The Rapid Rise Of The Sensex Is A Worry

While the markets scaling new highs is always good news for investors, the speed at which it is moving should cause some pause

4 July 2024 12:30 AM GMT

On Episode 331 of The Core Report, financial journalist Govindraj Ethiraj talks to Pratik Jain, Partner at PwC India.

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SHOW NOTES

(00:00) The Take

(05:02) Stories Of The Day

(05:38) The speed of the Sensex’ rise is a worry

(08:46) How much rainfall do we really need?

(10:36) GST, lower numbers and seven years on

(24:19) How much screen time do Valley Tech CEO kids get?


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.

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Good morning, it's Thursday, the 4th of July and this is Govindraj Ethiraj broadcasting and streaming from and headquartered in Mumbai, India’s financial capital.

The TAKE

As the market reaches and crosses new highs, the exuberance is slowly getting revealed and in different ways.

None of this to say that the markets will crash tomorrow but it does demonstrate the relative weakness of the foundation it sits on, translated small and trigger happy investors punting away on stocks and also, thankfully, investing in mutual funds via SIPs and the like.

The reason for all this, as I have shared before, is the desperation to find ways of growing savings which are being devoured by inflation, if they are growing at all.

As I think of this, I wonder if an entire generation has only spent the last few years deriving satisfaction from the appreciation in their investments rather than growth in real income and maybe caring less for the latter. And remember, this is not just stock markets. It’s also investments like crypto where several people have lost more than their proverbial shirts.

I hope it's not the case but I am not sure.

There are several symptoms which point to the excesses.

Several friends are struggling with precise information on stocks they or mutual funds they own.

The reason is they buy through fintech intermediaries who in turn don’t seem to be able to or are not updating their data properly and not in real time for sure.

I don’t use any of these fintech apps for good reason so I can’t claim first hand knowledge.

One friend told me the value of her holdings as seen on one such broking app varies between Rs 2 and Rs 2 lakh and despite much calling and chasing, the answers seem vague.

Shyam Shekar, the founder of IThoughtPMS, a Sebi registered portfolio management services firm managing investor funds had this interesting point on social media.

According to him, zero broking fees which now the Sebi has stopped because it was being cross subsidised, has done more harm than good to our society.

He argues that it has taken the culture of speculation into the lives of people who should never be speculating.

It has normalised gambling in a class of people who can only be destroyed by it.

The stock exchanges (mainly NSE) used the zero brokerages to perpetuate a rampant speculative culture in the Indian middle class, he says.

The cross subsidy argument is fair because the funds earned from speculators in derivatives was subsidising the zero broking model wherein you don’t pay brokerage when you buy or sell stocks.

He also says that almost 95% of active users in zero brokerages lose money.

This is not to say the reverse that if you had brokerage then there would not have been such a high level of retail interest.

But the fact is that contributes.

Am sure you can see the combined impact of this.

Slick and smooth apps run by smart fintech companies where a few clicks can get you going, zero brokerage and powered of course with the desperation that only high inflation can lead you to.

And of course, once you see others doing it, then you want to join the party.

This is a movie that I have seen several times and so have others and are advising caution repeatedly.

Sebi itself is obviously grappling with how to address an overheated market though there are no obvious and imminent signs of structural weakness, except of course of the inflated values of stocks themselves.

The solution, whether for Sebi or RBI will lie outside of the stock exchanges, in the way personal loans are growing or savings are coming down.

The regulators, to their credit, are alert to this and have been racking their brains and scratching their heads for some time.

But to come back to fintech apps for a moment, if you had a bank account, I am sure you would not depend on a third party slick app to tell you what your bank balance is.

Similarly with stocks and mutual funds, do make the effort to go one layer deeper and start looking at the source, including with the depositories to see what you own and at what price and maybe use a pure data aggregation website, like valueresearchonline, moneycontrol or economictimes to write down your portfolio, no of shares or units, acquisition cost and so on.

Believe me, you need to start treating your stock investments with the same care as your bank accounts.

It's 80,000 times. The Speed Is Concerning

The benchmark indices scaled fresh record highs on Wednesday, led once again by the financial biggies like HDFC Bank, State Bank of India, Axis Bank, Kotak Bank.

