Markets Fall As Tariff Fears Return
The tariff deadline is approaching and the markets seem somewhat surprised by the fact that the US is doubling down
On Episode 622 of The Core Report, financial journalist Govindraj Ethiraj talks to Garima Kapoor, Economist & Executive Vice President at Elara Securities (India) as well as Sunil Thakur, Partner at Quadria Capital.
SHOW NOTES
(00:00) Stories of the Day
(01:00) Markets fall as tariff fears return closer to July 9 deadline
(04:40) Government spending jumps in the first quarter, will the economy see a bump up?
(11:45) India plans three new strategic oil reserves, oil prices rise
(13:04) Investments into hospital chains are accelerating, what is driving this latest surge?
(21:20) Foxconn pulls Chinese staffers from India in surprise move
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 Thursday, the 3rd of July and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital, now seeing a lot of rain.
Our top stories and themes.
The stock markets fall as tariff fears return closer to the July 9th deadline.
India is planning three new strategic oil reserves. Elsewhere, oil prices rise.
Government spending jumps in the first quarter. Will the economy see a bump up?
Investments into hospital chains are accelerating. So what's driving this latest surge?
And Foxconn pulls its Chinese staffers from India in the hundreds in a surprise move.
The Markets Fall
The tariff deadline is approaching and the market seems somewhat surprised by the fact that the United States is doubling down, suggesting expectations were clearly of a rapprochement all around. Well, not quite and not yet.
The Indian markets are nervous today, swinging between positive and negative territory before closing at 83,409. That's down 287 points. The NSE Nifty 50 was also down 88 points, closing at 25,453.
In the broader markets, both the nifty mid cap and the nifty small cap, 100 indices were down by 0.1% and 0.4%. That's the mid cap 0.1 and small cap 0.4. So marginally. The rupee was down on Wednesday as the dollar was up ahead of U.S. economic data. The rupee closed at 85 rupees, 70 paise against the U.S. dollar, which is down about 0.2% for the day, Reuters said.
Also adding that Asian currencies had declined, led by the Malaysian ringgit, which fell about 0.7%. The dollar index was up about 0.3% and just short of the 97 mark. On Wall Street, S&P futures were down after a new report showed that private payrolls were down in June, raising concern over the state of the U.S. economy, according to CNBC, which added that the private sector lost about 33,000 jobs last month. And this is the first monthly decline in this payroll report since March 2023.
Economists polled by Dow Jones had expected payrolls to actually grow by 100,000, according to CNBC. Sticking to the United States, a debate within President Trump's Republican party over a massive tax cut and spending bill returns to the House of Representatives amidst that self-imposed July 4 deadline. The bill has already been passed by the United States Senate by the narrowest possible margin, according to Reuters.
And the latest on the tariff tantrums, President Trump has said he is not considering delaying his July 9 deadline for higher tariffs to resume and has renewed his threat to cut off talks and impose duty rates on several countries, including Japan. When asked, he says that he was not thinking about the pause and that he would be writing letters to a lot of countries. India is looking at a deal at this point, though it's not how exhaustive or comprehensive it will be given that negotiators could not have had as much time as they would have liked.
So could it be an interim deal or a more final one? Not clear, but tending towards interim. Trump attacked Japan for not accepting U.S. rice exports, Bloomberg reports. He also said that auto trade between the two countries is imbalanced and Japan should be forced to pay 30, 35 percent or whatever the number is that they will determine because they have a very big trade deficit with Japan.
Bloomberg quoted him saying Trump had proposed a 24 percent tariff on Japanese goods in April and those have been subject to a 10 percent charge during this period like everyone else. He said that I'm not sure we're going to make a deal. I doubt it with Japan.
They're very tough. You have to understand they're very spoiled. Meanwhile, oil prices are seeing war risk premium building up once again as Iran suspended cooperation with the United Nations nuclear watchdog and markets weighed expectations of more supply from major producers next month while the U.S. dollar has softened further, says Reuters.
Brent crude was up close to a dollar to about $68.03 a barrel or just over $68 and Brent has essentially swung between $69 and $66 between or rather since June 25th after the Israel-Iran truce brought some stability. Gold prices are up again as traders once again appeared concerned by the U.S. fiscal situation and of course that overall tariff-led uncertainty and thus move to safe haven gold. Spot gold was at around $3,340 per ounce and futures were around $3,351 per ounce.
Government Spending Picks Up
The government of India has kicked off FY26 that's the year 25-26 or the current financial year on a strong note with a sharp uptick in expenditure. Overall revenue receipts were up 24 percent year-on-year while total expenditure was up about 19.6 or about 19.7 percent year-on-year.
