russia, Ukraine, Israel, Iran are being settled through dialogue. There is no war in near future and that is the reason why the gold market started.
But how long it will continue, that is a question mark. You know, anybody would like to see a new president coming and talking sensible things like bringing dollar index and strengthening the dollar and everything. But eventually after 7, 8 days, 10 days, we are all again going to look at the balance sheets of US, which is certainly in a very, very patch.
Govindraj Ethiraj: What's the medium term outlook then for gold versus the dollar or let me put it this way. Do you feel that the gold prices are going to be essentially determined by the way the dollar is going to move or could that relation break?
Surendra Mehta: No, no, that relation won't continue. Eventually, the gold prices would move based only on the balance sheet size of US. The more the debt, the more the gold prices would.
So, in my opinion, for the first 7, 8 days or 10 days, the gold prices can go down $2,565 in the international market. Eventually, the market will look at the US economy. It will look at the bond yield.
It will look at dollar index, which in my opinion, certainly for first 7, 8 days, 10 days, the dollar index is trending. US bond yield is getting better, but I don't think this can last longer. So, eventually, the gold prices will again start increasing after an initial sum.
Govindraj Ethiraj: So, now to come to the domestic market, we've obviously seen prices fall by about a little over 2000 rupees per 10 grams in the last year or two. But there are two or three other factors. This is obviously we're getting into wedding season.
This is still high demand period. How are you seeing domestic outlook overall?
Surendra Mehta: Domestic demand in the Indian market, there is going to be a problem with the domestic demand. As we have seen that demand has already started falling down due to the high gold prices. If these surge in the prices continue for another one year or two, because a 30% rise in price in last 52 weeks, if this 30% rise or even if these prices go up by say 20% on an year-to-year basis, so which is beyond the inflation of the Indian economy, so the demand in Indian market is likely to be hit.
And we may see a fall in the gold demand, at least the jewelry demand by about 15% to 20%.
Govindraj Ethiraj: So, this also presumes that you're seeing prices remain high for the next couple of months, at least, I mean, through January, let's say.
Surendra Mehta: We'll see the prices remaining high, at least for the next three years. The BRICS countries are trying to trade among themselves. So, what will be the value of US dollars?
The de-dollarization has already started taking place and I think the de-dollarization is one factor which will shape up as the BRICS nations move from one step to another step.
Govindraj Ethiraj: Right. Mr. Mehta, thank you so much for joining me.
Surendra Mehta: Thank you.
Some Corporate News
Tata Steel
A bunch of factors were at play in the second quarter of FY25 for Tata Steel — restructuring in the UK, Kalinganagar expansion, and weak market conditions. In an audio interview, T V Narendran, managing director and chief executive officer (MD & CEO), Tata Steel, tells Ishita Ayan Dutt that in many ways, this was the worst, and that Q3 also comes with challenges. Edited excerpts:
Q: Cheap imports and weakness in global markets are weighing on your Indian and European operations. What is the outlook for the December quarter?
We are not out of the woods yet. We are still in a fairly challenging market situation. We have guided that realisations in this quarter in India will be about Rs 2,000 less per tonne compared to Q2. In the UK, we will be about 50-55 pounds lower and in the Netherlands, about 70 pounds lower.
On the cost side, the coking coal cost will be about $20 per tonne lower in India, and in the Netherlands, it will be about $10 lower. So, there is still pressure on the margins for Q3.
I hope things will get better going forward. At least in steel prices, the low point was about $450 per tonne in August internationally and now it’s around $500 per tonne. Hopefully, if the Chinese stimulus works a bit, then the exports will drop, which can help the prices.
I also think with the outcome of the US election, more steps will be taken to strengthen Europe in terms of investments, protection, etc. That should help us. But this is going to be a challenging quarter.
Yes. Unless steel prices drop further, which is not in our hands. But at current steel prices, this is the worst.
