Indian Market Volatility Is Inching Up

The stock markets ended lower on Tuesday with volatility rising to a 15-month high amid the ongoing national elections. The Nifty Volatility Index rose for the ninth consecutive session to close at 17.01, a 15-month high

8 May 2024 12:00 PM GMT
On Episode 287 of The Core Report, financial journalist Govindraj Ethiraj talks to Kunal Pande, national co-head for digital risk and cyber, and national leader for digital trust financial services sector at KPMG in India.

Our Top Reports For Today

  • (00:00) Stories Of The Day
  • (00:50) Indian market volatility is inching up, invest or hold?
  • (03:59) Why the last 15 years of stock picking strategies will not help investors
  • (08:08) India’s growing number of ghost malls
  • (09:27) Growth vs load - Why some bank systems are failing

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.


Stock Markets Fall But Volatility Inches Higher

The stock markets ended lower on Tuesday with volatility rising to a 15-month high amid the ongoing national elections.

The Nifty Volatility Index, a gauge for domestic market volatility, rose for the ninth consecutive session to close at 17.01, a 15-month high.

It's up almost 70% from April lows.

The rising volatility is not unexpected in itself and perhaps only demonstrates that all election periods are embedded with some uncertainty, however sure market participants are of the outcome.

Also, if you go by the benchmark index numbers, the markets are broadly steady. But obviously, the derivatives positions reflect the uncertainty which is rising.

The S&P BSE Sensex fell 384 points to end at 73,512 levels. The Nifty50, ended near 22,300 at 22,303, down 140 points.

The broader markets lost more with the BSE MidCap, and SmallCap indices falling much more, ending 1.9 per cent, and 1.65 percent lower, respectively.

Foreign institutional investors are also selling close to Rs 1,000 crore in three trading sessions in May, reported Mint quoting NSDL data.

"FIIs have been continuously selling, which has caused nervousness among domestic retail investors," G. Chokkalingam, Founder and Head of Research at Equinomics Research told Mint, adding they generally don’t buy before general elections.

They wait for the election outcome even if they have to pay a premium. I have observed this over the last two decades," Chokkalingam said.

Meanwhile, total securities owned by sovereign wealth funds in India soared nearly 60 percent in the one-year ending April 2024 to touch Rs 4.7 lakh crore, MoneyControl reported, quoting data compiled from the National Securities Depository Limited (NSDL).

Some of the big sovereign funds include the Government of Singapore, Abu Dhabi Investment Authority, Kuwait Investment Authority and Norwegian pension fund.

The government of Singapore’s biggest investments in Indian stock markets are in companies such as Reliance Industries where the fund owns a 1.5 percent stake worth about Rs 30,000 crore at current market prices, Trendlyne data showed. It also owned 2.34 percent or shares worth around Rs 25,000 crore in HDFC Bank, data showed.

In 2023 the assets under custody of sovereign wealth funds was Rs 3 lakh crore, data showed.

In contrast, the assets under custody of overall foreign portfolio investors (FPIs) grew about 40 percent during this period to reach Rs 69.5 lakh crore.

In the last five years, the central government has eased the compliance process for such funds and has also provided special tax exemptions for certain sovereign wealth funds such as the Abu Dhabi Investment Authority, moneycontrol reported.

Elsewhere, oil was steady on Tuesday thanks mostly to weakness in the physical market which offset concerns about a conflict in the Middle East as a ceasefire deal between Hamas and Israel hung in the balance, Reuters reported.

Brent crude futures were down 30 cents at $83.03 a barrel.

Oil brokers told Reuters that even if there was a truce, there was still a question on whether Houthi hostilities in the Red Sea would cease and the Suez Canal would reopen, reducing risks of shipping in the region.

Why Strategies Of The Last 15 Years Won’t Work

Fund manager and investor Jyotivardhan Jaipuria told me in a conversation a few weeks ago how his funds decided to focus on the investment theme as opposed to the consumption theme in recent years, a strategy that has obviously paid off because stocks linked to investment themes like infrastructure and real estate have done well.

In a column in Business Standard, another veteran India investor Akash Prakash says the markets are clearly signalling from its price action and sectoral leadership that we are back towards a scenario reminiscent of 2003-08 where that bull phase was led by by capex-heavy sectors, infrastructure and real estate, and investment-driven sectors.

The market was more focused on revenue growth than returns on capital and free cash flow. The so-called quality universe of long-term compounders lagged the markets.

This period was the last time quality compounders were actually cheap in India. Investors were chasing growth at any price, and capital investment was greeted with cheers from the markets.

