On Episode 939 of The Core Report, financial journalist Govindraj Ethiraj talks to Sudhir Kapadia, Senior Board Advisor as well as Vaibhav Sanghavi, CEO at ASK Hedge Solutions.

SHOW NOTES

(00:00) Stories of the Day

(00:50) Indian Markets Capture Asian Debt Flows Share

(04:12) The Problem With Exchange Traded Funds And The South Korean Example

(10:14) Why Fund Managers Have Changed Some Of Their Investment Strategies In The Last Month

(20:32) The Government Eases Tax Burden For Electronics Manufacturers Like Apple, Among Other Moves

(29:30) Apple To Bring Back A Senior Executive From Retirement For The Hardware Division

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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 feedback@thecore.in.

Good morning, it's Wednesday, the 5th of August, and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital.

Our top stories and themes…

Indian markets are capturing a big share of Asian debt flows.

The problem with exchange-traded funds, in the South Korean example

Why fund managers have changed some of their investment strategies in the last month.

The government eases tax burden for electronics manufacturers like Apple, among other moves,

And Apple to bring back a senior executive from retirement for hardware division in a vote for experience.

Markets, ETFs, South Korea and Results

Unbridled optimism continue to power US markets into Tuesday with the Dow Jones Industrial Average futures climbing about 642 points. The interesting point is what is driving the Dow up.

It was a 10% rise in Caterpillar, the world's leading manufacturer of construction and mining equipment, including diesel engines and industrial turbines, according to CNBC, where Treasury Secretary Scott Besant also said on CNBC's Squawk Box that we are in talks with the Iranians, adding that there is a chance we may have a deal today or tomorrow to open the strait and move towards a more normalised position in this conflict, thanks to which oil prices moved lower, with Brent crude now at about $80 a barrel. Will it end up being another market-aimed statement of the kind we've been seeing in recent months, only to shift or retreat later? Let's see. But Indian markets will surely get a boost, even if they're not guzzling the same energy drink Wall Street is.

Meanwhile, the Reserve Bank of India is expected to keep its policy rate unchanged at 5.25% today as it attempts to balance the price impact of high crude prices, a monsoon deficit with higher inflows, including via NRI deposits now crossing $40 billion and aiming at much higher. While rates may be untouched, the commentary and any fresh data points will of course be closely watched by the markets and by us. The rupee ended nearly unchanged on Tuesday, thanks to divergent impulses ranging from portfolio inflows and importer hedging demand to caution ahead of the Reserve Bank's monetary policy decision today, which kept the currency in a narrow band according to Reuters, which added that it closed at Rs.95.37, slightly changed from its previous close of Rs.95.33. Meanwhile, after staying in the positive for a good part of the trading day, the benchmarks were down, snapping a four-day winning streak.

The Sensex was down 210 points to 78,428 and the Nifty was down 159 points to 24,614. The mid-caps were down to about 0.3% and the Nifty's small cap was up 0.23%. Meanwhile, we've been reporting on net foreign institutional investor outflows from India this year, almost at $27 billion. It's interesting to see how other countries in the region are doing.

A note from Bank of Baroda Research says Japan, for instance, this year has seen something like $62 billion of inflows, while China has seen as about $18 billion. But the shocker here, at least to those who have not been following this closely, is South Korea, which has seen $100 billion of outflow this year. But we're talking about equities.

The debt story is a little different and interesting. The report points out that India's outflow in the equity segment is supported by buoyant flows in the debt segment of about $8.7 or close to $9 billion. Thanks, of course, also to some recent moves by the Reserve Bank and the government.

For other economies within Asia too, net debt inflows have been buoyant. For South Korea, it's been at $42.9 or almost $43 billion. And for Japan, it was about $37.5 billion.

So total net debt inflow for Asia in the Bank of Goroda sample, excluding China, is about $97.9 or almost $100 billion. And excluding China and Japan, it's about $60 billion. So India's share in Asia, excluding Japan and China, is about 14% for the current year to date in the debt segment, according to the report.

So India is attracting a fair amount of proportionate debt flows so far. Speaking of South Korea, its main stock index, the KOSPI, has fallen about 44% from its June 19th high to last week. And that is the worst crash since the Great Recession.

