Unrelenting Foreign Portfolio Investor Outflows
Foreign portfolio outflows are unrelenting and appear to be ignoring almost all positive macro signals
On Episode 746 of The Core Report, financial journalist Govindraj Ethiraj talks to Gautami Gavankar , President Banking Solutions at Kotak Mahindra Bank Limited and Sheetal Sapale, Vice President at Pharmarack.
SHOW NOTES
(00:00) Stories Of The Day
(01:20) Unrelenting FPI Outflows
(03:29) China’s Big Export Push Is Visibly Moving From The Us To Other Countries Including India.
(08:12) Why Buying Jewellery As An Investment Is Not The Best Of Ideas.
(09:43) How Worsening Aqi Levels Has Meant Record Sales Of Anti Asthma And Other Respiratory Drugs.
(15:37) Why Succession Planning Is Important In India’s Family Owned Businesses, For Inheritors And Shareholders.
(24:31) How Harvard Is Investing Your School Fees In Bitcoin And Losing It.
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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 feedback@thecore.in.
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Good morning, it's Tuesday, the 9th of December and this is Govindraj Ethiraj broadcasting and streaming weekdays, usually from Mumbai, India's financial capital, but in transit right now.
Our top stories and themes for the day…
It's unrelenting foreign portfolio outflows.
China's big export push is visibly moving from the US to other countries, including India.
Why buying jewellery as an investment is not the best of ideas?
How worsening air quality levels has meant record or high sales of anti-asthma and other respiratory drugs?
Why succession planning is important in India's family-owned businesses, not just for inheritors but also shareholders?
And how Harvard is investing your school fees in Bitcoin and losing it?
Outflows
Foreign portfolio outflows are unrelenting and appear to be ignoring almost all positive macro signals as we've been discussing on the core report. A quick reminder, in the last quarter, GDP growth was at a six quarter high of 8.2%, retail inflation was down to 0.2% and outflows are pushing the rupee down and preventing the markets from moving towards a higher from an all-time high hit recently.
The rupee ended weaker on Monday as a fall in local shares and a marginal fall in Asian currencies weighed on the currency, even as traders remained cautious on speculative positions, according to Reuters, which added that the rupee closed at Rs. 90.07 against the dollar, down 0.1% for the day. If you recall, it had hit an all-time low of Rs.
90.46 on December 4, largely because of the non-signing of the India-US bilateral trade agreement, which has clearly not happened as was expected to, and of course sustained foreign capital outflow from the Indian stock market. Speaking of the trade agreement, there is no sign of it that it will happen or the US will cut import duties from 50% to 25%, which is the 25% penal tariffs imposed on India's import of Russian oil, though import of Russian oil has dropped considerably. On the other hand, Russian President Vladimir Putin and India's Prime Minister Narendra Modi were exchanging hugs in New Delhi, so there you go.
On Monday, the Sensex and Nifty were down. The Sensex was down 609 points to 85,102. The Nifty 50 was down 225 points to 25,960.
The broader indices were also down. The Nifty mid-cap 100 was 1.8% down. Nifty small-cap 100 was down 2.6% for the day.
Meanwhile, a December 4-8 poll of 41 economists conducted by Reuters has forecast that inflation is measured by the annual change in the Consumer Price Index, or CPI, rose to 0.7% in November from 0.25% in October. The data is going to be released on the 12th of December, and this would mark the 10th straight month inflation has remained under the Reserve Bank's medium-term target of 4%. Analysts told Reuters that the CPI likely stayed underrated in November but did rise from last month because of a broad-based increase in food prices along with a diluting of Bayes effect.
The Big Dump
China's exports to the United States continue to drop, but it's not like the factories there are lying idle. Exports have been ramped up considerably to other countries, including India. Imports from China to the U.S. have dropped 26% year-on-year according to data from Freight Intelligence from Sonar, but trade volumes from China to the South Asia Pacific region have significantly increased according to a report in CNBC, which also quotes Project 44, which tracks supply chain shifts to say that China's trade in 2025 has increased to Indonesia by 29%, Vietnam 23%, Thailand 4.3%, and India 19.4%. So I repeat, according to Project 44, which tracks supply chain shifts, China's trade in 2025 has increased to India by about 19%.
Thanks to all of this, China's trade surplus has crossed $1 trillion for the first time, Bloomberg is reporting. China's exports were up 5.9% from last year, higher than expected, but imports only rose 1.9%, creating a surplus of $112 billion. Overall, China's trade surplus for the first months of the year is 21.7%, higher than the same period last year.