All of this pickup in capex momentum bodes well for overall growth outlook, a note from Ilara Securities has said. According to them they see the current year as the year of execution with spending upon schemes both revenue and capex remaining a top priority. Capital expenditure as a percentage of budgeted expenditure was about 19.7 during April to May which is the highest in the last six years, says the report.
The top three ministries that led the capex in April to May include the ministry of ports shipping and waterways, the ministry of railways and ministry of roads transport and highways; they're all above 20 percent. Interestingly, according to the Ilara note the ministry of steel saw capex as a percentage of total budgeted expenditure at 47 percent, the highest share to date. So while revenue receipts have been growing, net tax revenue grew at a slower pace of 10 percent year-on-year compared to the 14.7 percent during the same period last year.
Gross tax collections were up about 12 percent. All of this recovery was led by a turnaround in excise duty collections which increased about eight and a half percent year-on-year versus about 5.8 percent decline last year thanks also to a two rupee per litre hike in excise duty on petrol and diesel in April. Personal income tax and corporate income tax collections have slowed. All of this was evident also in the advanced tax collections. I reached out to Garima, chief economist at Ilara securities and I began by asking her whether we were on track to repeat government spending levels that we've seen or saw in previous years.
INTERVIEW TRANSCRIPT
Garima Kapoor: In terms of CAPEX, we've started the CAPEX on a very robust note. We've almost done 20% of the budget estimates, growing by more than nearly 54% financial year till date versus 28% that you normally see in the previous six years. Even if the government achieves what it has set out, which is the budget estimates, still as a percent of GDP, we will be significantly below the peak.
We've hit the peak of government spending on the CAPEX side as a percent of GDP at about 3.3% to 3.4%. Now we would probably be close to 3.1%. So I think 3.1% at least keeps it steady compared to what it was last year. So it is not as bad given the context that there were a lot of questions being raised about the ability of the government to continue its CAPEX spending. So I think so far the government achieves the target it has set out, we should be okay in terms of momentum.
Govindraj Ethiraj: Right. So you've said that the ministries that are leading this are both shipping, waterways, railways, roads and transport, which is, I guess, to be expected in some ways. But was this a surprise, the pickup that we've seen particularly in this quarter?
Garima Kapoor: Actually, no, because I think the biggest problem or the biggest mistake that the government made last year was not spending. Although there was election related uncertainty, even after elections concluded, the government was on a very slow track in terms of spending well until November last year. And the slowdown in government spending had its own ramifications in terms of slowing the momentum of growth.
So one thing that the government has understood, probably the policy circles in Delhi also have understood, is the mistake that they do not have to make is to basically slow down on its spending, especially if the fiscal outlook in terms of revenue looks okay. So I think with that understanding, the execution is being front-loaded. Remember, what we need is, of course, a front-loading of government spending to basically revive the momentum, especially because the global backdrop, given the uncertainty relating to tariffs, is pretty high.
So at least you need to have your domestic policies in order so as to be able to counter the external risks.
Govindraj Ethiraj: Right. And how are you seeing this in terms of overall outlook? Or how are you seeing not just the outlook but the transmission of this spending, which as you say is about 3.1% of GDP levels or reaching there, to the overall economic outlook?
Garima Kapoor: Two things are important here. One, of course, you execute or spend what you've promised, especially in CAPEX, where central ministries are concerned. And second is you execute and at least spend what you've promised in schemes where central and state both are involved.
For example, solar rooftop or the Nal Sejal that is drinking tap water or the rural housing scheme. Remember, in some of these rural schemes which have a part component of state contribution and a part of central, the execution was very, very paltry last year. So one is, of course, taking care of the CAPEX, especially in sectors where the central government has complete control over.
And second is making sure that execution for schemes where state and centre both are involved is also critical. I think to be able to counter the slowdown or to ensure the momentum of growth does not decelerate, both are equally important. The central CAPEX alone is not going to take care of making sure that transmits into the economy because the states also don't spend into the schemes.
It leads to a generalised slowdown and working capital challenges for MSMEs, which we have seen percolate last year. So I would say both aspects are critical. As of now, both the central and state seem to be executing things well as planned and certainly it does not reflect the kind of weak momentum that we saw last year.
So, so far so good.
Govindraj Ethiraj: Okay, last question. So if you were to see this now in contrast to private capital expenditure, which of course has been sluggish, all of which obviously helps the economy, how would you view it?