Singapore Airlines will make an additional investment of Rs 3,194.5 crore in Tata Group-owned Air India post-merger of Vistara in November. The merger, announced on November 29, 2022, and set to be completed on November 11, 2024, will result in Singapore Airlines having a 25.1 per cent stake in the enlarged Air India.
Full-service carrier Vistara, which started flying on January 9, 2015, is a joint venture between Tatas and Singapore Airlines, where the latter holds a 49 per cent shareholding.
Diabetes
Diabetes has become the leading cause of deaths in Mumbai, with fatalities rising steadily over the past decade.
From 2014 to 2022, diabetes claimed 91,318 lives, including 14,207 in 2022 alone, up from 2,544 in 2014, according to a report titled ‘Status of Health Issues in Mumbai' by Praja Foundation.
The report also attributes 79,384 deaths to respiratory illnesses, linked to deteriorating air quality, while tuberculosis claimed 45,676 lives in the same period.
The Mumbai-centric report also highlights the lack of sufficient clinics and health infrastructure.
At a larger level, the diabetes figures might sound surprising or not depending on how closely you follow this subject but the extent of diabetes linked mortality is definitely worrying.
It also stands to reason that if this is the case in Mumbai, other major cities cannot be far behind.
I reached out to Dr Rajiv Kovil, state secretary for the Research Society for the Study of Diabetes in India and began by asking him first if the numbers and the proposition were in keeping with the trends he was seeing.
The report also highlights critical gaps in the city's healthcare infrastructure, noting that although the health budget increased by 98% over past six years, certain long standing issues remain unaddressed
INTERVIEW TRANSCRIPT
Dr Rajiv Kovil: The numbers are true. Importance is that India as a country and globally, we have moved from infections and other causes being the largest cause of death to NCDs. And if you look at the projections from today 2024 to 2040, almost 75 to 80 percent of all deaths would be attributed to non-communicable disorders.
And in non-communicable disorders, we have diabetes, heart disease and cancer as the main drivers for the NCDs globally. And whatever is happening globally is also occurring in India. So the Praja report was not surprising at all.
It is something that we have been seeing and we have been seeing these trends over the last one and a half to two decades now.
Govindraj Ethiraj: Right. And why diabetes more than, let's say, heart disease or cancer? The prevalence of diabetes is higher.
Dr Rajiv Kovil: 60 to 70 percent of people with type 2 diabetes have some form of cardiovascular disease and they die of some form of cardiovascular disease. So diabetes is not just a sugar problem. There are a lot of multiple abnormalities inside and what you get is at the end that the sugar or the cholesterol or the blood pressure are byproducts of the problem inside.
The core defect is inside and the core defect is wrong deposition of fat in the body and which may lead to a liver issue which we call as non-alcoholic fatty liver. You could have obesity, you could have diabetes, you could have cardiovascular disease, you could have hypertension, you could have high cholesterol, you could have cancer. But it's a common soil hypothesis.
The origins are the same. They may manifest in different individuals differently based on your genetic makeup, what are the circumstances surrounding you and what is your lifestyle. It's a common soil hypothesis.
So these things will emerge and these things will continue to be the main killers of the society in the next few years or few decades to come.
Govindraj Ethiraj: And in the patients that you interact with, how do you see the acceleration or rather where does the acceleration point start and where does the disease in some ways take complete control which thus leads to death.
Dr Rajiv Kovil: So the biggest problem with diabetes is that in majority of individuals is asymptomatic and even today. So almost close to 50 to 60 percent patients do not have symptoms and that's a bigger problem. So acceptance doesn't occur.
So the younger you are, you deny the problem and you feel probably the lab is wrong or something I did in the last few months changed things. So diabetes takes minimum five to seven years to develop. So the acceptance and denial remains for a very longer period of time and then the silent issue that diabetes has, it carries with it a lot of other known enemies which could be the blood becoming thicker, cholesterol going higher, the good cholesterol going lower.
