Markets Flat As They Weigh Conflicting Signals

Volatility levels rise amidst general elections and a rising VIX levels could also trigger short term bearishness according to analysts so the markets will be in the jittery zone for some time.

7 May 2024 12:00 PM GMT
On Episode 286 of The Core Report, financial journalist Govindraj Ethiraj talks to Gautam Kalia, senior vice president and head of the wealth management platform Super Investor at Sharekhan by BNP Paribas.

Our Top Reports For Today

  • (00:00) Stories Of The Day
  • (01:00) Markets flat as they weigh conflicting signals, could that be the presiding theme in coming days?
  • (06:12) Well known NBFC IIFL Finance hit with liquidity crunch after banks slow down lending following RBI crackdown
  • (08:29) Drought hit Australian farmers benefit from Indian pulses demand
  • (09:51) Apprehension and optimism are both ruling high in the markets ahead of election results, what should you be doing?

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.


Fear & Love In Markets

The markets are and will likely stay in a period of conflicting sentiments for a few weeks. Remember we are on 7 May and the results of India’s general elections are on June 4 and of course there are a few phases of polling to go before that.

And…it is one of the hottest summers ever. And technically, summer is just starting.

Global cues were strong overnight on Monday and lifted the markets in early trade as they usually do before the momentum began fading into trade.

As flat trading days go, yesterday must have been among the flattest.

The BSE Sensex ended at 73,896, up 17 points while the Nifty50 closed at 22,443, down 33 points.

So the Sensex closed up and the Nifty which is a broader index closed down.

The BSE MidCap and SmallCap indices declined 0.95 percent and 1 percent, hence were worse off than the benchmark indices.

A gauge we don’t speak off usually is the volatility gauge of VIX.

Vix is a volatility index which measures, as the name says, volatility in the stock market. When the VIX is low, volatility is low. When the VIX is high volatility is high, which is usually accompanied by market fear.

So the India VIX, some also call it the Fear Index by the way, was upto 16.5, up almost 15%.

Barely two weeks ago, the VIX was just under 10, on April 23.

Volatility levels rise amidst general elections and a rising VIX levels could also trigger short term bearishness according to analysts MC spoke to.

Of course they also pointed out that VIX levels have risen historically to above 22-24 ahead of elections so from 11 to 16 is not a cause for major concern.

All of this obviously means that the markets will be in the jittery zone for some time as we referred to last week as well.

Whatever your election predictions are, a certain degree of apprehension is bound to creep in as the days pass and we come closer to the results.

So let's put sentiment aside for a moment and pick up on how a biscuit company and a commercial vehicle company are reporting their demand and sales.

Britannia Industries is trading near a 52-week high after having jumped almost 9% on Monday, thanks to expectations that demand will go up, particularly rural demand.

Sales are still moving slowly, growing 3.1% for the quarter ended March 31 2024 at Rs 4,014 crore while net profit actually declined slightly to Rs 537 crore.

Annual sales were also up only 3.5% to ₹16,546 Crores. Analysts at various brokerages are however seeing gross margins as stable at around 45%, reported the Mint.

With monsoons predicted to be strong, the bets on rural demand will increase.

Elsewhere, Ashok Leyland, the Chennai-based truck maker said there is no indication of a downfall in the industry.

From freight demand, freight rates, reduction in diesel prices, and sentiment of fleet owners, everything was looking positive, the company told Business Standard, adding that they saw a 10 per cent growth in volumes in April.

They also said there was no impact of elections on sales, which often happens. Interestingly, Ashok Leyland says while the industry is expecting a fall of around 4-7% this year, they are holding a more positive view particularly if May-June does well and may even see a small growth.

The point of course is that it's tough to call a clear trend because some companies of course do better than the rest at all times.

Which is also why we are talking about them but it does also tell you that industry trends in these two very different segments.

An interesting data point from Wall Street where as you know the wait for an interest rate cut by the Federal Reserve is getting longer and longer.

A Bloomberg report says last year, investors pocketed nearly $900 billion in annual interest from US government debt.

And this is double the average over the previous decade.

That’s set to rise as over 90% of Treasuries carry coupons of 4% or more. In mid-2020, just 5% yielded that much.

