Is India the Only Major Market Now Running on Fundamentals?
The markets are doing fine but the economy is bracing for the 25% additional tariff from the US
On Episode 663 of The Core Report, financial journalist Govindraj Ethiraj talks to Prabhakar Kudva, Director and Principal Officer - Portfolio Management Services at Samvitti Capital.
SHOW NOTES
(00:00) Stories of the Day
(00:50) India braces for tariff bomb. RBI Governor assures support.
(07:00) India’s oil imports fall year on year and month on month.
(09:16) India’s hotting surfing destination also hosts a rising fund manager who is pulling in money from the rest of the country.
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 [email protected].
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Good morning, it's Tuesday, the 26th of August, and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital, but presently in transit.
Our top stories and themes.
Is India the only major market in the world now running on fundamentals?
The country braces for a tariff bomb, the Reserve Bank of India governor assures support.
India's oil imports have already fallen year on year and month on month.
And we take a break, India's hotting surfing destination also hosts a rising fund manager who's pulling in money from the rest of the country.
India's Markets And Fundamentals
So the stock markets are doing fine but the economy is bracing for the 25% additional tariff that US President Donald Trump has said he would impose from tomorrow, that's August 27th. That would take the total tariff to 50% and severely harm if not decimate labour-intensive exporting industries like apparel, leather, seafood exports, and gems and jewellery, among others. The Reserve Bank of India governor said that they remain focused on price stability while supporting economic growth, adding that financial and price stability were enablers rather than obstacles to economic expansion.
He also said at a banking conference in Mumbai on Monday that we have not lost, that the central bank has not lost sight of its growth objective and added that the central bank will continue to provide ample liquidity to the banking sector doing whatever else is required to support the economy. Like I said, that statement comes a day ahead of those additional 25% tariffs if they happen. He also said the Reserve Bank of India which has cut the repo rate by 100 basis points was closely monitoring the impact of US tariffs on Indian exports and said he was hopeful that negotiations would play out and the impact will be minimal.
He also said that 45% of sectors remain outside the tariff regime and the government is pursuing free trade agreements to mitigate risks. He also said that the Reserve Bank of India is working to enable trade in local currencies calling it an important area. The Reserve Bank kept rates steady earlier this month citing easing inflation and global uncertainties after redline inflation fell below target in July for the first time in eight years giving it room to support growth if needed according to Reuters.
Now with these voices of support or otherwise the stock markets resumed an upward march thanks mostly to hints of interest rate cuts in the US by Federal Reserve Chairman Jerome Powell on Friday which sent Wall Street and then Asian markets rocketing once again. So the belief is that some portfolio investors could return to emerging markets like India which has not been the case almost this whole year. Powell also left the door open for rate cuts in the Jackson Hole Summit in Wyoming on Friday citing weakness in the jobs market but also emphasised at the same time the ongoing risk of higher inflation spurred by President Trump's tariffs.
At close the Sensex was up 329 points on Monday at 81,635 and the NEC Nifty 50 was up 97 points to 24,967. IT stocks were doing well for apart from other reasons the belief that their valuations are fairly beaten down and that's is and has been the presiding view in the market for some time now. The Nifty IT index was the top performer advancing about 2.4 percent.
Speaking of valuations both Wall Street and China stocks are zooming like there is no tomorrow. Let's take a look at China. Stocks rose again on Monday extending a liquidity driven rally showing signs of euphoria in some corners of the market according to Bloomberg which said that the markets have come off their best week since November.
The benchmark CSI 300 index has now climbed another 2.1 percent with turnover on Shanghai and Shenzhen exchanges reaching a combined 3.1 trillion yuan in dollars that's 433 billion dollars, the second highest on record. So the rally is mostly driven by technology stocks but stocks in the property sector are also joining this rise in China that is. Investors are also betting that the rally has more room to run amidst a capital rotation into equities optimism over deep seeks updated models and expectations that authorities will keep sentiment supported before a military parade on September 3rd according to Bloomberg.
On the other hand key benchmarks are up more than 20 percent from this year's low and signs of overheating have also started to emerge. Bloomberg quoted a note from Macquarie Group economists saying that the stock rally reflects abundant liquidity rather than improved fundamentals. Under such conditions investors are more willing to give thematic players the benefit of doubt and liquidity indicators are key to watch, they said.