But then, post the global financial crisis, the market’s drivers of performance again reversed.

From 2009 onwards until very recently, we saw the era of the quality compounder. Quality stocks, typically consumer-facing with high returns on capital, stable and predictable growth in both revenue and earnings and with a good industry structure performed incredibly well.

This was the era of consumer stocks and plays on formalisation, says Prakash.

Moreover, while these stocks delivered reasonable earnings in the 15-20 per cent range, they also had strong multiple expansion, which supercharged their performance.

This multiple expansion phase seems to have now ended and we appear to be in the midst of a period of multiple normalisation for the quality universe.

As their multiples compress, these stocks have been mostly treading water with limited price appreciation over the past 18 months.

Similarly, he says, the markets have seen value migration from PSU stocks to their private sector competitors. This was most visible in the PSU/private bank trade, but was also seen in telecom, insurance, and aviation.

This trade is also now reversing. PSU stocks are now trading at multiples above their private peers in some sectors and have delivered a huge return alpha over the past 18-24 months.

Markets seem to believe that the PSUs can now keep their current market share and have better productivity and profitability. They continue to have scope for operational improvements.

So what is the message ?

The basic message, Akash Prakash says is that the portfolio construct that made one successful over the last 15 years has been underperforming for some time and is likely to continue to do so until there is full reset of multiples within the quality universe.

Portfolio managers who have cut their teeth in the last 15 years have, by and large, only seen the quality trade work. If you were not there in 2003-08, you have not seen the opposite or antithesis of quality driving markets. The market action is quite clear. Leadership has changed. We are unlikely to go back to the old dynamic anytime soon.

Moreover, anyone investing over the last 15 years has largely made their money backing quality at almost any price and avoiding PSU stocks and asset-intensive businesses like the plague.

This strategy says Prakash is unlikely to work in the current bull market setup, with mid-caps, PSUs and stocks benefiting from the investment cycle leading the charge.

So what should an investor do? Forget their investment philosophy and latch onto what is working?

Dump their quality stocks and buy the manufacturing and investment theme? Or should you move in the opposite direction?

There is no clear answer here and I won’t borrow further from Prakash but it is useful to know that veteran fund managers also struggle with these issues.

Jaipuria in my conversation echoed the same thought though differently.

He said his team was constantly evaluating getting back into IT stocks because they had been beaten down for precisely the reasons we spoke of earlier but then were unable to make up their minds.

India’s Ghost Shopping Centres

India's small malls are increasingly turning into ghost malls as consumers move towards online purchases and bigger shopping centres for a better experience, a report from real estate consulting firm Knight Frank has said.

Ghost malls or vacant spaces jumped 60% in 2023. Mall properties with a vacancy rate of more than 40% have been termed ghost malls.

Area available for lease in all shopping centres grew roughly 2.5 times in major Indian markets in 2023 but the number of ghost malls went from 57 to 64.

The "Think India Think Retail 2024" report, released by real estate consultancy Knight Frank, studied 340 shopping centres and 58 high streets in 29 Indian cities.

"As nearly $798 million (Rs 6,700 crore) is lost or trapped in the gross leasable space of these non-performing shopping centres," said the report.

The largest inventory of ghost shopping centres was in the Delhi NCR, followed by Mumbai and Bengaluru.

The report said overall shopping centre vacancy in eight major Indian cities improved to 15.7 per cent in 2023 from 16.6 per cent in 2022, indicating rising demand in the retail segment.

Excluding ghost shopping centres, the vacancy rate in the segment improved to 7.4 per cent.

Why Are Banks IT Systems Failing?

A few weeks ago the Reserve Bank of India ordered Kotak Bank to stop issuing fresh credit cards and stop onboarding customers digitally.

The reason broadly was that its IT systems were failing to work smoothly.

Other banks have faced similar problems even as they go for rapid growth and scale using technology.

HDFC Bank was asked to halt new card issuances four years ago as well following repeated outages in its data centre. Full operations were restored only two years later.

There is no doubt several banks are facing this issue from my own conversations with CIOs in banks and in the context of growth of payment systems like UPI which places unprecedented strain on bank’s core banking systems.

So where is the pressure coming from and where is it felt the most within banks, why are banks unable to keep up with the challenges of growth and targets they set for themselves.

I reached out to Kunal Pande, National Co-Head for Digital Risk and Cyber and National leader for Digital Trust financial services sector. He is also part of KPMG International’s Global Payments Leadership Group.

Updated On: 8 May 2024 6:00 AM GMT
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