Garima Kapoor: The data that we have until last quarter, that is until March, and also the results that we evaluated and analysed for the companies, barring select sectors, automobiles, EVs, auto and particularly power, particularly renewable energy and heavy industries like steel, we are yet to see across the board pickup in investment intentions. So I would still say everything is right, all that is needed for the CAPEX momentum in the private sector to come through. As of now, there are no clear indications that it will come through anytime.
What might happen is that because a lot of factors that could drive consumption are gradually falling in place, a gradual uptick in consumption that sustains at least three to four quarters perhaps could be the lever that we need finally to push CAPEX. But as of now, from the data that we analyse, it is not yet drawn based. So the challenge is that you cannot move beyond the handle of 66.5% growth in absence of private participation, especially in terms of CAPEX. So you will have to contend with this kind of growth because it is only so much that the government can do in absence of private participation.
Govindraj Ethiraj: Right, Garima, thank you so much for joining us.
Garima Kapoor: Thank you.
New Oil Reserves
India is exploring building three strategic new oil reserves to boost an emergency stockpile and strengthen energy security, the head of the company in charge of strategic reserves told Reuters India as we know is the world's third largest oil importer and consumer and we import more than 80 percent of our oil needs. The government-owned engineers India limited is doing feasibility studies to build these new reserves the head of the Indian strategic petroleum reserve limited told Reuters India currently has petroleum reserves or strategic ones at Mangalore, Padur and Vizag all in south of India and can store about 5.3 million tonnes of crude which could be tapped in the case of supply disruptions. So the plans now are to create a new 5.2 million tonne reserve at salt caverns at Bikaner in Rajasthan and a 1.75 million tonne facility also in Mangalore in Karnataka.
Healthcare Investments Accelerate
A report by the Economic Times which is based on information from sources says the IPO bound Manipal Health Enterprises is leading a race to acquire Sahadri hospitals with a bid of about 6,800 crores or about 800 million dollars. There are others in the fray for this Pune-based hospital with 11 facilities across Pune, Nasik, Ahilyanagar and Kharad comprising about 1,300 beds, 2,500 clinicians and 3,500 support staff according to that Economic Times article.
Interestingly it's already owned by Canada's pension fund Ontario Teachers Pension Plan which had acquired it from Everstone Capital in August 2022 at a valuation of about 2,500 crore according to that report. Now the race to acquire hospital assets continues with increased focus on single specialty hospital chains like IVF, oncology and nephrology and more importantly in tier 2 and tier 3 cities. Single specialty hospitals now command about more than 40 percent of all healthcare private equity deals in the last six years, up from about 15 percent between 2015 and 18.
Some of the big recent deals include Temasek investing 2 billion dollars in Manipal, DPEA-EQT investing about 650 million dollars in Indira IVF and Blackstone investing close to 600 million in quality care. So apart from the tier 2 and speciality phenomenon the market gap is obviously large. India has only about 16 beds per 10,000 people according to the World Health Organisation and needs about 100,000 plus new beds in five to seven years.
Hospitals overall saw about 8 billion dollars of investments including private equity and FDI in the last three years with M&A deals worth about 7 billion dollars according to that ET report. On the other hand more business houses are entering the space including business houses like the Bajaj Group. So is this a steady and sustained build-up or is there a race now for some of these hospital assets? I reached out to Sunil Thakur, partner at Quadria Capital, a leading healthcare private equity fund with more than three and a half billion dollars of assets under management and I began by asking him what was leading to this acceleration that we were seeing in deals and the outlook ahead.
INTERVIEW TRANSCRIPT
Sunil Thakur: I will say it's deal activity starting off, I would say it's now getting to a culmination because you know if you've observed in the last few years the hospital sector specifically within healthcare has gone through a lot of hyperactivity and it's coming about because of obviously the secular trend that we are seeing where the need for high quality hospital beds has moved from, not moved I would say, but has expanded beyond say the tier one, tier two cities and is expanding across the extra urban locations across India and the interest is what is coming from both the large strategics as well as the mega funds if I can call it and therefore in the past three to four years you've seen acquisitions you know across the region and these are large acquisitions be it the acquisition of care hospital by Blackstone, the acquisition done by KKR of HCG, equity of AIG, equity acquiring a large stake in AIG and also taking controlling stake in IVF. So we are seeing a raft of activity in this and it's coming because of the need of high quality hospital beds across India and therefore now the market especially on the corporate hospital side is converging in terms of the number of operators and it's getting to a handful of operators which is you know between 15 to 25 large operators across strategics and private equity health hospitals.
Govindraj Ethiraj: Right, so if you were to look at some of the recent deals they also suggest I mean it seems to me that they're also being flipped by some of the large players. So is that something that you had anticipated earlier? I mean usually one would have thought maybe investors would have held on for longer.