So why is all of this happening? Well, for one, Trump's tariffs caused China's exports to the U.S. to fall by about 20%, but China also cut its purchases of U.S. goods by a similar amount. Duties on China, that is, on Chinese goods coming into the U.S. are still high at about 47.5% according to the Peterson Institute of International Economics quoted by Reuters. So far this year, China's exports to the U.S. have declined about 19% year-on-year, while imports have dropped 13%.
An Extended AI Boom
A capital deluge into artificial intelligence infrastructure is yet to peak, according to Ben Powell, chief investment strategist for APAC at BlackRock, who spoke to CNBC. His point, the sector's pick-and-shovels suppliers from chip makers to energy producers and even copper wire manufacturers remain the clearest winners as hyperscalers race to outspend each other, according to CNBC.
He said that the CAPEX deluge continues, the money is very, very clear, and BlackRock is focused on what he calls traditional picks-and-shovels, CAPEX super boom, which still feels like it's got more to go. AI infrastructure has been one of the biggest drivers of global investment and GDP growth this year, particularly for the U.S., also fuelling a broader market rally. There are other points of impact.
The CNBC report says that grid operators from the U.S. to the Middle East are racing to meet soaring electricity demand from new data centres. S&P Global has estimated that data centre power demand could nearly double by 2030, mostly driven by hyperscale enterprise and leased facilities along with crypto mining sites. In India, just the state of Telangana has $25 billion or approximate commitment from Google, Adani, and Reliance industries.
The impact of these data centres on scarce resources like water is not clear as yet.
India Energy Week segment
Oil prices fell on Monday as investors monitored ongoing talks to end the Russia-Ukraine war ahead of an expected U.S. Federal Reserve interest rate cut this week, according to Reuters, which added that Brent crude futures were down to about $63.18 a barrel on Monday afternoon, while U.S. West Texas Intermediate was at $59.50. Elsewhere, the group of seven countries, the G7 and the European Union, are in talks to replace a price cap on Russian oil exports with a full maritime services ban, according to sources who spoke to Reuters, which could likely and quite possibly cut or rather curb supply from Russia, which is also the world's second largest oil producer.
The U.S. has also ramped up pressure on Venezuela. Part of the Organisation of Petroleum Exporting Countries, or OPEC, including strikes against boats it said were attempting to smuggle illegal drugs, and separate talk of military action to overthrow President Nicolas Maduro. Elsewhere, Chinese independent refiners have stepped up purchases of sanctioned Iranian oil from onshore storage tanks using newly issued import quotas, according to sources.
Love For Gold
Indian households have been overpaying for gold, according to a new research paper from Kotak Institutional Equities. This comes on the heels of data that retail investors have substantially increased their allocation to financial gold compared with equities over the past two months. Now, equities and equity mutual funds are still much higher, but gold has definitely risen, particularly exchange-traded funds.
The paper argues the perceived benefit from the sharp gold price rise may be smaller for Indian households, given that the bulk of household gold purchases are in the form of jewellery. And therefore, the paper also appears to argue that one should not bet too much on the wealth effect for these reasons. Also, it points out that the value of gold is only 60-70% of the jewellery purchase price.
And finally, of course, diamond prices have not done well, and they do form a meaningful part of the jewellery purchase price. On the other hand, gold's investment appeal has negative implications for India's external sector balance, as was quite evident last month when the balance of payments shot up because of hefty jump in gold imports. Bottom line, don't buy gold jewellery as an investment product, because that makes limited sense, according to this report, given that gold prices would need to rise 20-30% more, or rather 25-30% more, for households to break even on their purchases, assuming, of course, the price of precious stones is stable.
So Kodak says essentially that it makes more investment sense to buy financials, that is ETFs or exchange-traded funds, or physical, that's coins, bars, and bricks, all of gold.
High AQI Is Equal To High Drug Sales
Most of northern India and parts of western India, including Mumbai, have been reeling with worsening air quality levels this season, and that's something I can see and testify to as well.
Now, this is something we know too and can literally, like I said, see and smell every day we open the window, if we do. What you perhaps did not know is that sales of anti-asthma, amongst other respiratory drugs, are also hitting new highs, according to a just-out report from pharma industry tracking firm PharmaRack. This includes drugs in the anti-asthma and the chronic obstructive pulmonary disease segments, now the highest in the months of November in the last three years.
