India's Rank In MSCI Increases

A lot of the rising prominence in emerging markets is thanks to the mid-cap segment. Even as other major emerging markets like China have underperformed, they too have rebounded in the last few months.

16 May 2024 12:00 PM GMT
On Episode 294 of The Core Report, financial journalist Govindraj Ethiraj talks to Hetal Dalal, president and COO of Institutional Investor Advisory Services (IIAS).

Our Top Reports For Today

  • (00:00) Stories Of The Day
  • (01:09) India’s rank in MSCI increases and why that will mean more flows
  • (03:48) How foreign institutional investors are most pessimistic on India in over 12 years
  • (06:13) Why oil prices could stay low this year thanks to soft global demand and mild weather in Europe
  • (08:22) What should make more money, anonymous coding for global companies or selling your own brand of cars in global markets?
  • (12:25) How Indian companies are not paying sufficient attention to churning their boards and putting off till last moment
  • (22:19) Singapore’s new rockstar prime minister

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.


India Goes Up In The MSCI Index

India’s emerging market standing continues to grow, even as emerging markets themselves as a category have now begun moving after almost a decade of hibernation, as we pointed out in our conversation with ASK Weath’s Somnath Mukherjee on Tuesday, 14 May.

India's weight in MSCI's Global Standard index, which tracks emerging market stocks, has risen to another record high, which means more funds potentially in a few billions of dollars could flow in.

With this, India has further narrowed the gap with China on the index. While China's weightage in the index will fall to 25% from 25.4%, India's weight will rise to 19% from 18.2%. The changes, announced on Wednesday, will be effective May 31, Reuters reported.

A lot of the rising prominence in emerging markets is thanks to the love it or hate it but you can’t ignore it mid-cap segment. Even as other major emerging markets like China have underperformed, though they too have rebounded in the last few months.

MSCI will add 13 Indian companies and three deletions in the May review.

Now to markets on Wednesday.

The main indices were volatile as election-related nervousness continued though not at the same levels in previous weeks.

The S&P BSE Sensex ended down 118 points at 72,987 after some ups and downs while the NSE Nifty50 ended at 22,200, down 17 points.

Interestingly, or not, the broader markets held their gains with the BSE MidCap, and SmallCap indices closing 0.6 percent and 0.96 percent higher.

So, the broader markets saved the day so to speak.

Now, several noteworthy folks have been arguing that domestic investors who are investing heavily in the market in the last couple of years will keep the market going despite waves of selling by foreign institutional investors which in earlier years could have sent stocks crashing.

For example, just in May, FIIs have sold over Rs 17,000 crore worth of stocks but that has not really dented the markets which have been hit more because of domestic investors grappling to make sense of political signals.

So while domestic flows are strong, it is a classic market mistake, to build long term views on the basis of average investor and mostly short term behaviour.

Indian investors are pumping in funds and will continue to but there will be cycles where there will be selling either because of panic or some other need. At this point, you need different classes of investors to pick up the slack and with different, longer term views on the market. Or even to take the market up further.

FIIs Are Most Pessimistic In Over A Decade

And while on the subject of FII selling, data compiled by Bloomberg says Foreign investors are the most pessimistic in over a decade on Indian stocks.

Net short positions — measured as the difference between the number of index futures contracts on which global funds are long to those on which they hold a short position — surged to around 213,000 contracts, data compiled by Bloomberg showed.

The gap is the widest since data going back to 2012.

Overseas investors have pulled out about $4 billion from local stocks since early April, reflecting a cautious outlook about the outcome of the elections.

Some of this is to do with an expectation of lesser seats in parliament despite a victory for the BJP.

Slightly lower turnout numbers are adding to the nervousness.

Meanwhile, stocks of Mahindra and Mahindra Ltd (M&M) gained 1.5% to hit an all-time high of Rs 2,306 on May 15 a day before the auto major is scheduled to announce its January-March quarter (Q4FY24) results.

So far this year, the stock of this auto major has surged over 32 percent, outperforming the 2 percent rise in the benchmark Nifty 50 index.