The BSE Sensex index crossed the 80,000-mark for the first time today, hitting an all-time high of 80,074. It ended at 79,987, up 545 points or 0.69 per cent.

On the NSE, the Nifty50 touched a new record high of 24,307.25, before closing at 24,287, up 163 points or 0.67 per cent

In the broader markets, the BSE MidCap and the BSE SmallCap index rose 0.86 per cent each.

While the markets scaling new highs is always good news for investors, the speed at which it is moving should cause some pause.

Remember, there is nothing intrinsically that has changed in the fundamentals in the last many months, except steady growth and maybe a return to political continuity, for those who were betting on it.

And then, you can see capital flows coming back, given how languishing stocks like HDFC Bank are rising again, in this case rising 4 percent to Rs 1794 levels.

Now, this is the third fastest 5,000-point intraday rise for the Sensex in history, from April 9 to July 3.

The index took just 57 days to gain the last 5,000-points - from the 75,000 mark to 80,000 levels on an intraday basis, shows data, compiled by Business Standard

The fastest 5,000-point rally for the Sensex was nearly three years ago (September 24, 2021) when the index hit an intraday high of 60,333 in a span of just 28 trading days, rising from the 55,000 mark.

Mahindra & Mahindra (M&M) has been the top gainer that surged over 37 per cent during this period to around Rs 2900 levels, ACE Equity data shows.

Fund manager and founder of Abakkus AMC Sunil Singhania told MoneyControl that investors should be cautious of the meteoric rise in some small- and mid-caps though he felt overall market valuations appeared reasonable.

Singhania pointed out that public sector defence companies trading at 17-18 times sales are experiencing excessive valuations.

Similarly, companies associated with railways and those announcing ventures into electric vehicles (EVs) have seen stock prices surge without corresponding profit increases, leading to a potential bubble.

He explained that the Nifty, on an FY26 basis, is at 17.3 to 17.4 times PE, which is only 5-6 percent higher than the 10-year average.

This is far from a euphoric 25 or 30 times PE. On a trailing basis, Nifty is at 20.2 times. “On a trailing basis, current valuations are similar to 2020 levels, indicating that the gains in Nifty have mirrored profit increases,” said Singhania, a point other value investors have also made, including on The Core Report.

How Much Rainfall Is Important

Monsoons were projected to be better than last year and quite likely will be but the month of June which sees the onset of monsoons on the southern coast of India in Kerala has not gone well.

There is a 11% deficiency so far, as we mentioned yesterday, quoting figures released by the Indian Meteorological Department.

There is no doubt that the delayed rains and heatwaves are affecting food prices, particularly vegetables.

Former Agriculture Secretary Siraj Hussain points out in an article in MoneyControl that this is the third year of deficient rainfall in June.

According to him, if the IMD’s forecast for subsequent months turns out to be correct and the distribution of rains is not skewed, overall production of kharif crops or monsoon planted crops like rice and pulses which include dals, should still turn out to be good.

IMD data however says that India’s southern peninsula has received 14 percent excess rainfall.

But the concern is water level in reservoirs in southern states continues to be below average.

The total live storage available in these reservoirs as of June last week was 16% of live storage capacity of these reservoirs, as compared to 20% and normal storage level of 22% (of the last ten years.

Low rainfall in Karnataka and Maharashtra affected production of several crops, including Sugarcane, Husain points out.

Onto vegetables, if monsoon rains in July turn out to be normal and well distributed, the prices of vegetables are likely to cool down by the end of September, says Husain.

Interestingly, last year, despite a deficient monsoon, rice production was 136.7 million tonnes and thus was not hit much.

GST Collections Are Down, The Broader Pictures

Goods and services tax (GST) collection for June 2024 stood at Rs 1.74 trillion or Rs 174,000 crore, a 7.7 per cent year-on-year (Y-o-Y) growth, an official source told Business Standard.

This Y-o-Y growth is notably less than the 12.4 percent and 10 percent increases recorded in April and May, respectively. Month-on-month figures, too, were flat.

In May this year, the gross GST collection amounted to Rs 1.73 trillion, while April witnessed a record-high GST collection of Rs 2.1 trillion. The June revenue brought the financial year-to-date total to Rs 5.57 trillion, said the source.

