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From Dalal Street To Wall Street, It’s All About Valuations

In the first week of January, Kotak Securities said it believed the Nifty index was overvalued by 20% and expected a time correction in the next 6 to 9 months. This comes obviously on the back of a strong 2023 for Indian stock markets

By Govindraj Ethiraj
New Update
Dalal Street Wall Street
On today’s episode, financial journalist Govindraj Ethiraj talks to Shankkar Aiyar, veteran economic journalist, author and columnist.

Our Top Reports For Today

  • (00:00) Stories Of The Day
  • (03:00) From Dalal Street to Wall Street, it’s all about valuations
  • (05:58) Oil prices hit a 2024 high as middle east tensions rise again.
  • (06:46) China’s FDI is down 82% from 2022
  • (07:16) Do India’s Farmers Earn Enough?
  • (19:47) India’s aviation regulator wades in, from freeing up airport slots to ensuring baggage arrives on time.


NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.

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Steady Cues for This Week

Depending on which cues they take, Indian markets should open steady to strong as markets in the region, notably China as traders digest strong travel and tourism data as they return from the Lunar New Year break.

Looking back at last week, the Sensex rose 1.16% to 72,427 while the Nifty 50 rose 1.19% to 22,041.

While India’s general elections to be held most likely April onwards are likely to see the BJP return to power at the centre, the markets are taking further encouragement from recent pre-poll surveys that point to the same outcome.

Last week, auto stocks did well, we also spoke of January seeing record passenger vehicle sales though manufacturers are now producing beyond what dealers can stock who are complaining about high inventory levels.  Public sector banks also did well, led by State Bank of India, the largest of them all.

While domestic investors continue to hold up and indeed pump up the market, foreign portfolio investors are still being cagey about equities. 

Foreign investors sold stock worth close to Rs 3,700 crore net this month, possibly due to interest rates remaining high in the US. In January, they pulled out Rs 25,000 crore so they have been net sellers since the beginning of the year.

The story is different in debt as we have been discussing here and have invested over Rs 16,560 crore in the last month, over close to Rs 20,000 crore in January.

Meanwhile, India's foreign exchange reserves snapped a two week gaining streak to hold at $617 billion as of February 9, reported Reuters. The reserves fell by $5.27 billion in the reporting week, their steepest fall in a month, after having risen by a total of $6.36 billion in the prior two weeks.

From Dalal Street to Wall Street, It's About Valuations

Valuations have been a concern in India for some time. In the first week of January, Kotak Securities said it believed the Nifty index was overvalued by 20% and expected a time correction in the next 6 to 9 months. 

This comes obviously on the back of a strong 2023 for Indian stock markets, its best since 2017 with the Nifty 50 and the Sensex rising by 20 per cent and 19 per cent respectively. 

And then there were the midcap and smallcap indices which rose 46 percent and 48 per cent.

Now on Wall Street, the US markets are holding strong too but they are also significantly being driven by tech or more specifically the Magnificent Seven stocks. 

A Bank of America Corp team has now said that there are a host of similarities between tech stocks now and previous bubbles which suggest the Magnificent Seven is nearing — but not yet at — levels that may lead it to pop, reports Bloomberg.

Bond yields adjusted for inflation, seen as a proxy for tight financial conditions, are a common way for stock-market bubbles to burst, wrote the team led by Michael Hartnett. 

By their maths, given all of the debt sloshing around the global financial system, the real yield, which subtracts inflation from the Treasury 10-year yield, would have to reach 2.5% or 3% to end the investor craze for artificial intelligence and mega cap tech. 

It’s currently about 2%.

Another metric that Hartnett’s team’s mention is that the gains are smaller than other bubbles measured trough-to-peak. 

Since a low in December 2022, the Magnificent Seven has jumped about 140%. It’s not quite the 190% surge seen during the Internet bubble for the Nasdaq Composite or the 230% rally of FAANG stocks from Covid lows, the strategists said.

Of course during the internet bubble, many of the companies did not have any real businesses and do not exist but obviously when stock prices reach such highs and so soon, it is time to do some careful stock taking.

It's for roughly the same reason that investors are wary about valuations of Indian companies even as they acknowledge the soundness of the fundamentals.

This is also the reason institutional investors have been heavily advocating shifting to large cap stocks since January. 

In some ways, the warning is perhaps apt because it ought to make one think of what stocks one is invested in rather than fret about the market as a whole. These warnings, whether on Dalal Street or Wall Street, also remind us that there is a force of nature called gravity.

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Oil Hits A 2024 High

Oil has now closed at around $83.47, its highest this year as increasing tensions in the Middle East outweighed all the positives, particularly on supply and demand that have been keeping prices down for the last few months. 

