Nervousness In The Political Theatre Could Transmit To The Stock Markets

The markets were riding a wave all this while on the back of confidence and determination that there will be continuity with an even stronger mandate. The events of the last few weeks suggest while the mandate may still be in sight, the ruling party itself appears jittery.

29 April 2024 12:00 PM GMT
On Episode 280 of The Core Report, financial journalist Govindraj Ethiraj talks to Yashwant Deshmukh, Founder of CVoter as well as Rahil Shaikh, Managing Director of MEIR Commodities.

Our Top Reports For Today

  • (00:00) Stories Of The Day
  • (01:09) Nervousness In The Political Theatre Could Transmit To The Stock Markets As Second Phase Of Polling Ends
  • (08:35) No Recovery In Entry Level Cars This Year, says Maruti Chief.
  • (10:01) Global Debt At Levels Not Seen Since 1820s says WEF Chief.
  • (11:08) How Concerning Is The Lower Turnout Levels In Phase I And II Of Voting (with Yashwant Deshmukh of CVoter) and India’s Unusual Voter ID Problem
  • (23:33) How Sugar Prices Are Rising Because Of Heat Waves
  • (30:35) Musk Skips New Delhi, Lands In Beijing 5 Days Later, Hawks Robotaxis Now
  • (32:49) Energy Transition Drives Big Metals And Mining Deals, Trading Bets

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.


Political Nervousness Could Transmit To Stock Markets

Well, it's another holiday shortened week with markets shut on May 1 or Wednesday.

It is my sense that some of the political undercurrents and accompanying nervousness will start manifesting themselves in the markets till the results of the general elections are declared on June 4.

The markets were riding a wave all this while on the back of confidence and determination that there will be continuity with an even stronger mandate.

The events of the last few weeks suggest while the mandate may still be in sight, the ruling party itself appears jittery.

But that could also be last minute jitters too though last minute or not, the jitters will get transmitted to the markets, at least till the results are out.

Till then, the bet is that strong domestic fund flows will keep the counters ringing, i said domestic and not international because we are seeing consistent outflows there in both equity and debt and more on that in a moment.

Some positive news on the currency front, the Rupee closed at Rs 83.35 on Friday, having risen for the week marginally.

But even that marginal rise was its strongest since the week ended February 2. The rupee had hit a record low the week before.

And not so positive news, India’s foreign exchange reserves fell for a second week to a six-week low of $640 billion as of April 19, Reuters said quoting Reserve Bank data.

Reserves fell by a little over $8 billion in the last two weeks and reflects, among other things, RBI’s active intervention in the forex markets, in this case buying rupees.

India is also facing the brunt of overall weakness in Asian currencies.

And interesting news on currency, a report from Bank of America says that it is bearish on a slew of Asian currencies and neutral at best on others.

The reason the investment bank ascribes to this is that it is the start of a “chaotic era.”

And that is linked to delays in the US Federal Reserve cutting interest rates and the sustained strength of the US Dollar.

Bank Am says it is bearish on the Chinese yuan, South Korean won, Taiwan dollar, Thai baht and Vietnamese dong.

Where does India figure ?

Well, under BankAm’s list of neutral currencies which include the Indian Rupee, alongwith the Hong Kong dollar, the Indonesian rupiah, the Malaysian ringgit, the Philippine peso and the Singapore dollar.

So nothing in Asia is spared as you can see.

Now, let's return to the stock markets.

The Nifty 50 ended with weekly gains of 2% with a fair bit of ups and downs with Friday breaking a 5-day positive run.

The broader factors playing on the markets are the same as before, which include US inflation, geopolitical tensions and then selling by Foreign Institutional Investors (FIIs).

The Federal Reserve is meeting this week but nothing is expected to change, in terms of interest rates.

Moneycontrol says some 200 BSE listed companies will announce their fourth quarter and full year earnings this week. And will also respond to results from ICICI Bank, Maruti among others that came over the weekend. More on that in a moment.

US stocks were strong on Friday with all indices including the Dow Jones IA, S&P500 and the Nasdaq Composite all ending firmly in the positive.

Now, let's return to FIIs.

FIIs were net sellers to the tune of Rs Rs 6,300 crore in April.

The reasons attributed by the street are the sustained rise in US bond yields and concerns over tweaks in India's tax treaty with Mauritius.

Significantly, they are also pulling out of debt which was generally primed to see not just positive but substantial flows in coming months because of India’s inclusion in various bond indices including the JP Morgan and Bloomberg indices.

There were net investments of Rs 35,098 crore in March and Rs 1,539 crore in February, data with depositories quoted by agencies showed.

Interestingly, FPIs withdrew Rs 10,640 crore from the debt market during the period under review as well, the BS said.

In the last three months, FPIS had invested almost Rs 57,000 crore in the last three months in debt.