Back home rating agency Fitch Ratings has affirmed India's long-term foreign currency issuer default rating or IDR at BBB minus with a stable outlook earlier S&P raised India's credit rating from BBB minus to BBB in a somewhat unexpected move given that it's happened in the full fury or in the face of the full fury of the tariff war also suggesting at least partially that the tariff war will have limited impact on the economy and something that many economists including those the core report has spoken to have pointed out. And on Wall Street other market going gangbusters futures were down on Monday after the Dow Jones industrial average hit intraday and closing records and as investors looked ahead to Nvidia earnings according to CNBC Dow futures fell about 153 points or 0.3 percent S&P 500 futures were also similarly down and so were Nasdaq 100 futures. Last week the markets on Wall Street saw a winning session and on Friday the Dow was up more than 800 points to hit those intraday and closing highs.
Meanwhile the impact of Powell's statement suggesting or hinting at interest rate cuts is being felt in other markets gold was down on Monday as the dollar firmed easing from a two-week high hit in previous sessions after comments from Powell according to Reuters which added that spot gold was down to $3,367 per ounce on Monday morning. Speaking of prices the government that's India will start sourcing price data directly from e-commerce giants like Amazon and Flipkart which is owned by Walmart to overall its benchmark inflation index and that aims to capture shifting consumption habits and address concerns that current data is outdated according to an interview with the head of the statistics ministry in India by Reuters. The statistics ministry has begun scrapping prices from e-commerce websites in 12 cities with a population above 2.5 million and is in talks with platforms to access data directly according to the ministry of statistics and programme implementation official who spoke to Reuters.
Now India has about 270 million online shoppers in 2024 and this is projected to grow about 22 percent annually according to a Bain and company study that was released in March this year. So all of this could obviously make India's retail inflation data more robust by accounting for prices on online platforms as their share in household spending arises. This is also happening by the way in the US and South Korea which are integrating scanner and online prices into inflation measures according to Reuters.
Now the move to share data is obviously good but it's not clear right now whether the e-commerce platforms will proactively share or passively provide links which could mean that a lot of interesting and perhaps competitive data could also be pulled out.
Oil Imports Fall
India's crude oil imports have fallen about close to nine percent in July to about 18.5 million tonnes month on month, the lowest since February 24 according to government data quoted by Reuters.
India is just to give you a background of the world's third largest oil importer and consumer so this gives you a sense of its importance. On a yearly basis crude oil imports fell 4.3 percent to 19.4 tonnes in July 2024 and imports of crude oil products when we say products we mean products like petrol diesel and jet fuel fell about 12.8 or close to 13 percent on a yearly basis to 4.3 million tonnes in July while product exports declined 2.1 percent to 5 million tonnes. Product exports is something that has been highlighted by the U.S. government and several officials of the treasury and the commerce departments in the United States who accused India of buying cheap oil and refining or rather exporting refined product for hefty profits.
The data also said that fuel consumption in India fell about 4.3 percent month on month and on the other hand state refiners like Indian oil and Bharat Petroleum have bought Russian oil for September and October delivery resuming purchases after discounts widened according to Reuters. The other refiner Naira Energy which was once SR oil backed by Russia and other European Union sanctions is relying on a dark fleet to import oil and transport refined fuels according to shipping reports and LSEG flows according to Reuters. Just to give you a sense once again the additional 25 percent tariff is set to kick in tomorrow or promised to for buying Russian oil which will take total tariffs on India to the U.S. that exports to the U.S. at 50 percent.
And crude oil prices which we haven't referred to in a bit is now at about 68 dollars or a little over 68 dollars a barrel. Crude oil NYMEX is at about 64.3 or just under 65 dollars a barrel. So not much has changed in recent weeks.
Small Town Fund Managers
If you've dreamt of fund managers checking out the surf in exotic beaches around the world even as they make dollops of money for their wealthy clients, this example from India comes close. There was a time you had to liaise with Mumbai and its financial market participants to raise money in other parts of the country particularly smaller towns. But that's changing.