West Texas Intermediate rose above $79 a barrel after Hezbollah chief Hassan Nasrallah said the group will escalate its fight with Israel, heightening risks in a region that accounts for about a third of the world’s oil output, Bloomberg reported. 

The International Energy Agency in Paris said this week that oil markets could be in surplus all year

Crude is up more than 10% this year, near the top of the range it has traded in since early November.

China’s FDI Falls Sharply

China’s FDI stood at $33 billion last year, 82% down in 2022, according to data from the State Administration of Foreign Exchange released Sunday, reported by Bloomberg. 

That measure of new foreign investment into the country — which records monetary flows connected to foreign-owned entities in China — slumped to the lowest level since 1993.

Do India’s Farmers Earn Enough?

Farmers are protesting around Delhi, demanding higher minimum support prices for their produce. The calculations for this MAP are complex and there is much history and of course politics to it.

Last week, we spoke to Crisil Ratings Director Pushan Sharma who pointed out that the Government would only buy crops trading in mandis or agricultural market places below the minimum support price, the real cost to the Government, assuming 16 of 23 crops which account for 90% of production of field crops, works out to Rs 21,000 crore.

The mechanics of this are, like I said, complicated. 

One larger question is what are farmer’s incomes and the importance of viewing it from that perspective. Since it is the lower incomes that are driving their protests, rather than the prices of their produce, at least if viewed from an economic and not political perspective.

I reached out to Shankkar Aiyar, veteran economic journalist, author and columnist who addressed this issue in a weekend column in The New Indian Express.

I began by asking him where we stand in terms of farmer’s income?

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Aviation Regulator Steps Up Ante

India’s aviation ministry and its Directorate General of Civil Aviation appears to be getting more customer and flyer focussed, at least going by some recent actions.

In its latest missive, it has asked airlines to ensure that all baggage of passengers are delivered within 30 minutes of landing of a flight at an airport.

The directive from the Bureau of Civil Aviation Security (BCAS) to seven scheduled airlines also comes against the backdrop of delays in passengers getting their baggage after landing on a flight, reported the Business Standard.

The Bureau of Civil Aviation Security has asked airlines to ensure timely delivery of baggage by February 26.

And here is where I discovered something interesting.

Airlines have to ensure that delivery of the last baggage is made within 30 minutes as per the Service Quality Requirements of Operation, Management and Delivery Agreement (OMDA).

"The mandates require the first baggage to arrive at the baggage belt within 10 minutes of shutting off the aircraft engine and the last bag within 30 minutes of the same," the statement said.

So if you did not know this earlier, you know it now.

Baggage within 10 minutes of engines powering down and last bags within 30 minutes.

I would acknowledge that on domestic flights, baggage usually arrives fast but this is far from the situation on international flights when the system seems to cave in under the load.

Anyway, the DGCA earlier also asked Mumbai airport to reduce the number of scheduled flights and restrict the movement of business jets during rush hours in a bid to reduce congestion and improve on-time departures. 

The move was expected to force airlines to cut some 40 flights and hit operations of private jets which are used by some of the country's top business houses.

Mumbai airport is owned by the Adani group and  is the second busiest in the country after Delhi and sees heavy movement of business jets.

There must be some high intensity back channel lobbying going on so we will update you on developments as they happen.

Yes, I have not got amnesia about how the DGCA could have clearly better handled the cascading fog-induced delays last month around the country. It clearly needs to change its procedures and be more liberal in people movements even as it is conscious of security.

For example, allowing passengers back onto the terminal on delays or allowing mixed use airports, like in the United States. 

And finally, the DGCA hauled up Air India after a 80-year-old passenger who had asked for but did not have a wheelchair on landing from New York last week and then collapsed after the long walk to immigration .

Reports said the passenger was taken to Nanavati Hospital for treatment but he was pronounced dead on arrival.

In this case, while the DGCA has rightly taken up the matter with the airline, it is also a fact that there are many passengers who monopolise wheelchairs because it takes them with greater ease through immigration and customs.

Reports again said there were 32 wheelchair passengers on the flight and only 15 wheelchairs turned up and the other passengers including the man who passed away was asked to wait, at least according to the airline.

I have personally seen very fit looking, admittedly old people who seem to show no signs of wear and tear when getting off the wheelchair at the aerobridge or after getting off the wheelchair at the arrivals.

The DGCA perhaps needs to segregate wheelchair passengers from those who could go on a buggy because the walk to immigration can be a long one, particularly after an exhausting and claustrophobic 14-15 hour flight. And conversely I would think.

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That’s it from me for today, the beginning of the week, have a great week ahead.