Sunil Thakur: Well I think some of them are being opportunistic and obviously it is coming from the private equity side because you know private equity always has a certain span of investment period, any investment that they do. So most of it is coming from the private equity investors. Typically they hold assets for anywhere from four to seven eight years but you know most of them tend to be opportunistic and with the kind of multiples that are trading especially in the hospital sectors, I believe it's more of an opportunistic call to take the benefit of the macro environment that we are in and the hyper deal activity situation that we are in.
Govindraj Ethiraj: Right, so Sunil when I spoke to you a few months ago as well I think two trends that you had pointed out. One is of course the investment in super speciality hospitals or chains and the second of course is tier two and tier three cities. Is that something that you're seeing continuing to see more of or are there any other sub trends that are emerging?
Sunil Thakur: That trend continues Govind especially on the single speciality side and that while we've been since the time we started we were a firm believer of single speciality but now we're seeing many funds going after single speciality because the opportunity in the mid market and large market space in the hospital sector in some ways is drying up because of consolidation that you mentioned and also we believe that single speciality has advantages over multi-speciality. It comes about because of specialisation you bring the entire flywheel effect of attracting good clinicians, procurement benefit, improving quality and when you operate those single speciality at a scale you are able to offer those services at an affordable price and also create the accessibility because then you sort of try and take those models to many locations through many centres.
So that will continue in fact it will accelerate going forward. That's the take that we have on single speciality.
Govindraj Ethiraj: And within a single speciality even from your own vantage point what would you say are the top three that are attracting investments right now?
Sunil Thakur: So mainly it's the one to deal with chronic care. So things like dialysis, IBF, ophthalmology, oncology. These are the ones which are at the forefront.
Then you also have specialities like derma which is skin care which has a certain retail format to it. Other ones where people see a lot of activity. Dental while it has the opportunity and we've seen many successes in the western market because insurance covers it.
It is yet to sort of grow at a rapid pace as other specialties when you talk about the market in India.
Govindraj Ethiraj: Right and if you were to take a step back and obviously valuations are increasing and many companies would be IPO bound. What would you say are some of the concerns? I mean when I say concerns I don't mean necessarily from a financial standpoint but from whatever you've seen in the market so far as an active and focused investor in this space.
Investing in relatively a newer industry which is coming into let's say the or is getting financialized from an investment point of view. What would be some of your concerns?
Sunil Thakur: Well the concern mainly for investors like us because we only invest in one sector which is healthcare is valuation I would say to some extent. But it's also about talent. It's also about regulatory policies and not so much that you know the regulatory policies are at worst but it's about the predictability which is improving I must say.
But these are broadly the big concerns valuation, talent, regulation.
Govindraj Ethiraj: Right. Last question. So many of these investments as we've discussed are happening in tier 2 and tier 3 cities.
I mean I know cost is a big issue but do you see any interest in the tier 1 cities beyond what we've seen in the past?
Sunil Thakur: Well absolutely. There is enough and more interest in tier 1 cities. Especially when you talk about things like single specialities.
It is being tested out in urban locations in tier 1. So that is where the paying population is. That is where the supply side ecosystem and when I say supply side ecosystem the most important supply side is the clinical pool or talent pool that we have.
Only when these single specialities find success and traction in tier 1 cities is when they decide to move to tier 2 cities. So there is enough and more to be done in urban centres and as you know urban centers themselves are growing. It's expanding and there are micro markets getting created within these tier 1 cities or metros.
So enough and more to be done in tier 1 I would say.
Govindraj Ethiraj: Right Sunil. Thank you so much for joining me.
Sunil Thakur: It's always a pleasure. Thank you.
Foxconn Pulls Staff
In a surprise move Foxconn technology has asked hundreds of Chinese engineers and technicians to return home from its iPhone factories in India which will deal a blow to Apple's manufacturing push in India according to Bloomberg. The bulk of Foxconn's Chinese staff have been told to fly back in a move that started about two months ago and more than 300 Chinese workers have left and mostly support staff from Taiwan remain in India according to those sources who spoke to Bloomberg.
It is not clear at this point why Foxconn is sending those workers home. Foxconn is Apple's biggest iPhone assembler and India was obviously seen as a major contender to new manufacturing or rather for new manufacturing capacity in case of higher tariff walls on Chinese exports to the United States. Bloomberg says earlier this year officials in China verbally encouraged regulatory agencies and local governments to curb technology transfers and equipment exports to India and Southeast Asia in what could be a potential move or attempt to prevent companies from shifting manufacturing elsewhere, says Bloomberg.