The bull market of the last few years has seen capital raising move to small towns with its own captive investors big and small both within those small towns and from overseas who are connected to those small towns. But more interestingly these small town fund managers are pulling in funds from other parts of India too and not just as I said their immediate locality. Prabhakar Kudwa, co-founder of Samvid Capital and whose firm runs various wealth management products is based out of Mulki in coastal Karnataka best known as a surfing destination and maybe one day a place for smart investments as well.
I spoke with Kudwa who had earlier built a software product for broking platforms before venturing into fund management along with his co-founders and I began by asking him what took him to Mulki.
INTERVIEW TRANSCRIPT
Prabhakar Kudva: A lot of investors got into the markets post the COVID surge, right? So that is where their journey started. And I think people have seen a lot of wealth creation happen in the markets, right?
Over the last 4-5 years, they have tasted blood, so to speak, right? So they've really made money. And the investment amounts also have ballooned considerably.
So having said that, because we've had a cushion of the gains of the last 3-4 years, although this year itself has not been so great, because of all the reasons that you mentioned, right? Because of the post election, slowdown in the country, and then, you know, Trump and tariffs and all of that. The overall sentiment is, you know, I would say it is cautious for this year.
But if I were to kind of step back and look at how people are feeling with their journey over the last 3-5 years, I think people are more than happy, because I think people have pretty much made money across. So I'm talking only about equity markets right now. So primarily, whether it's mutual funds or PMSs or AIRs, people have made money, they've created wealth, and they are only more eager to kind of, you know, utilise this correction to add to their accounts, because people generally are quite optimistic.
I think these, just that the recent news flow is kind of holding them back. End of the day, right? Markets are all about psychology, although we keep educating them that times like this is when you create the alpha, right?
So this is when you have to come in and invest. But I think apart from that, you know, the big picture, I think investors are very confident. I think the same is reflected in the mutual fund flows also.
And I think we are seeing no difference.
Govindraj Ethiraj: And I mean, you manage a portfolio of products. So what has been the engagement level or interest or flows across these products again in the last few months?
Prabhakar Kudva: See, generally, when an investor comes to us, right, so he has different options in front of him, right? So primarily, there are mutual funds, there are PMSs and there are AIRs, right? So generally, the set of investors that we deal with, which is basically HNIs and Ultra HNIs, they, of course, have their quota of mutual funds quite full generally, and they are looking for differentiated products or a differentiated risk reward curve, which is why they come to an AIR and a PMS, right?
So if you want to do what the market is doing, then I think mutual funds are doing, you know, much more than that. So when they come to us, they want us to maybe kind of dial up the risk a little bit and attempt to, you know, get that return also slightly higher than what a mutual fund will do, right? So these are sophisticated investors, they understand cycles by and large, I would say that the interest has been quite good.
So incrementally, I would think a lot of money is actually coming. So a lot of money is going into mutual funds. But also, incrementally, AIR and PMS as a category are capturing, you know, a fair amount of market share from the mutual funds also, and as well as the incremental new money that is coming.
So people are willing to bet on differentiated managers, niche managers, I would say that, you know, most of their money, you know, let's say if they have a 60% allocation to equities, they may still have about 30-40% in mutual funds, but that incremental money that they have is definitely flowing into these new categories like PMS and AIR.
Govindraj Ethiraj: How would you describe your average investor, particularly those who are investing in the AIRs and the PMSs?
Prabhakar Kudva: If I can categorise them, then mostly business owners, like a lot of entrepreneurs, and a whole lot of professionals also, right? Professionals, typically in the senior roles. These are the three main categories, plus, of course, NRIs, right?
So these are the four segments, so to speak, that are investing in these products. The thing is, I think, one of the reasons why PMS, AIRs, and these differentiated products have taken off over the last 4-5 years is the amount of information and knowledge that is available, you know, out there, right? There are so many platforms today, so many channels for people to really get exposed to new strategies, new investors.
Otherwise, for somebody like us sitting, you know, in a corner of the country, it would have been very difficult to scale up, right? So thanks to social media, Twitter, these aggregator platforms, even if you're sitting here, I have customers from, you know, Gujarat, Pakistan. It's thanks to the technology and the interest, you know, of all of these investors to really learn and understand and know and explore, right? Which is leading them to, you know, people like us and, you know, differentiated products.
