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Markets Plunge On Overall Shakiness

We have been calling a weak market for a few days now and it is indeed exhibiting all the signs of one that has no major upwards triggers combined with continued flow of capital which is getting absorbed

By Govindraj Ethiraj
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Markets Plunge Shakiness
On today’s episode, financial journalist Govindraj Ethiraj talks to G Chokkalingam, Founder of Equinomics Research as well as Peter McGuire, the Australia CEO of trading firm XM.com.

Our Top Reports For Today

  • (00:00) Stories Of The Day
  • (01:00) Markets Plunge On Overall Shakiness
  • (02:17) Overseas Companies Reduce Stakes In Local Subsidiaries And Investments, ITC Parent BAT Kicks Off
  • (12:59) Are Sebi And RBI Too Soon Or Too Late In Responding
  • (17:55) Morgan Stanley Says Its A 2000s Like Feeling With Stage Set For A Private Investment Boom
  • (19:32) Gold And Bitcoin. How Two Totally Divergent Asset Classes Are Zooming Away
  • (25:49) Luxury Brands Pile On To Big Leases In 2023 As Demand Rises

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.


Markets Plunge On Weakness, Could Be Stable

We have been calling a weak market for a few days now and it is indeed exhibiting all the signs of one that has no major upwards triggers combined with continued flow of capital which is getting absorbed.

I will shortly explain why and the pulls and pushes at work right now.

Before that, what happened on Wednesday ?
Well, the BSE Sensex fell 906 points, or 1.23 per cent, to end at 72,762 levels, while the Nifty50 broke below the 22,000-mark to end at 21,998, down 338 points or 1.5 per cent.

The percentage points are important because if you look at the mid and small caps, the fall has been steeper.

So in contrast to a roughly 1.2-1.5% fall in the benchmark indices, the broader Nifty Midcap 150 index closed 4.17% lower and Nifty Smallcap 250 index ended 5.18% lower, their biggest fall in two years. Also, they have been sliding for the last few days.

There are several sectoral drops as well which is also reflecting their presence in the smaller cap indices and vice versa.

So what are the forces at work?

First, the regulatory overhang is still strong because it is clear that both financial regulators are now investigating various sources of funds and the movement of them, particularly into the smaller cap and SME stock universe where listing guidelines are less stringent.

One sign that the froth, to use Sebi’s term, has been fuelled by money that is either non taxed or non accounted emerged following raids by the Enforcement Directorate on a Dubai-based alleged money mover or hawala operator.

Moreover, stockbrokers are now asking for additional margin money from clients in order to keep positions, but some clients are choosing to liquidate positions instead, due to the perceived risk, MoneyControl is reporting.

There is another factor that is affecting some prices though with an interesting twist which I will come to.

Bloomberg has compiled a series of stake sales involving foreign companies reducing their ownership or stake in Indian companies essentially taking advantage of the high prices though that might be combined with some strategic moves as well.

At least seven firms including US home appliance giant Whirlpool Corp. and Singapore Telecommunications Ltd., have reduced holdings in their local units since June, data compiled by Bloomberg show. 

Whirlpool reduced its stake in the Indian unit from 75% to 51% last month and said it plans to use the proceeds of about $468 million to reduce debt. Singtel plans to use funds to invest in areas such as data centres, according to exchange filings. 

British American Tobacco has been conferring with bankers for a large divestment which it has kicked off. 

Interestingly, the last major exit was in 2022 by cement maker Holcim AG when it sold its India business to Adani Group in a deal worth about $11 billion. 

Of course all of this is being cushioned by continued and strong inflows into mutual funds and markets in general. 

Equity assets with local money managers rose to a record $277 billion in February, with flows to recurring stock investment plans reaching a new monthly high of $2.4 billion, Bloomberg said..

The twist is in ITC.

Its key shareholder and once parent BAT had announced a few weeks ago (WHEN) it was officially reducing its stake in ITC. I can’t help but add that speculation that BAT would reduce stake is several decades old and it is finally happening.

ITC’s parent BAT is not seen to be active on the company’s India operations, at least not the way we have seen in companies like HUL or Nestle though the brand and ownership patterns are quite different.

The twist is that the ITC stock price shot up in a weak market on heavy selling. Moreover, brokerages are putting buys.

Its stock price shot up 8 percent in trade on March 13, following a 3.5 percent stake sale by BAT worth close to Rs 17,500 crore and at a small discount to the previous session's closing price.