Then on Friday, after bullish reports of AI demand from some of the big tech companies, the KOSPI rebounded 18%. And that was the largest ever one day gain. The volatility or the wild swings is something that we've talked about in the past on the core report, and which is why these markets are very tricky to invest in unless you're either very brave or a really long term investor.

Now, the reason behind this volatility is leveraged exchange traded funds, says a new report from Professor Scott Galloway at the NYU Stern. SK Hynix and Samsung, two key AI chip suppliers, make up more than half the value of the KOSPI, both of which fell about 24 and 29% before rebounding. But the drawdown would not have been so dramatic, says Professor Galloway, if not for a key ingredient, and that's leverage.

Single stock exchange traded funds multiply the daily price movements of one specific stock, and they were launched in the South Korean market in May and have also become popular with retail investors. By early July, leveraged exchange traded funds of SK Hynix and Samsung made up 70% of all trading value on the South Korean market. So leveraged ETFs amplify a stock's upside but also its downside, says the professor.

And 92% of investors in these ETFs are retail investors and they've lost something like $39 billion so far, says Professor Galloway. Moreover, an estimated 1.2 million South Koreans, about 3.4% of the adult population, have now received a margin call. And it's estimated that between 1% and 5% of retail stock trading accounts in the US received a margin call in 2008.

And that was when the big crash happened. Meanwhile, South Korea's Financial Services Commission has announced plans for a nationwide debt counselling hotline as part of a suicide prevention initiative. And the country's finance minister apologised last week saying the ETFs were introduced without careful consideration.

Professor Galloway argues that this is not just a South Korea problem. US assets under management and leveraged ETFs have touched about $218 billion, up 60% since the end of March. They are still a small share of the overall asset class, about 1%, but 40% of all ETF trading volume.

So all of this, of course, is to give you a sense on what could happen if markets were to take a certain direction, including in India.

But back home, results are strong, including of consumer product companies. Marico maker of parachute coconut oil and Sephola reported quarterly profits above expectations on Tuesday, thanks to steady demand and lower raw material prices.

A Reuters report pointed out that rising incomes and a growing appetite for branded cooking and hair oils, packaged foods including 4,700 BC popcorn and Sephola oats, and personal care products supported demand for Marico's last quarter. Profits were up 25% to about 630 crore rupees for the first quarter ended June 30. And this was above analyst estimates of about 580 crore rupees.

Revenues were up 23% to about 3957 crore rupees, again, higher than analyst estimates. Sales volumes were up 11%. And that's the highest in 20 quarters.

Meanwhile, rival AWL agribusiness, earlier known as Adani Wilmar and also maker of fortune cooking oil, reported a 48% jump in quarterly profit and 7% growth in sales volumes. In telecom Bharti telecom saw a 37% increase in first quarter profit on Tuesday, thanks to subscriber additions and users upgrading to costlier plans. Net profits were at 8167 crore rupees, up from 5948 crore a year ago.

The company said it added about 15 million customers, taking its total customer base to 681. But that's across 15 countries. To give you a sense on how quarterly profits are performing in other sectors as well, engine oil maker Castrol India reported a 42% increase or almost 43% increase in its quarterly profit on Tuesday, thanks to volume growth across its consumer, industrial and institutional businesses, according to a Reuters report.

Castrol supplies lubricants to major auto companies like Hiro and Maruti Suzuki.

Merchant Fees for UPI Transactions

India has moved a step closer to reintroducing merchant fees on transactions made through the popular UPI or Unified Payments Interface. After proposed changes to the country's payments laws were introduced in Parliament on Tuesday, according to a Business Standard report, UPI is one of the world's largest real-time payments networks and processed about 23.6 billion transactions in July, according to official data.

The UPI universe is dominated by Walmart's Phone Pay and Alphabet's or Google's Google Pay. Financial industry representatives, including bankers, have consistently argued that growth in digital payments has become harder to sustain because payment firms do not earn fee on UPI transactions, limiting their ability to invest in the ecosystem. An amendment to the country's Payment and Settlement Systems Act, which was tabled in Parliament, would allow the introduction of a merchant discount rate or MDR on digital payments, according to that report.