Moreover, sales are rising in more parts of the country as pollution levels increase there too. I caught up with Sheetal Sapale, vice president of PharmaRack, who put out this report, and I began by asking her about the rise of respiratory drug sales, particularly in the month of November.
INTERVIEW TRANSCRIPT
Sheetal Sapale: So, respiratory category is a category which usually shows increase in sales in the months of monsoon as well as winters. It's mostly the cough and cold segment which is on relatively higher side in monsoon season but then winter season where asthma conditions flare up because of the climatic conditions, usually you see a pickup in the months of November, December, January every year for this anti-asthma category as well as the histamines category. However, what is little unusual this year is the growth over same period last year.
While the asthma category if you see, it has grown by 10% over last year which is relatively high as compared to the growths of 23 and 24 which were single-digit growths. This year for the first time, asthma category has shown a double-digit growth which is a concern and you know we keep on reading news about air quality index then this type of growth is more or less in line with the air quality problems.
Govindraj Ethiraj: Right, your data also shows that cough and cold market seems to be steady and systemic anti-histamine seems to have grown close to 10%.
Sheetal Sapale: Yeah, systemic anti-histamines are typical products which are used for taking symptoms of allergy, taking care of allergy symptoms like you know watery eyes or sneezing, runny nose. Typically, when there is allergy to pollutants or pollens then you get these symptoms and pollution usually leads to these type of symptoms. That's the reason why we see higher sales of anti-histamines.
Govindraj Ethiraj: Right, and you said anti-asthma and chronic obstructive pulmonary disease have risen very sharply and higher than before and that's worrying. When you say it's worrying, what do you mean from at least from your vantage point?
Sheetal Sapale: See, the diseases do not increase sharply, they aggravate sharply or you know earlier probably I was able to manage my asthma condition with milder doses or you know just being in away from polluting climates but then today the pollution is so widespread that there is no escape for me and I am exposed to the bad air regularly because of which my consumption of anti-asthma products increases. A lower dose doesn't help, I need to go on a higher dose or earlier I had to just take one puff of the medication, today I need to take it probably more frequently. That's the reason why my consumption has increased.
Govindraj Ethiraj: Correct, and what about regional spread? Are you seeing changes or shifts there as well in terms of where in the country these drugs are being sold this time?
Sheetal Sapale: Yes, north zone we have been hearing about air quality index in north zone being bad typically because of the asthma burning in Punjab and Haryana and we have seen the growth of both the anti-asthma products as well as anti-histamines double digit in majority of the states of north zone. Followed by north zone we have e-zone, e-zone most of the states it's relatively cleaner except Bihar and Jharkhand where we have seen double digit growth for both the anti-histamines as well as anti-asthma products. In western zone it is more of your MP, Chhattisgarh and Mumbai.
If you have read in the last two weeks of November air quality index was a problem in Mumbai city. South zone seems to be relatively cleaner in majority of the states except Tamil Nadu.
Govindraj Ethiraj: This is saying not by looking at the AQI data but by sales of these drugs that you track.
Sheetal Sapale: Yeah, it is not looking at the AQI data. AQI data also suggests the air quality condition it's not green but it is not purple or black but in north zone the AQI is purple in majority of the states whereas in the rest of India at least it is in the range of yellow to orange or red not purple.
Govindraj Ethiraj: What you're seeing is therefore a rise in the sales of all three categories of drugs that you spoke of which is somewhat directly linked to rising AQI and this is happening in more parts of India and at a higher level than before. That's really my question to sum up.
Sheetal Sapale: So, it is not all three categories. It is the anti-asthma, COPD and histamines category. Cough and cold it's normal because now the monsoon impact which leads to cough and cold or respiratory infections that has gone down.
So, it's mainly the anti-asthma, the COPD and the anti-histamines category which are showing a relatively higher double digit growth in many of the states which is a little unusual. However, we have also identified certain pockets like MP Chhattisgarh and some more states where this growth has been double digit for the last three years. That is more concerned because that talks about air quality going down in these states for three consecutive years in this month.
Govindraj Ethiraj: Got it. Last question Sheetal. So, how are the drugs being administered?
Are these mostly you know like for example oral syrups, sprays? Is there any shift there in the way these are being administered?
Sheetal Sapale: So, anti-asthma products are mostly your nasal sprays and anti-histamines are usually syrups.
Govindraj Ethiraj: And that you're saying continues as before?
Sheetal Sapale: Yes. Right.
Govindraj Ethiraj: Sheetal, thank you so much for joining me.
Sheetal Sapale: Yeah, thank you so much.