The share sale has cut the holding of BAT to about 25.5 percent from 29 percent. BAT will have to wait for 180 days before paring its stake further, Moneycontrol reported.

So why did it shoot up ?

One view, according to MoneyControl, is that the stake sale could lead to a re-rating of ITC's stock, as investors view it as more independent. There is no perceived change in the fundamentals though.

The increase in liquidity of the stock is seen as a plus.

All this is interesting because in many other cases, the same factors would have sent the stockprice in the other direction.

One stock brokerage, Prabhudas Lilladher, has said their long-term target on ITC is around Rs 465 to Rs 480, implying an upside of around 18 percent, said MC.

To come back to small caps and mid caps, it's not just existing small cap stocks and hundreds of them which are hitting circuits or sinking but also IPOs which for the first time in months are not getting gobbled up on launch as we are seeing right now.

I reached out to G Chokkalingam, Founder of Equinomics Research and began by asking him for a temperature check on the innards or the middles of the market and also on how he was seeing the outlook.


Rupee Down, Oil Up

Elsewhere, the Indian rupee dropped on Wednesday on the back of weakness in most Asian peers after U.S. inflation data topped expectations, but most market participants said the decline was likely a blip.

The rupee was at 82.8600 to the U.S. dollar on Wednesday morning, Reuters reported.

Meanwhile, oil was up on Wednesday.  U.S. crude oil and fuel inventories fell last week, Reuters reported with sources citing American Petroleum Institute figures ahead of Wednesday's official U.S. inventory report.

Brent futures for May rose 83 cents, or 1%, to $82.75 a barrel.

Market Regulators, Too Soon Or Too Late?

The Wall Street Journal had an interesting piece on the front page. It hailed technology stocks as secure against higher interest rates or oil prices while rapidly expanding.

“For all the talk of a high-tech bubble, there is a basic logic driving the divergence of market values: High-tech is where the growth is,” it said.

The article appeared this month for sure but 24 years ago, in 2000.

A WSJ columnist points out that we now know the dot-com bubble had started to deflate two weeks before the piece was even published. The Nasdaq dropped almost 80% to its low two years later.

Back home, that the stock markets have turned shaky in the light of increased regulatory scrutiny is quite clear.

It is also clear that much of the money that has flown into small cap and mid cap stocks and am sure others as well is not patient capital so to speak.

You can infer this from the fact that the source of the funds itself, whether unaccounted in tax or raised from borrowings on assets like gold, makes them either suspect or fundamentally volatile.

If people have borrowed to put funds into the markets, it is logical that they will always be on the edge for fear of losing their principal and by extension their shirt. And would thus run for the door.

We have of course been noting how the Sebi and RBI have been cracking down for some time.

While market participants, including wide eyed fintech bros have been expressing extreme shock and displeasure, have been suggesting if not arguing that the crackdowns are either unfair, an attack on budding entrepreneurs or an overkill, I would actually ask the opposite question.

Did the RBI and SEBI wait for too long?

The only reason I ask or pose this question, is first, because someone should pose it and second, because, the quality of surveillance and monitoring not just by the exchanges and banks but the larger financial transaction system is much superior to what it was even a decade ago.

What this means is that there is now highly sophisticated software that is powering the triangulation of transactions at the Income Tax, for example, among other authorities.

You could thus safely say that regulators have been seeing unusual activity for a while.

By the regulators own admission, in some cases like PayTM Payments Bank, they have found KYC norms being violated for over a year. Elsewhere, Sebi is also saying that they have been seeing unusual activity in small cap stocks and on the SME stocks and exchanges for a while.

I take that to mean several months if not a year.

In another bond issuance where Sebi has cracked down on JM Financial, the case is likely from November 2023, only five months or five long months, depending on how you look at it.

Moreover, it clearly appears that there are elements of unaccounted cash flowing in, as raids by the enforcement directorate are purporting to reveal, not in the bond case but elsewhere.

If that is the case, then could the regulators have acted sooner ?

This is obviously rhetorical and there is no easy answer because if a regulator acts too soon, then the move in itself could spook the markets prematurely. 

And the regulator could also be on the backfoot of sorts because actions like this tend to rock the whole boat and which obviously has other ramifications…imagine the markets in a 10 to 20% free fall.

For instance, Kotak Bank founder and market veteran Uday Kotak said on Wednesday he acknowledged the presence of some frothiness and bubbliness, but emphasised that it is not yet out of control.