M&M’s stock price jump shows the markets are still putting money into established companies, including in legacy businesses, even as they seek other opportunities.

And another reminder, global markets are still strong.

Global shares rose while the dollar retreated on Wednesday, after a hot reading of U.S. wholesale inflation set a nervous tone for trading, Reuters reported.

And if you haven't noticed it already, a frenzy in so-called meme stocks entered a third day, with shares in AMC and GameStop soaring by more than 25% in premarket trading.

The last time this happened, movies were made on the phenomenon and people also lost their shirts, pants and most of their clothing.

The MSCI All-World share index traded at a record high, up 0.15% on the day, which brought gains for 2024 so far to 8.3%.

Global Oil Demand Softens

Oil prices are not responding to the classic risk premium factors like war or low intensity warfare as we are seeing in parts of the world.

The reason is demand.

The International Energy Agency of IEA has said the outlook for global oil demand growth this year continues to soften amid an economic slowdown and mild weather in Europe.

World fuel consumption will increase by 1.1 million barrels a day this year, about 140,000 barrels less than expected a month ago, the Paris-based organisation said, reducing its projections for the second month in a row, Bloomberg reported.

The revised forecast reflects a first-quarter demand contraction in rich countries combined with an upward revision to estimates for 2023.

“Poor industrial activity and another mild winter have sapped gasoil consumption this year, particularly in Europe, where a declining share of diesel cars in the fleet were already undercutting consumption,” said the IEA.

Oil prices are trading slightly below $83 a barrel, having retreated 10% from this year’s peak.

On the other hand, consumption is on track to reach an annual record of 103.2 million barrels a day this year even with the lower growth forecast, according to the agency. That’s because its demand estimate for 2023 was revised higher.

The agency made no changes to estimates for 2025, when it expects that world oil demand will increase by 1.2 million barrels a day.

Russia’s Oil Exports Are Falling.

Russia’s April exports of crude and petroleum products dropped to levels last seen in late-2023 amid Ukrainian drone attacks and planned output cuts, putting pressure on the nation’s oil revenues, according to the International Energy Agency again.

This is already impacting India’s imports of crude oil, which stands at over 85% of total needs.

The country exported a total of 7.3 million barrels a day last month, down 6.4% from March, the Paris-based agency said in its monthly report published Wednesday.

Is Writing Software More Lucrative Than Making Cars

A couple of years ago, I was speaking to the CEO of an Indian software company on the sidelines of the software industry association Nasscom’s annual gathering in Mumbai.

In that interview, he told me about this interesting new project they were working on for a major global museum wherein they were working on visitor data to create more insights and then solutions or approaches to build more long term relationships among other things.

It sounded quite interesting to me, more so because Indian IT companies barely speak about the nuts and bolts of the projects they work on with global majors, in any industry. It also sounded interesting because this was a museum and not some ageing bank revamping its internal systems.

A few hours later, I got a panicked call from the company's communications team saying the CEO had begged and pleaded not to use the reference to that museum because there were very strict non-disclosure agreements which he may have forgotten about while speaking with me.

I didn’t see any point in making a point on this so we deleted it.

I was reminded of this story when I read this insight from Business Standard yesterday which said Tata Motors reported a consolidated net profit of Rs 17,483 crore (adjusted for exceptional gains and losses) for Q4FY24, surpassing TCS’ consolidated net earnings of Rs 12,434 crore.

THis was a near 200% jump in bottom line for Tata Motors, while TCS grew 9.1 per cent in net profit.

Both are obviously Tata companies and hence the contrast.

Now all of this might change in the very next quarter but it is an interesting reversion to something more basic.

Is there more money in making original products for which you enjoy brand value and franchise and of course market presence or mostly anonymous coding for other companies, however big that might be.

Well, the Indian IT industry story has mostly been one of anonymous service and quiet victories.

While Tata Motors for instance is a brand that is out there, for instance in electric cars where it right now controls 80% of the market in India or of course its ownership of Jaguar and Land Rover.

Conditions have conspired to make software coding more lucrative all these years, perhaps decades, including of course a weak rupee.

Could that change in the next decade ? I don’t know the answer but it is only logical that Indian IT companies could do better only if they had their own products.