There is of course no decision on the level of fees, and that would come from elsewhere, but that also will be the contentious part, though it's quite likely that small payments will not be touched, or at least will not be touched for some time.

Positivity in the Markets

Except for a slight dip on Monday, the markets have been humming a fairly positive tune in recent weeks, thanks to several reasons, both internal and external, as we've been discussing on The Core report as well. Now, corporate results, as we've talked about, are increasingly surprising on the upside. There are other factors as well, including some strategy shifts in sectors that may be coming back into favour.

I spoke with Vaibhav Sanghavi, CEO of ASK Hedge Solutions, part of the ASK Asset and Wealth Management Group, which focusses more on large investors. I began by asking him to describe his funded approach and also what he was seen changing or changed in the markets in recent weeks.

INTERVIEW TRANSCRIPT

Vaibhav Sanghavi: We have always been fund focused on adjusted returns, led by adopting a long shot strategy, largely from a fundamental equity long shot perspective. So we are like any other global hedge fund who tries to generate those kinds of consistent returns irrespective of where the market goes. So for us, I think being objective in terms of looking what the markets are like, rather than being a bull always, kind of differentiates us in terms of our investment style.

Govindraj Ethiraj: Got it. And let's talk about what's happening in the markets right now. So we've seen some sort of tight turning in the last few weeks, and for various reasons, including, I guess, better than expected Q1 results, some easing off at least in over the weekend on the West Asia front.

Now, my question is, what's the secular trends within this? And what are the parts that continue to be unpredictable?

Vaibhav Sanghavi: So I think, let's take a little step back and see what has happened in the last one year and why the markets have been the way they are, especially on the one year kind of time horizon, because that will probably give you some cues of what is that we are expecting from here onwards as well. Now, if you see from last six months, which is, to be very honest, apart from the last two months have been pretty challenging, you know, from a market standpoint. And the reason is, of course, Middle East conflict is one big reason.

And because of it, we have seen a huge amount of stress, especially on the oil prices. Now, oil going from $70 to $110. And to be very honest, if you go and buy in the spot, it will be close to $140, $150 then.

So it was pretty expensive as a big macro headwind, you know, from an India economic standpoint. Not only that, I think what we were also struggling with, in some sense, was the movement of the INR, which is our currency. So now, both of them, which were kind of big pain points, and to accompany that was the overall artificial intelligence theme, where India on a perceived basis was kind of absent in some sense.

So all of that got combined. And that's why sizable in the performance over the last one, one and a half years. Now, having said that, now what has changed in the last two months, few things have changed.

One, of course, government has taken extremely constructive steps with respect to FCNR, ECBs, and taxation reforms in terms of the government securities, by which I think we've already known that the inflows in the last one odd month has been close to about $40 billion. Now, while this is just the start, I think a couple of more months to go. My sense is that I think we will reach $80-90 billion.

I think that's a great cushion from an Indian market standpoint, especially on the currency, the liquidity, and the banking system on an overall basis in terms of getting cheaper kind of cost of deposits in some sense. So that's a sea change, which has happened. Secondly, I think the earnings have been pretty much robust across the board, as compared to wider expectations that the Middle East conflict will have some impact.

We're not seeing that, honestly, and I think that's very, very encouraging. And lastly, the AI trade, which we're talking about, I think the whole region now is starting to come under pressure, including your Korea, China, Taiwan. And this is where we are starting to see some amount of rebalancing starting to happen again in favour of India, and which is why the FPI flow, if you see over the last one month, have been pretty steady or probably positive as well.

So all in all, when you now look at it, earnings continue to grow, GDP forecast continuing to grow, and macro situation getting stabilised, my sense is basically that we are getting a lot more constructive, as compared to last one and a half years.

Govindraj Ethiraj: Got it. And you know, before we started, you were telling me that some of your strategies have changed in view of what we have seen in terms of evolution in the market itself. So what's changed?

And what made you change in response to that?

