Dear Reader,
The Indian market is red-hot, and nobody is quite sure why. To be sure, we all know about India being the fastest-growing large economy and the cleanest dirty shirt in a stinking closet, but there’s been more than ample time for the markets to discount that fact. The rally is all the more surprising because crude oil prices, long the bugbear of the Indian economy, are up 30 percent in the past three months. And while the government has kept domestic fuel prices unchanged, it can’t do much about the pressure on the rupee. Retail food inflation is very high, at 9.94 percent year-on-year in August 2023. Our Monsoon Watch column says, “Any improvement in rainfall from now on wouldn’t change the dynamics of summer-cropping this season, but should help the reservoirs come up to a level and support the winter (rabi)-cropping season. That said, the intensification of the El Nino effect will be key to monitor, as it is anticipated to last until February 2024.”
What’s more, the broader market has done superlatively well, with both the BSE Midcap and the BSE Smallcap indices up over 35 percent in the past six months. Small wonder that Kotak Institutional Equities called it a Mad(-cap) dash, pointing out that, “The primary driver of the rally appears to be irrational exuberance among investors, with high return expectations (and purchase decisions) being driven by the high returns of the past few months”.
My colleague Shishir Asthana, who writes Moneycontrol Pro’s Market Outlook newsletter every Monday, predicted that the Nifty would scale Mount 20k this week, but even he said analysts have stopped trying to justify the rally on fundamentals, adding, “Most agree that the ground situation has worsened, especially for those companies depending on the export market for growth”. Yet, the very low reading of the India Vix, the fear gauge, indicates an extraordinary degree of complacency. ‘What could possibly go wrong?’ is the prevailing sentiment.
Analysts, of course, have to justify the ways of the markets to investors. Our columnist Vijay Bhambwani had a cogent explanation of why rising oil prices leave the equity markets unfazed. On the other hand, OPEC has said oil demand will be tight in the fourth quarter of 2023. OPEC is hardly an unbiased party, of course, but then the International Energy Agency said much the same thing.
Others have said that although stock indices have scaled new highs, valuations have not. A Motilal Oswal report says, “As the benchmark soars to a new high, the Nifty-50 trades at a 12-month forward P/E of 18.8x, a 7% discount to its own long-period average.” We pointed to another report that justifies the rally by pointing to the expanding Return on Equity of the corporate sector, adding helpfully that the RoE expansion will be led by capital intensive and cyclical sectors such as auto, capital goods, infrastructure, utilities, telecom, commodities and financials.
The buoyant equity market is a golden opportunity for firms seeking to raise money and both the number of IPOs and the listing gains have shot up, a happy combination. Gesu Kaushal, MD, Equity Corporate Finance at Kotak Investment Banking, gives us four reasons for the IPO resurgence.
Will the exuberance in the primary market continue? This article says, “The optimism in the markets as reflected in the Nifty sustaining above its life-time high of 20,000 suggests that investors can expect gains to be decently rewarding, and even more so for fundamentally strong businesses.” But we were less sanguine about the quality and valuations of the IPOs this week -- we said investors could subscribe to the SAMHI Hotels IPO, raised our eyebrows at Zaggle’s valuation, were not enamoured of the risk-reward ratio at RR Kabel, and declined to embark on the Yatra Online IPO.
We were also wary of the all-pervasive optimism, telling investors to exercise caution in the grid storage issues after the rally and had a similar message about the Mazagon Dock Shipbuilders stock. We also pointed out that, taking the IIP data, 13 of the 23 manufacturing industries saw lower production in July 2023 than in July 2019, before the pandemic. And we cited a Motilal Oswal report that showed corporate investments do not support the capex revival theme.
The external environment is, of course, much worse. The European Commission recently axed its 2023 global trade growth forecast to 0.2 percent from 1.3 percent and predicted a German recession this year. The problem is that inflation continues to remain elevated despite faltering growth, which the European Central Bank tried to balance by a dovish hike this week. In the US, retail inflation accelerated for the second straight month in August and the market is discounting a 40 percent chance of the Fed hiking rates by the end of the year.