The reversal is noteworthy.

Banks Are Doing Fine, For Now

This is results season and we are the The Core Report trying to pick a handful, every now and then usually from sectors that send signals on how the broader economy is doing, both at the consumption and investment level.

Let’s pick two results,

ICICI Bank, the second-largest private bank, reported a better-than-expected 17% increase in fourth-quarter net profit on Saturday thanks to robust loan growth, though its lending margins shrunk.

Standalone net profit, excluding subsidiaries, beat analyst estimates to rise to a record Rs 10,708 crore rupees ($1.28 billion) in the January-March quarter from Rs 9,122 crore rupees in the same period a year earlier.

Net interest income, or the difference between interest earned on loans and paid on deposits, increased by 8.1% to Rs 19,093 crore rupees

But net interest margin (NIM) -- a key gauge of profitability -- was 4.40%, lower than 4.90% a year earlier, and 4.43% reported in the previous quarter.

Reuters reported ICICI Bank’s senior official saying the bank was focused on "risk-calibrated operating profit".

ICICI Bank's total loans grew by 16.8% during the quarter, while deposits grew 19.6%.

Earlier this week, peers Axis Bank and IndusInd Bank

also reported strong growth in loans and deposits for the fourth quarter.

All banks as we have been discussing here are furiously opening new physical branches, for all the talk on digital banking, including the kind which came under heavy fire from the RBI in the case of Kotak Bank.

ICICI opened 623 branches in the last financial year and will aim to open a "similar number of branches" this year, an official said.

ICICI also pointed out that it was focussed on building a resilient technology infrastructure, whatever that means, adding that the bank's IT spend increased to 9.5% of total expenses in 2023-24, from 5.6% in 2018-19, according to Reuters.

Given the RBI’s crackdown, it won't be surprising if all banks up their technology spend further, as much to keep pace with growth as to keep systems capacity ahead of peak demand.

Good news for IT services companies and hardware majors i would reckon.

Speaking of banks, they may be compelled to slow down their loan growth as deposits are not growing at a similar pace, S&P Global Ratings has said and BS has reported.

In the Asia-Pacific 2Q 2024 Banking Update, S&P Global Ratings Director SSEA Nikita Anand said the agency expects the sector's strong credit growth to moderate to 14 per cent in FY25, from 16 per cent in FY24, if deposit growth, especially retail deposits, remain tepid.

Anand said there is a deterioration in loan-to-deposit ratio of every bank, with loan growth being 2-3 percentage points higher than deposit growth.

"We expect banks to bring down their loan growth in FY25 and bring it in line with deposit growth. If banks do not do that, they would be paying higher to get wholesale funding, which will impact profitability," she said at a recent webinar of S&P Global Ratings

Entry Level Car Sale Recovery Distant For Now

Entry level small car sales are not going up nor are they expected to.

India's biggest carmaker Maruti Suzuki reported standalone profits up 48% on year to Rs 3,878 crore rupees compared with analysts' estimates which were higher.

This is Maruti's first profit miss since the first quarter of fiscal 2023, Reuters reported.

So while sales are at record highs, profits per unit or car sold were low due to discounts on slow-selling entry-level models.

Sales of small cars have been hit as we have been discussing on The Core Report thanks to stress at lower income levels, a factor that is also evident in low cost housing.

A recovery of demand within the small-car market will not happen this year, and maybe not in 2025, Maruti Chairman R.C. Bhargava said in a post-earnings media call, reported by Reuters.

Maruti has been benefiting from, like other auto companies, from sales of more expensive sports utility vehicles (SUVs). Maruti’s sales revenue grew more than 19% and sales volume increased 13% to 584,031 units or half a million units.

This is for the last quarter.

Maruti’s total expenses rose 16% with input costs rising more than 10% which in turn is linked to its volume increase.

Global Debt Levels At Highs Last Seen In 1820s

In an interesting and worrying observation.

Global debt ratios nearing 100% are close to levels not seen since the 1820s and there was a “stagflation” risk for advanced economies.

This was stated by Borge Brende, president of the World Economic Forum in a speech in Saudi Arabia yesterday.

He told CNBC that global growth [estimate] this year is around 3.2 [%]. It’s not bad, but it’s not what we were used to — the trend growth used to be 4% for decades, adding there was a risk of a slowdown like that seen in the 1970s in some major economies.

“We cannot get into a trade war, we still have to trade with each other,” he explained when asked about avoiding a period of low growth.

“Trade will change and global value chains — there will be some more near-shoring and friend-shoring — but we shouldn’t lose the baby with the bathwater..”...

Brende said governments should consider how to reduce that debt and take the right fiscal measures without getting into a situation where it kicks off a recession. He also pointed to persistent inflationary pressures.

Are Low Voter Turnouts Concerning?