THe official acknowledged to Business Standard that growth is not as robust as in past months, with various underlying factors contributing to this.

Nevertheless, the upward trend is expected to continue in the upcoming months, with gross collections likely to remain above the Rs 1.6 trillion mark,” the official said.

I reached out to Pratik Jain, Partner, Indirect Tax at PWC to get a sense on how he was viewing tax collection numbers but also to ask about how, 7 years on, where GST collections stood.

Data Centres Are Going Nuclear

You probably know that data centres are turning out to the next big energy guzzling monsters on planet earth right now.

Data centre power consumption is shooting up in turn because of, among other, high intensity AI chips and their applications.

Which makes me wonder, is it really worth it ? I will be back with more on this as I did ask around a little to understand how much energy are data centres set to consume and waiting for some figures ?

I think the larger question is also how many do we really need ?

And should we calibrate because we can’t be cutting down energy consumption on one end and going ballistic on another end.

And you can’t trust tech companies to give you a clear view because it is in their interest to sell faster chips and faster computing, whether or not it actually makes a difference to your life.

The WSJ is now reporting that tech companies scouring the country for electricity supplies have zeroed in on a key target: America’s nuclear-power plants.

The owners of almost 30% of U.S. nuclear-power plants are in talks with tech companies to provide electricity to new data centres needed to meet the demands of an artificial-intelligence boom, the journal has said.

Amazon Web Services is nearing a deal for electricity supplied directly from a nuclear plant on the East Coast with Constellation Energy, the largest owner of U.S. nuclear-power plants, according to people familiar with the matter.

In a separate deal in March, the Amazon.com subsidiary purchased a nuclear-powered data centre in Pennsylvania for $650 million.

These plants sit or will sit next to data centres so no transmission and distribution losses or challenges.

This is crazy and almost science fiction if you think of it.

Imagine Adani, who is getting into this business, buying a nuclear power plant in India to power its data centre.

In India, by law, the private sector is not allowed into nuclear power. Of course the lobbying to change this has been on for maybe two decades now.

Anyway, the journal says nuclear-powered data centres would match the grid’s highest-reliability workhorse with a wealthy customer that wants 24-7 carbon-free power, likely speeding the addition of data centres needed in the global AI race.

And then of course, the WSJ points out, quite rightly that instead of adding new green energy to meet their soaring power needs, tech companies would be effectively diverting existing electricity resources.

That could raise prices for other customers and hold back emission-cutting goals.

The same could and will happen in India though differently.

The data centre that Amazon purchased in Pennsylvania can receive up to 960 megawatts of electricity, enough to power hundreds of thousands of homes.

The relatively new arrangements mean data centres can be built years faster because little to no new grid infrastructure is needed. Data centres could also avoid transmission and distribution charges that make up a large share of utility bills.

How Much Screen Time Is Good?

Ever since I read about Bill Gates and Steve Jobs and how they were moderating exposure to social media for their children, I have followed this theme somewhat closely.

Basis the assumption or presumption that tech CEOs have a pretty good idea of the harm that excessive social media can do and thus are careful with it in their own family environments.

Peter Thiel, well known investor in Facebook and cofounder of Paypal and Palantir Technologies, among others says

He doesn't like his kids spending too much time in front of screens during the week.

He was speaking to New York Times Andrew Ross Sorkin at the Aspen Ideas Festival last week.

In that conversation, Sorkin asked Thiel about the recent announcement from US Surgeon General Vivek Murthy that his office would push for labels on social media platforms warning about the dangers they pose to children's health.

Thiel said he allows his own children just an hour and a half of screen time a week. Thiel's children are young — 3 and 5 years old

BusinessInsider says Thiel isn't the first tech leader to admit that they strictly limit their children's screen time. Snapchat CEO Evan Spiegel said he also limits his 8-year-old's screen time to one and a half hours a week.

BI also quotes Google CEO Sundar Pichai saying earlier he didn't give his middle-school-aged son a cellphone and that all televisions in his home are locked with an "activation energy" that makes watching TV not easily accessible.

Anyway, here is the clip of Thiel speaking with New York Times Andrew Roskin at the Aspen Ideas Festival in the USA, last week.

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