Vaibhav Sanghavi: We saw that major steps taken by the government, especially in the FCNR, and the INR stabilisation, which clearly makes us very, very constructive in terms of the whole financial space. If you would have asked me the same questions a couple of months ago, you know, our stance was that the financials were probably market performer or slightly underperformer as well. But I think the measures which are taken by the government, along with how the banks themselves have kind of, you know, behaved or probably performed, we are getting pretty constructive, especially on the private bank space, who are the beneficiaries of the whole FCNR.

So that's something which we have turned around. Along with that, NBFCs, I think money available to them, overall cost of funds getting down, you know, is something which we do see that the pressures have been taken off from the NBFC regime as well. So I guess that's a space we have turned 180 degrees in some sense and got a lot more constructive in addition to our longer term themes, which has been there, including your data centres in the CDMO.

Govindraj Ethiraj: So you're saying that overall cost of funds for the banking financial system has come down, and that in turn has changed your opinion on the prospects for finance companies, for financials, including non-bank finance companies, because you're seeing lower cost funds for everyone. So let me come to data centres and CDMO. So what's the route to or what's the entry point for public markets here?

Vaibhav Sanghavi: So I think when we talk about data centres, right, and this comes from the fact that if you look at India as a country currently, we are going at about 1.6, 1.7 gigawatts of capacity. In the next five years, that is estimated to grow close to about 8 to 10 gigawatts more. Now, when you're talking about 8 to 10 gigawatts, it's easily $100 billion of capex, which we are talking about.

Now, if that is going to happen, we are very constructive in the whole pick and shovel theme, which means whatever goes into building the data centres is something one should be very, very closely looking at. I'm not saying that they are absolutely undiscovered. They are discovered.

They are trading at a rich valuation in some sense as well. But my sense is this order inflow will continue to keep this whole space pretty buoyant. And now when we talk about this whole space, what comes into them is right from diesel gen sets to chillers to switch gears, electrical equipments, wiring harness.

So all of those which goes into building of a data centre, and lastly, the utilities are the play probably from the whole data centre theme.

Govindraj Ethiraj: It's interesting you mentioned diesel gen sets, because that I'm assuming is the backup power, not the primary power. So I mean, you could be investing in primary as well as secondary. Okay, you also mentioned CDMO.

So what's the latest there?

Vaibhav Sanghavi: So I think one, that the quarterly results are probably showing why CDMO space is doing great. But more than a quarterly numbers, I think, from a longer term perspective, I think we are extremely positive in terms of having constructive view because of the Biosecure Act. And because the Biosecure Act, my sense is basically that incremental RFQs, which are coming at a very rapid pace, and the whole China plus one theme, in effect, you know, is likely to do well, continue to do well, you know, even from these levels.

I am sure that the valuations may be looking at a little expensive in the shorter term. But the way the companies are doing the CAPEX, looking at the turnover ratios, I think the growth can be pretty consistent over the next three to five years. Sanyam Bhutani Right.

Govindraj Ethiraj: US President Trump talked about 100% tariffs on imported drugs, not right now, but after a year and then expanding beyond that. So is that something that you see happening at all? Was that just a threat?

And if there is some prospect of it turning into reality, then how would companies here respond?

Vaibhav Sanghavi: See, eventually, if they are going to put the tariffs on all the countries which are doing that, then there is no problem, purely because everybody would be at the same level. Ultimately, it's going to get expensive for the US consumer. So on a relative basis, I think we are good.

Yes, but if it would have been a case that India is being tariffed, but not the other countries are competing countries, then there will be a problem in some sense, which I don't see honestly kind of happening. So I think we should be good. I'm not seeing that as a big worry here.

Govindraj Ethiraj: Right. Is there something that sort of investment opportunity or sector that you're seeing right now?

Vaibhav Sanghavi: Effectively, I think there is a lot of innovation happening, especially on the smaller defence kind of companies. We've seen massive progress in terms of space, in terms of technology, in terms of catering to specific defence requirements. I think few of those companies will have a pretty sharp J curve, you know, should the product be kind of viable and be acceptable by, you know, the various agencies.

Now, of course, it's very difficult to kind of analyse what will fly through what will not, but that's a space I think we would want to do a lot more work on. And that's a sector probably to be looked at where technology is kind of aiding the products, not only in defence, but across the industries. Sanyam Bhutani Good note right on.