Close to one billion people Indians were and are eligible to vote in the seven-phase general election that began on April 19 and concluded on June 1, with votes set to be counted on June 4.

For a variety of reasons which we will come to shortly, voter turnout levels are lower this general election, which is seeing the BJP gunning for a third term after a 10-year reign.

Approximate voter turnout data at the end of polling put Friday's turnout at 61%, lower than the 65% in the first phase last week, and 68% in the second phase five years back.

There are of course 5 more phases to go but it’s also getting warmer or hotter depending where in India you are.

And of course politicians may still convince voters to visit the ballot booth.

I reached out to Yashwant Deshmukh, Founder of CVoter, the polling and survey company and asked him if the turnout numbers were a concern though and how does it compare historically ?


Sugar Prices Rising Thanks To Demand And Heat Waves

India's sugar consumption this year is set to hit a record high as demand during the peak summer season gets a further boost from above normal heat waves of which more are being declared as I speak.

Higher consumption would lift local prices and boost margins of sugar producers, benefiting farmers as well.

India's sugar consumption in the 2022/23 marketing year, which ended on Sept. 30, stood at 27.85 million tons.

Higher demand has already begun pushing up sugar prices.

How are heat waves likely to impact sugar prices and the crop in general and what could be different this year.

I reached out to Rahil Sheikh, MD of MEIR Commodities, an agro commodity trading firm based in Mumbai which specialises in sugar and began by asking him how he was seeing the impact of heat waves on the crop and his outlook.


Robotaxis Anyone?

Last week, Elon Musk indicated that he would not visit India for a much planned and trumpeted visit to meet Prime Minister Narendra Modi and announce a $2-3 billion investment because he had very heavy Tesla obligations.

Exactly five days later, or yesterday to be precise, he landed in Beijing in his private jet in what is being reported by Reuters as a surprise visit.

Musk is expected to meet senior officials to discuss the rollout of Full Self-Driving software and permission to transfer data overseas, Reuters said.

Tesla had rolled out Full Self-Driving, or FSD, the most autonomous version of its Autopilot software, four years ago but has yet to make it available in China, its second-largest market globally, despite customers urging it to do so.

It is now being widely reported that Tesla wants to focus on robotaxis, because among other things, it is a good value booster for the stock price.

Musk said last week Tesla would introduce new, cheaper models using its current EV platforms and production lines and would offer a new "robotaxi" with self-driving technology on Aug. 8.

Tesla shares are down almost a third since the start of the year

What this means for India or does not is not clear unless India wants to make a pitch for autonomous cars. China’s roads can be chaotic too though may be less than India at least proportionately. Either way, the cars and their neural networks need to be trained in these roads.

It does not seem imminent in India though.

Earlier this month, Tesla said it would lay off 10% of its global workforce against falling sales and an intensifying price war for EVs led by Chinese brands.

Reuters said Tesla has sold more than 1.7 million cars in China since it entered the market a decade ago and the Shanghai factory is its largest globally.

Musk's visit also coincides with the Beijing auto show, which opened last week and ends on May 4. Tesla does not have a booth at China's largest auto show and last attended in 2021.

According to Reuters, General Motors CEO Mary Barra also made an unannounced visit to the Beijing auto show.

This does seem like China is turning on the pressure or top automotive executives want to stay connected with China, arguably the most dynamic EV market in the world

Energy Transition Drives Big Metals And Mining Deals, Trading Bets

There is action in the metals and mining space, after a while and energy transition is driving it.

BHP Group has proposed a takeover of Anglo American in a $39 billion deal that would create the world’s largest copper producer even as it triggers a shakeup of a size not seen in over a decade, Bloomberg is reporting.

The proposal has got rejected for now and will be revised, more on that shortly, but copper is regaining its lustre also because it has a key role in energy transition across the world. Prices of copper have been rising steadily.

A tie-up with Anglo would give BHP roughly 10% of global copper mine supply ahead of an expected shortage that many market watchers have predicted will send prices soaring.

BHP Group is considering making an improved proposal for Anglo American PLC after its $39 billion initial offer was rejected by the London-listed miner, according to people familiar with the matter.

BHP last year bought copper producer OZ Minerals Ltd. for about $6.4 billion in its first major purchase in years, but has otherwise focused until now on selling assets such as oil, gas and coal.

Elsewhere, some of the world’s biggest energy trading companies are returning to metals, years after getting burnt in the notoriously difficult markets, Bloomberg reported.

The big trading firms are building out their metals teams, as they look to deploy capital generated by record profits.

This is happening as forecasters are turning increasingly bullish on copper, aluminium and other metals.

Many commodities houses also see strong links between metals usage and power markets.

The metals trading space is dominated by Glencore Plc and Trafigura Group.

Updated On: 29 April 2024 6:00 AM GMT
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