Govindraj Ethiraj: And that really was my next question. I mean, so if you were to split your investors, I mean, how many would come from, let's say, the part of Karnataka you're from, and how many from just outside that part of Karnataka and outside the state?
Prabhakar Kudva: I would say 60 to 70% still is Karnataka or rather at least with roots in Karnataka. So a lot of our customers are NRIs. So they presently are not here, but they have roots here.
Or the parents will be here, but the kids are maybe elsewhere in the country or outside the country. So I think 70% is, you know, still Karnataka and 30% is something that is probably from the rest of the country.
Govindraj Ethiraj: And would you say that, again, if I were to go back six months to a year, say September 2024, when the markets hit a peak, would you say that investors have become more patient or are more patient investors with you?
Prabhakar Kudva: I think the latter, because we do a lot of due diligence. A mistake that a lot of investors make is they try to, especially during the bad years, right, compare what they would have made in other asset classes, like an FD to the equity markets. But the key thing to understand is, just like you can't compare a game of cricket and a game of football.
They are two different games, right? So equity markets inherently work on the concept of cycles. So there are years where nothing happens.
And then in just one year, you make up for all of that lost ground, right? That's the nature of the beast. There's a lot of education that we do before we onboard the investors that this is a five year game, right?
Anything less than five years, you know, please do not venture here. And also the money that you bring in, right? The most important quality that the money should have is comfort in the sense that that money should be able to sit through pain.
So we've had some periods of good returns. But my observation is that the investors who really made that good return are the people who also underwent the pain. A lot of times people think, you know, is there a holy grail whereby we can bypass all the difficult periods and just get in, you know, when the next bull market is starting?
But as we all know, right, markets don't announce a new bull market. And typically, the bull markets come out of painful periods. That has been the history.
If you look at the data, difficult periods sow the seeds for the better period. They create the conditions required for a bull market, which is, you know, investor apathy, low valuations, reduction in the flows, low liquidity. That is what creates the scene for the next bull market.
Govindraj Ethiraj: Right. And how are you looking at things ahead? I mean, the next, let's say, a few months or the next quarter or so, what's your assessment?
What's your outlook?
Prabhakar Kudva: I think the worst seems to be behind us for sure, unless something absolutely new comes in. I think in terms of what's happening, you know, in the macro, I think pretty much what is happening is not something that anyone would have anticipated, you know, the way the US-India relations have resolved, right? So 25% is the actual tariff and then we have a political tariff of another 25%.
So it's likely that that goes away. That is what the market is anticipating. But if that doesn't, you know, then that's something which will be negative.
And our Indian policymaking is also, it comes to the fore during difficult times as we have seen. So the GST reforms have been announced. My own personal opinion is probably that a near-term bottom is made.
We may consolidate here for some time and as we go into the Q2 and Q3 results, you know, in the festive season, the markets may go back to the new highs. That's what I think.
Govindraj Ethiraj: Right. And the festive season has technically begun or is about to begin with Ganpati around the corner. Janmashtami has already happened.
So technically it started off. So it's not a marathon for sure. It's a sprint and we've already started off.
So what's your sense? I mean, do you feel people are going to spend this? I mean, it's not so much about buying stock or equities, but you feel people are going to spend, people are going to be more open with their wallets?
Prabhakar Kudva: I think so. I think so. I think one of the main problems with this quarter was that the rain, the monsoon, at least that's my analysis, the monsoon spread very quickly across the country, right?
Generally the monsoon moves a little bit slower. So it starts from Kerala, it hits us in coastal Karnataka, and then it goes towards the rest of the country. But I think this time it happened just way too fast.
And generally monsoon dampens the consumer sentiments, right? That has always been the case. That's why Q1 generally is a bad quarter, right?
So I think as, you know, the monsoon gets over and people start stepping out more, plus, you know, combine that with these reforms where the government is trying to push consumption with the tax cuts that will come into play this year, the income tax cuts, the GST rate cuts will come into play. I think the stage is fairly well set for a good Q2 and Q3 from a consumption point of view.
Govindraj Ethiraj: Prabhakar, we've run out of time. Thank you so much for joining me.
Prabhakar Kudva: Thank you. Thank you, Govind.