Govindraj Ethiraj: Vaibhav, thank you so much for joining me.

Vaibhav Sanghavi: Great. Thank you very much, Govind.

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Jio BlackRock has launched a Jio BlackRock Nifty 50 exchange-traded fund, since we've talked about it a little bit, marking their entry into the country's exchange-traded fund market through their joint venture, which is between Jio Financial and BlackRock.

The exchange-traded fund will track the Nifty 50 index, giving investors exposure to the largest 50 companies through a single investment. Jio BlackRock has about 18,000 crore rupees in assets under management as of June 30th. There are over 250 exchange-traded funds in India across categories, and that includes exchange-traded funds for commodities like silver and gold.

Tax Breaks for Tech Companies

India is seeking to extend tax breaks to foreign firms that provide machinery to local electronics manufacturers in a move that could boost companies like Apple and Google as they ramp up domestic production, according to a report on Bloomberg. The government is set to introduce amendments to the Income Tax Act this week that will offer tax exemptions to contract manufacturers until 2041, according to that report. The previous tax break was to end in 2031, and the latest proposal includes electronics products like mobile phones, laptops, tablets, and servers.

There are other moves, including for easing rules for fund managers who run India-specific funds, and more on that in a moment. A need has arisen to undertake certain immediate taxation measures with a view to mitigate the impact of external economic shocks, ensure stability in the domestic economy, and support key sectors affected by prevailing global conditions, according to that bill, a copy of which was reviewed by Business Standard. I reached out to Sudhir Kapadia, senior board advisor and former national tax leader at Ernst & Young, and I began by asking him if he was seeing this move as part of a larger strategic tax regulation step or specific to some categories at this point, as in the case of electronics.

INTERVIEW TRANSCRIPT

Sudhir Kapadia: To answer the last question first, it is certainly part of a larger sort of policy framework on encouraging particularly electronics manufacturing in India and of course there is a semiconductor mission and a lot of the critical energy and everything else. So that is a kind of the backdrop without a doubt. As is known in public domain, companies like Apple did express at the time of the supply chain currency on China to increase their footprint and I think the latest figures indicate that the share of exports for Apple phones made in India significantly increased from just a couple of years ago.

Clearly the broader policy has borne fruit. One of the issues which arose in such arrangements whether it is Apple or any other MNC is that see what happens is go in that they would like to sort of provide the critical components and critical equipment tools for manufacturing the end product, manufacturing and assembling the end product as per the global specification because ultimately it is a global product. Now what happens is that when you need to have this handy locally on site with your CM or with your contract manufacturer in India, it creates or it could create a very significant tax uncertainty for such a foreign company called a taxable business presence because you have a paraphernalia here, you have component you know warehousing here whatever.

So actually the last budget and this is a further refinement by the way Govind, it's not that this is a new provision, it is a further refinement of the earlier one which sought to give that tax certainty for two such foreign companies to say that the mere as long as you own those equipments, you own those tools, you own those components as a foreign company and you provide them to your contract manufacturer which has a proper legal arrangement with you, that by itself does not create a taxable presence for the foreign company. Needless to say the income earned by the Indian company is of course subject to tax so this is not like some big revenue relief or exemption the government is giving as it should not. The second important point I think you alluded to is that you know when you are looking at long-term investments in any country, the earlier provision had a you know end date of 2031 which was considered too you know near and too soon and this I think going up to 2041 is a great move because including you know if you count from 2026 or 2025 when this provision was introduced, it's a good solid 15-year runway and I had said earlier in my discussion with you that what I find is fascinating is that increasingly you are finding a lot of provisions which actually give 15 to 25 years of tax certainty in the law which is a first of its kind in the history of tax legislation in India which I think is a great signal. Got it.

Govindraj Ethiraj: So there have been some other announcements as well in this or other inclusions as well including on how foreign fund managers or fund managers who are investing into India through Indian vehicles will not face the same tax burden.

Sudhir Kapadia: Absolutely, you hit the nail on the head. Similarly what happens is you just to summarise take any offshore fund which of course you know pulls investments from investors around the world but which is an India dedicated fund. So quickly you know post-liberalisation the structure was you had an offshore fund you know Cayman, Luxembourg wherever the management of the fund would be stitched together in a way manner of speaking in Mauritius, Singapore, sometimes few of them in Dubai and then the whole investments were anyway in the Indian market.