Put differently, when will India produce Microsoft or Adobe ?

Like I said, I don’t know the answer but the comparison between Tata Motors and TCS did remind me of the question.

Diamonds Are Not Forever

This is an almost impossible to believe story on the face of it. A mining giant that has been associated with what is quite possibly the most prominent diamond brand in the world for over a century, is looking to sell it off to focus on copper.

Of course the diamond industry is on the retreat, thanks to falling prices and of course the well known lab grown or synthetic diamonds now substituting real ones in several markets including India.

Anglo American Plc on Tuesday said it will spin off or sell its De Beers business, a brand it acquired in 2011 from the Oppeenheimer family.

This move is part of a wider restructuring to fend off a $43 billion approach from BHP Group.

According to Bloomberg, the uncertainty over how a new-look De Beers may operate is spooking some of the industry’s biggest players.

The entire supply chain knows exactly how an Anglo-backed De Beers works in a market it largely controls, and the prospect of a new owner could upend the way diamonds are sold.

Diamonds are Forever, is of course the famous slogan that is associated with DeBeers since 1947 who also conceptualised and propagated the concept of a diamond ring in an engagement preceding a wedding or marriage.

Inflation-hit consumers are apparently spending less, leaving diamond buyers holding too much stock.

India’s Boards And Their Musical Chairs

How free and effective are India’s boards ? The straight off answer is barely free as evidenced by the sheer number of friendlies packed into boards, particularly in family run companies.

Freedom and effectiveness in this case is defined by the presence of independent directors who are able to question or act as a buffer to owners who might play fast and loose on several issues, including regulation.

The experience is that when something has gone wrong, independent directors usually come out as having been silent spectators.

The story today is about how hundreds of them are now rotating out and companies are not necessarily preparing for this and when they are, it's usually to circulate quite literally a trusted family member, lawyer or accountant.

Some 36% of all independent directors in the Nifty 500, representing 90% of the market capitalisation of the Indian markets will churn in the next 18 months, says a study by Mumbai based Institutional Investor Advisory Services (IIAS).

The reason also is that the Companies Act 2013 introduced a 10-year maximum tenure for independent directors on the board of a company, grandfathering those appointed before 1 April 2014.

IIAS says that investors expect companies to manage the board refresh in a staggered manner, balancing the need to refresh the boards while maintaining institutional memory.

In some cases it is happening.

But not always because though most of corporate India has indeed planned their board refresh, there are a handful of companies that have almost entirely shuffled their boards in a relatively short time period.

Some of the names are quite well known incidentally and are in public domain.

I reached out to Hetal Dalal, president and COO of IIAS and began by asking her how she was seeing the churn ?


Rockstar Prime Minister of Singapore

The island nation of Singapore has a new prime minister after 20 years.

Lawrence Wong has become the city-state's first new prime minister, succeeding outgoing prime minister Lee Hsien Loong who he also worked for for three years in 2005 as principal private secretary and civil servant before joining politics in 2011.

The 51-year-old Wong has an interesting personality, going by a Reuters profile of him which refers to his going on Tiktok to engage with citizens, including singing, playing guitar and posting on issues like mental health.

Colleagues describe Wong, who has held positions in the ministry of finance and will continue to hold that portfolio, as an able technocrat who embodies a generational shift in leadership yet exemplifies continuity in a nation ruled by his People's Action Party (PAP) since before independence in 1965.

Wong is "quite conservative" and "prefers incremental over radical change", said Donald Low, a former colleague who is now a public policy specialist at the Hong Kong University of Science and Technology.

Little is known of Wong's personality beyond the facts that he is a music fan and a dog lover, prompting one analyst to call for more details of his leadership plans.

"So far, Wong has not laid out his political vision or why Singapore should support it," said Chong Ja Ian of the National University of Singapore, pointing to his guitar-playing on social media.

"For me, I think Singapore needs a prime minister right now, not a cover band."

Well, that says something about Singapore’s freedom of speech and the confidence among some to speak freely, if nothing else.

Updated On: 16 May 2024 6:00 AM GMT
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