So it's like a bad friend to have. So it will catch many other bad friends and together it becomes a bigger problem. So what we have seen is that the complications have also become premature and the diagnosis of diabetes has come down by at least a decade in the last one and a half decades.
Govindraj Ethiraj: When you say it's come down that means?
Dr Rajiv Kovil: The average age of diagnosis. Like we have an internal data from the clinic which is three years pre-pandemic and three years post-pandemic and we have seen almost two and a half times more patients as compared to newborn patients as compared to pre-pandemic and the age of diagnosis which was around 48 pre-pandemic has come down to around 42 and the newly diagnosed so-called newly diagnosed people with diabetes earlier I think had 15 percent any kind of complication that diagnosis that has gone up to 30-35 percent. So that's an alarming rise and we are seeing two and a half times more people with diabetes and the majority of people who are getting diagnosed are in the late 20s and mid 30s which was not the case a decade back or a decade or 25 years back when I started practice. I was hardly seeing patients in the 30s but that's not the case anymore.
You see almost 25 to 30 percent of your clientele was less than 40 years of age today.
Govindraj Ethiraj: But in a way is that good news that people are recognizing and turning up faster as opposed to ignoring it?
Dr Rajiv Kovil: So an optimist will look at it from that angle that people are getting more aware and probably going and getting them checked. A pessimist would say that you are getting diagnosed early and probably you need to push yourself for the same amount of years with diabetes which is the challenge. Now the younger you are you have to live longer with diabetes and there is no structured care of diabetes in our country and that's the bigger problem and you have a lot of myths and misconceptions which surround diabetes and a lot of people want to treat diabetes.
All kind of NCDs for that matter. Obesity which is the driver for all NCDs including cancer is not recognized as a disorder as yet. It's considered as a cultural problem rather than a medical problem.
So there are a lot of cultural values and traditions which come into treatment of asymptomatic or a condition which otherwise looks benign which is not like diabetes. So there are a lot of not just medical problems there are a lot of social problems which are there with diabetes.
Govindraj Ethiraj: What would you tell people who are listening right now? I mean particularly I'm guessing those who've never checked or have checked but ignored because they think that oh it's always just pre-diabetic or it's not yet hit the borderline or whatever the alarm bell line.
Dr Rajiv Kovil: It takes a very long period to develop diabetes. So one accept the problem do not deny it. Seek medical help.
There are a lot of ways that a person often believes that if he doesn't take a medication he's not a diabetic and you become a diabetic only if you take a medication. It's not the values actually tell you whether you have diabetes or no. And diabetes today at diagnosis has a lot of people with complications.
So diabetes is all about screening for complications. It's not about chasing blood sugars which was it 30 years back. Today diabetes is a screening problem where you keep screening for complications.
Pick up early complications and there are a lot of ways of treating them. So I think everyone needs to get very proactive about all NCDs and lifestyle changes which has occurred in the last two and a half to three decades are genetic makeup which helps us store fat and not expend fat makes us very very liable or very easy targets for these NCDs. So exercise, eat right food, reduce your stress.
I'm saying though what I'm saying is not so easy to do but from a government standpoint I've always been advocating that the good food or the healthier food needs to be cheaper, more accessible and available to a larger group of patients. And today we see that whenever you go to a health store or a healthy food is three times the cost. So there needs to be huge taxation on wrong food.
All the apps which supply your food at 3am should be shut. Nutrition should be part of a curriculum in school so that children when they go to school they're just we have we have physical training but we nutrition a person eats for almost 70 years of his life he should know what he eats. So apart from learning all the history of all the people who ruled India it's better to have nutrition in schools, people should be able to identify food, a child should be able to identify food labels, he should know what is junk and what is not and that kind of a literate world or a literate population can only prevent these kind of complications otherwise we are doing the wrong right.
Govindraj Ethiraj: Dr. Kovil thank you so much for joining me.
Dr Rajiv Kovil: Thank you so much Govind. Thank you. Pleasure pleasure being here. Thank you so much.