Why then the exuberance? One reason is liquidity. The Chicago Fed Adjusted National Financial Conditions index is at its most accommodative in a year. But another reason is the flight from China. This month’s survey of global fund managers by Bank of America found alarm over China at its centre. It’s no wonder then that fund managers are jettisoning Chinese markets and moving to other centres, although it’s possible, as Ruchir Sharma writes in this FT story (free to read for Moneycontrol Pro subscribers) that we may have reached peak China pessimism.
Fund tracker EPFR said on 8th September, “Flows to China Funds finally cracked in early September ahead of export data showing global demand for Chinese exports continues to weaken”, adding that investors “continue to steer above-average sums into India Equity Funds which added to their longest run of inflows since a 30-week run ended in 2Q04”. Flows into funds with mid cap mandates hit a five-week high and India Small Cap Funds posted their 13th consecutive weekly inflow. Add that to the local inflows, and we have the reason for the exuberance.
As for a more fundamental basis for the flows into equities, the BofA survey found that the conviction among fund managers is that the global economy, ex-China, will have either a soft landing or no landing at all.
The upshot: as on 14th September year-to-date, MSCI China, in USD terms, was down 7.5 percent, while MSCI India was up 9.1 percent, MSCI Japan up 4.7 percent and MSCI US higher by 7.8 percent.
Incidentally, Vietnam, which President Biden visited immediately after the G20 meet and upped its relationship with the US to a ‘Comprehensive Strategic Partnership’, is up 14.5 percent year-to-date. Indo-US relations, in case you didn’t know, are a ‘Comprehensive Global Strategic Partnership’.
Such are the charms of aligning with the West. They are telling us, in the words of the Pet Shop Boys song ‘Opportunities (Let’s make lots of money)':
‘I'm looking for a partner
Someone who gets things fixed
Ask yourself this question
Do you want to be rich?’
Cheers,
Manas Chakravarty
Here are some of the other stories and insights we published this week, apart from our technical picks in the equity, commodity and forex markets:
Stocks
This stock is the best proxy play for rising inflows into equity funds,
Discovery Series: Ride this auto ancillary gem to leverage the CV industry upcycle
Indraprastha Gas, Krsnaa Diagnostics, Lemon Tree Hotels, RR Kabel IPO, Equitas Small Finance Bank, Weekly tactical pick—water treatment company, Kirloskar Ferrous
Markets
In the Money—Put ratio back spread
India's 'Bits' & 'Atoms': Who is winning the race?
Financial Times
‘He is driven by demons’: biographer Walter Isaacson on Elon Musk
Howard Marks: What tennis can teach investors about risk, return
Apple/iPhone: Pro model will add bite to sales in China
WhatsApp explores ads in chat app as Meta seeks revenue boost
The art of making good mistakes
Oil and gas demand may not peak so soon
Market see-saws always have two ends
Economy
India’s peak power demand rises at fastest pace in over a decade
Is the slack in NHAI road projects cause for concern?
Many committees later, still an underwhelming corporate bond market
Sound and fury in vegetable prices
The poorest bore the brunt of inflation
Personal Finance
In health insurance, don’t use restoration benefit as a substitute for higher sum insured
Why are large-cap funds losing money?
Why is Aditya Birla Sun Life AMC changing the investment strategy of its focused fund?
One year after Prashant Jain at HDFC MF: How the fund house has coped
Companies and industry
RBI’s investment rule rejig has a little freedom, lots of discipline for banks
Why October could prove to be a turning point for Hindustan Unilever’s shares
A risk to Indian pharma’s growth tempo
JSW’s electric dreams defy logic
Policy
Renewable energy: Govt aims to solve grid storage issues with funding support
India needs to fix its farm infrastructure urgently to avoid another tomato price explosion
SEBI’s tough stance against market manipulators will benefit investors
Tilting at windmills: Can India become a wind industry export hub?
Climate financing is crucial for India’s net zero ambitions
Startups and Tech
Nvidia aims to make India global AI hub
Start-up Street: Venture debt options for start-ups on the rise
SoftBank, CPPIB to participate in Eruditus’ $60-70 mn secondary funding, likely at 20% discount
Politics
NDA vs INDIA: the first electoral test
Geopolitics
Don’t miss the India-China subtext in G20 consensus
The Eastern Window: Countering China’s BRI would lift India’s global status
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