He said he saw a significant growth in the futures and options category, indicating the dynamism of the market but stopping short of suggesting an impending bubble.

So the term bubble itself denotes something different which is the final outcome of everything that goes in. But some or a lot of the funds going in itself have doubtful provenance as is evident. And also it does appear that there are bubbles within the market and not necessarily the whole market. 

Also, the term froth is now being freely used on Wall Street as well as investors and market watchers debate whether the current levels, which are all time highs for the Nasdaq, S&P 500 and the Dow Jones Industrial Average, are too high. 

Perhaps the answer is yes, or no or somewhere in the middle as it always is.

Whichever way, it is clear that the regulators relied on data and evidence to pronounce that there was froth in the system. Which is of course a good thing.

But conversely, it also suggests a delay and a potentially costly one at that.

The right way to call it is to perhaps blend intuition, experience and early data which in any case we have more of and call out excesses.

On Wall Street, the focus seems to be more on whether it is a speculative mania rather than misdemeanours. Which is not to say there aren’t any. It's just that no one knows of them right now.

No one is saying all this is an easy task but that is what is expected of regulators. And surely of regulators who are better armed with technology, data and intelligence than ever before.

FII Economists Bet On India’s Investment Revival And Growth

While on the ground, there is all kinds of selling pressure, foreign portfolio investors are obviously taking some effort to reassure all that the macro fundamentals for India remain solid and will get stronger.

Investment has become a major driver of India’s booming economy, according to economists at Morgan Stanley, adding that the country’s current expansion resembles that of the mid-2000s when growth averaged more than 8%.

The contrast with the 200s is perhaps statistically appropriate.

Morgan Stanley economists said the economy appears to have room for further expansion, given the path for additional capital expenditure — especially from private businesses — rising exports and a more stable economy, reported Bloomberg.

After declining for a decade, India’s investment as a percentage of gross domestic product is steadily climbing and could reach 36% by 2027 from a recent low of 28% in 2021, economists including Chetan Ahya wrote in a note Tuesday. 

The upswing mirrors the period from 2003-2007, when India’s investment ratio rose to 39%, they said.

While this is very likely as capacity utilisation in the private sector is now reaching its peak, it is yet to happen in a meaningful way. 

“We see a long runway ahead for the current expansion cycle,” the economists said.

Earlier this week, economists at Societe Generale  who seemed a little more circumspect wrote that investment remains a major growth driver for India’s economy. 

They said they were seeing early signs of a revival in private capital expenditure, signalling that investment appears to be expanding beyond just public capex.

Gold & BitCoin Walk Hand In Hand

Gold and bitcoin are setting new record highs at the same time. We have been documenting the gold part but not the bitcoin part.

The interesting thing, as you well know, is that gold is the ultimate safe haven asset, while bitcoin is a highly risky and speculative play and is either heavily regulated or banned totally depending on where you are.

Not so with gold of course. 

But what does it say about the markets when both these asset classes, almost at the opposite ends of the spectrum, rise in unison to record highs ?

I reached out to the Sydney based Peter McGuire, the Australia Australia CEO of trading firm XM.com and began by asking him what was driving this unusual phenomenon and what his outlook was, particularly for gold ?


Luxury Brands Pile Onto Real Estate

High streets have emerged as the top leasing choice for luxury brands in 2023, recording over 100% Y-o-Y growth while malls remain the second most preferred luxury realty category, with 300% Y-o-Y growth, according to CBRE data.

Real estate leased by luxury companies in India stood at 0.60 million square feet (MSF) last year – 170 per cent higher than in 2022, said a report on Wednesday, attributing the trend to “skyrocketing awareness” about brands, Business Standard reported.

Established luxury brands are “actively seeking” expansion opportunities in metro cities and pursuing larger space take-ups in existing locations.

Affluent consumers in Tier-II cities travel to the nearest Metro city for their luxury shopping. This has prompted luxury brands to look beyond the top-tier metro cities and open stores in places such as Chandigarh and Ahmedabad.

Demand for premium and luxury goods is increasing in the country due to a growing middle and upper class, said the report released jointly by real estate consultancy CBRE South Asia and the PHD Chamber of Commerce and Industry (PHDCCI). 

The report was based on data from eight cities: Delhi-NCR, Mumbai, Bangalore, Kolkata, Pune, Ahmedabad, Chennai, and Hyderabad.