Now, as we all know, investments can't be passive. So a lot of the, you know, the head and brain, the connects, the whatever an investment manager has to do in terms of interactions, etc., had to happen on the soil in India. The basic problem statement which came from the policymakers right since then has been that how do we ensure, how do we attract and ensure that the fund managers have a clean, straightforward setup in India and manage those funds, you know, without any burden of tax uncertainty? And that has been a revolution. I think it took much longer than it should have, but at least it's now finally sort of, you know, come to a stage where we have just four or five main conditions to be fulfilled, which I think are pretty standard and pretty normal.

In this particular amendment of yesterday, as many as about eight conditions have been removed which were causing unnecessary, you know, hurdles for getting this kind of approval for the tax certainty. The simple point was that, you know, what you want to do is you want to say that as long as there is an investment from an accredited fund—when I say accredited fund, a fund which is domiciled, you know, in a country which India has a tax treaty with, or the fund is, you know, basically governed under a proper regulator in the home country—then you should have absolute comfort that, you know, this is not some kind of a porous fund or a fund where rerouting is happening. And that is what one of the main conditions which have been relaxed really addresses this question and removes that kind of an onerous condition.

And the second thing was, you know, which they have amended not yesterday, but even in the last budget, to say you don't want direct, indirect ownership by Indian residents more than five percent because of this whole round-tripping. And what we had said is, no, indirect—how can anyone certify? It's impossible. And even in the last budget itself, they made it only a direct condition: direct shareholding you satisfy yourself it is not from India, and that's good enough.

So I think this is again a very good move. I think that, you know, if you look at the statistics as we know, the amount of capital which is allocated for investments in India, and even if, you know, 50 percent of that would now be managed from India, I think that helps India a lot—your increase in taxes because of the fact that high-net-worth individuals who are executives in this management industry will work from India, the fact that you set up the business in India, you pay your tax on the fees which you earn in India. And, you know, the general—I mean, cities like London, Singapore, New York, to an extent, you know, a lot of them thrive on the ecosystem created by financial services hubs. So I think it's a great move and one which IVCA, others, we have in Bombay Chambers, we have been kind of exhorting the government to move towards this direction, right? And if I can supplement that... So you see that this will attract—

Govindraj Ethiraj: more investment, or bring funds into India, or bring the fund managers into India? As we look ahead, what could potentially change?

Sudhir Kapadia: So, two different things, right? I mean, investments, of course, depends on the view of the country and everything else, so that's a separate topic. And investments allocation to India will be what they are. I think what this will do, Govind, is that it will attract, hopefully, more fund managers to India and fund management companies to India. So that's what this aims to do.

And why it may look a little, you know, underwhelming to say, "Okay, fund management," but, you know, the reality is that the—and I keep this, give this example—that of Warren Buffett and him, which is a very thin team manages the world's largest private equity fund from a small town, you know, in America, right? And it's about the head and brain, and about the assets and the management. If we are able to attract that kind of head and brain and the infrastructure around it on Indian soil for investments made in India, I think that would be a huge, huge change from, as I mentioned, in the last three decades we have been struggling to, you know, give that kind of comfort and tax certainty. That, I think, is the take-up.

Govindraj Ethiraj: Right. It's a good note to end on: focus on head and brain and bring more of that here. So thank you so much for joining me, Sudhir.

Sudhir Kapadia: Thank you.

Laura Legros Comes out of Retirement

And finally, in a vote for managerial experience over youthful vigour, incoming Apple CEO John Ternus is bringing back a trusted but retired lieutenant from his time running hardware engineering to join his new management team, according to a Bloomberg report. Ternus has hired Laura Legros, who served as vice president of hardware engineering until retiring in 2022, according to the report. She will report to Ternus when he takes over as CEO on the 1st of September.

This is also a rare instance of Apple bringing back a retired executive, says the report. Ternus, of course, takes the reins from Tim Cook, Apple's longest serving CEO, who is now transitioning to executive chairman.