The Next Generation
Shareholders don't pay much attention to succession in India's family-owned businesses unless something suddenly crops up, as it does occasionally. A majority of the leading businesses are also conglomerates and family-owned, like the Reliance, the Adanis, and the Birlas. Now, this is also perhaps the first time in decades where there will be a fair amount of intergenerational transfer of ownership and wealth.
How companies and individuals handle their transition is something we will focus on, but is important for shareholders also to track. I spoke to Gautami Gavankar, president of Banking Solutions of Kotak Mahindra Group, who handles, among other things, transition and trusts for family-owned businesses, and thus interacts with them closely. So, I began by asking her how she was seeing transitions right now, and whether the second and third generation were as committed to staying with the business and growing it as the previous ones.
INTERVIEW TRANSCRIPT
Gautami Gavankar: It absolutely holds true across all generations, across all countries, because as you grow bigger in a family, the desires, the aspirations, the thinking changes of every generation. If I were to ask you, your kids and you, do you think alike on every matter?
Govindraj Ethiraj: Obviously not.
Gautami Gavankar: Correct. So, here you are. Now, here it's only he's going to school or college and you're running your own professional life.
You run your life and he runs his life. But when there are family businesses, they have to think alike, they have to come together and they have to grow. Now, if there are kids and we've seen a lot of families send their kids outside India to study.
There are kids who may not want to come back to India. If the family business is globally diversified, he can become the CEO of US business or the UK business or the Singapore business. But if the family business is not diversified and he does not want to come back to India and there is a brother or a sister who's actually in the business, how does the family well get divided?
So, some of those issues also come. As we've seen families spread across multiple jurisdictions, it is becoming tougher and tougher for family businesses to stay together unless and until they've done some kind of planning to hold it together.
Govindraj Ethiraj: So, the second to third generation, in the examples that you've dealt with, do you find them being conscious of the fact that there are shareholders and their interests have to be protected first before their own interests come into the fore? I mean, unless it has other stakeholders like there are employees, there are people who partners, vendors, suppliers.
Gautami Gavankar: So, if you talk about listed companies, I think SEBI has done a very good job. The regulator has ensured that any transfer of shareholding into the trust has to follow certain regulatory regime which SEBI has put down. I know your question was more in the context of whether the second and third generations are thinking on this line.
The answer is yes because they understand that if there are fights in the family, if the businesses don't do well or if the second and third generation is actually not involved in the business and the professional management is not being put in proper place, then their stock value will go down. So, obviously, there is an understanding that they have to kind of worry and take care of the shareholders and the market cap and the valuations and the public at large. Having said that, if there is no planning put in place by the third generation to ensure that the second and the third generation stay united, you will see businesses that will not continue to thrive because then every generation will think differently.
The best way to manage a listed company and succession plan is try and get the businesses run professionally. So, even if the second and the third generation are not actually in the business and there are many Indian families in this situation. Let's not get into quoting names but internationally and domestically a lot of families have got their businesses run professionally but they still hold the ownership of the company.
So, so far as one is able to kind of get ownership and the management separation or if the ownership and management is the same, then there is a path as to how the succession will happen from the family perspective stroke. If there is no family member running to succeed, how it will happen through the professional management. If that is put in place, I think it will be perfect for the investors.
Govindraj Ethiraj: I'm sure you've seen cases where let's say there are family members who want to take over. I'm talking about the second stroke, third generation and they may not be the best people to do it and it's really time for professional managers to take over. Do you see that transition being managed well or is there a struggle and everyone suffers?
Gautami Gavankar:Some families proactively look at it and manage it. I would not want to say every family is able to manage it because then you will see every company being a part of the listed companies forever.
Govindraj Ethiraj: Let me ask the question slightly differently. So, you know, when we look from outside at company performance or stock price movement and things like that, are shareholders generally aware that this could be an issue which is perhaps slowing things down?
Gautami Gavankar: I think so. I think the analysts, when they analyse a company, look at the transition and the succession plan. Every company will be analysed from who is the next CEO, managing director, how much professional involvement is there in the management so that if the successor is actually the owner, owner successor is not involved, whether the company will continue to perform the way it's performing.
I think definitely it's a very important piece of every analyst when they kind of evaluate a company and not just the numbers because this is how the company will actually perform over a period of time.
Govindraj Ethiraj: We have big conglomerates in India right now where let's say the second generation has been or third generation has been installed within the company. If there is a feeling that the next generation is not fully up to it or not competent enough, who's going to tell the founder or the previous generation maybe who's been more successful in running this business so far?