So while we wait for more capital flows into the stock markets including in India and more on that later in the show, debt is doing well on Wall Street.

Brent crude is meanwhile quoting under $84 a barrel now at $83.52, even as it appears that hopes for near term peace in the middle east are fading once again.

Oil prices have been up and now down given the middle east tensions but it could have been worse were it not for lower demand levels, including in the US.

RBI’s Crackdown Begins To Tell

Banks and non bank finance companies are beginning to pay the price for their excesses. Kotak Bank said the other day the business impact would not be much but the reputation impact would be higher.

IIFL Finance, also Mumbai based but a non bank finance company, is reportedly facing a liquidity crunch because banks have turned cautious while lending to it, according to Reuters.

This follows a clampdown on IIFL’s gold loan business, the wire agency has reported.

"Banks are neither sanctioning new lines (of credit) nor disbursing from already sanctioned limits," an official at the company reportedly said.

The impact on overall business is likely to be around 5 billion rupees ($60 million).

Two months ago, the Reserve Bank of India (RBI) asked IIFL Finance to stop sanctioning, disbursing and selling gold loans, citing "material supervisory concerns" in its gold loan portfolio.

Soon after the curbs, IIFL Finance cancelled a proposed $400 million dollar bond fundraising plan.

IIFL has been raising funds, including $200 million from its main shareholder Fairfax and Rs 500 crore through bonds and another Rs 1,200 crore through a rights issue.

Banks on the other hand told Reuters they were in a wait and watch mode and waiting for the regulatory dust to settle. Some IIFL Finance's total borrowing was from banks as of December last year.

IIFL’s situation is interesting because lending freezes usually have domino effects, the kind of which we have seen before.

In the case of Kotak Bank, you could argue the impact is limited because its deposit taking ability is not affected. Remember, it has been asked to stop opening new accounts digitally.

But a non bank finance company borrows from banks, among others and then lends to retail customers usually in the form of products, including gold loans in this case.

One can only hope that there is no downstream impact of these freezes and banks and non bank finance companies are careful about not falling afoul of RBI regulations in future.

Australian farmers Benefit From India’s Demand

Australian farmers are grateful to India after India, the world’s largest consumer of pulses, removed import duties on some varieties of pulses in an effort to control food inflation, Bloomberg reported.

The government scrapped duties on chickpeas or chana dal and extended tax-free imports of yellow peas, according to a weekend notification from the Government.

Pulses are a key source of protein for many in India.

The decision could benefit drought-hit farmers in Australia — a leading exporter of the commodity — where sowing is underway.

Some farmers there are planting chickpeas instead of wheat due to ongoing dry conditions and in anticipation of higher demand from India, a commodity broker told Bloomberg.

India imports pulses from several countries, including Canada and Myanmar.

The retail price of chickpeas was more than 20% higher than a year earlier in New Delhi on Sunday, according to data from the food ministry.

Earlier, the government lifted a ban on onion exports and imposed a duty of 40% on overseas shipments of the commodity.

A ban hurts farmers as they can’t get the best prices for their produce and a high duty could be a mid way point of sorts.

Fear, Apprehension And Optimism Rule The Markets

A month ahead of the election results, there could be doubts on the most foregone conclusions.

The market has already priced in a BJP return to power but it is but natural that there would be some jitteriness, which of course has arguably been introduced by the BJP itself as it aims for a peak showing.

Putting that aside, the markets are at peak valuations as are so many stocks.

At a time like this, ahead of an event like election results, how should one be thinking of the markets and what are the strategies that work best, or are time tested.

I reached out to Gautam Kalia, Senior VP and Head of the wealth management platform Super Investor at Sharekhan by BNP Paribas


India’s Airlines Set To Capture More International Traffic

Indian airlines are set to soar in the international market, capturing a significant share of passenger traffic in the coming years, according to a new report by CRISIL Ratings.

The report predicts that by fiscal year 2028 (FY28), Indian carriers will hold nearly half (50%) of the Indian international passenger traffic market, a substantial increase from their current share of 43% (FY24).

Updated On: 7 May 2024 6:00 AM GMT
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