Gautami Gavankar: I think if the founder has created a company which has got listed, he exactly knows what's right and what's wrong with the company.
Govindraj Ethiraj: But there is a sense of wanting to control, right? Control, keep it within the family and so on.
Gautami Gavankar: Absolutely. So there are two, three ways to look at it. One, the promoter or the patron himself understands that my second and third generation, my second generation is not going to be fully involved or fully competent to run the way I have done it.
So he himself will have to take the steps. Secondly, he may not fully or completely rely upon his professional managers to take that decision and the professional managers may not actually get to that level unless they are very close of course. So advisors will play a big role because every promoter should and if they haven't, think about succession.
So when they start getting in talking to advisors like the lawyers or the consultants or the private bankers, this topic will come up and it is the duty of the advisors to kind of get into this discussion with them. Absolutely the advisors cannot tell them that your kids are not competent and that's not a fair way to do it as well. Maybe there is competence in some other way of doing business but I think this is something which has to be highlighted that you need to have a succession plan whether of your own owner's lineage or of professionals.
Govindraj Ethiraj: Right and you know as things pass on to the second or the third generation and the previous generation let's say steps back, what's your sense on what's the hit rate like? I mean you know if again in your 20-year study of let's say the companies that you work with, how have things worked?
Gautami Gavankar: I've seen the transitions when they're planned well, work very well.
Govindraj Ethiraj: Including the fact that they've selected their own sons and daughters to run the company.
Gautami Gavankar: Because the sons and daughters have been brought up keeping that in mind. They are actually involved in running the businesses. They have worked in the businesses while their parent or the father or the mother has been actually running it.
They've seen how it's been run. So the second generation if has been involved, I think the transition is very well. More important also is to not just manage the transition and the succession of the business but also of the wealth and thus both these things go hand in hand.
A family succession and a business succession. Both have to be thought through and put in place well in advance so that the company doesn't suffer, the investors don't suffer.
Govindraj Ethiraj: You talk about patriarchs and I guess in India and or countries like India the patriarch is the predominant decision maker but there are matriarchs as well. In your experience have you seen a difference in the way the patriarchs and matriarchs deal with this?
Gautami Gavankar: Not really. I think they are passionate of their companies and the wealth and the businesses that they have created. So I don't think they deal with it separately.
There's definitely an emotional quotient which comes in when there's a matriarch but I think they clearly look at who is competent to run my business better and not just because there is an emotional quotient they do they act differently. There is definitely that emotional quotient which comes in. I think what we have seen evolve over the last two decades is getting daughters share in the business or daughters running their businesses.
I think we have seen a lot of evolvement which has happened in this context. There was a time when I think the sons ran your businesses and the daughters got a fair amount of share. We've seen now as we have transitioned in last 10 to 15 years that daughters also get shareholding of companies.
They are also involved in running the businesses so that's also a beautiful transition that we've seen.
Govindraj Ethiraj: Yeah and is that because the daughters are asking for a role or is it because now the parents feel that okay this is a different world we need to divide equally?
Gautami Gavankar: Daughters are very well educated they're involved in the businesses. It's no longer the situation that they just got married and amounts were spent at the time of their marriages and then you know then that's about it. I think the evolution because of the way in the education system and because of the equal treatment being given to the son and the daughter I think there's a lot of evolvement which has happened and thus there is a transition which we see in patriarchs or matriarchs with respect to daughters as well.
Govindraj Ethiraj: That's a good note to end on. Thank you so much for joining me.
Gautami Gavankar: Thank you so much for inviting me.
Harvard And Bitcoin
Imagine as a parent shelling out literally crores of rupees to send your child and student to pay fees to Harvard. What Harvard does with those fees is of course Harvard's problem, but you would not expect them to put some of it into Bitcoin.
Well, a Wall Street Journal investigation says Harvard has lost a lot of money because of its Bitcoin investments after the prices fell recently. Now, to be fair, the amounts are small, less than 1% compared to the size of Harvard's $57 billion endowment, but the fact that a university like Harvard could even dip its toes in a wildly speculative asset is revealing. The Wall Street Journal says, assuming shares were purchased at the beginning of July, when Bitcoin prices were at a low for the quarter, then Harvard would have paid $294 million for shares that are worth about $255 million today.
Another $1.9 million shares Harvard bought in the second quarter before this year's big run-up may have fared better. Harvard is not alone. Other schools, too, have been hit by the drop in crypto prices, though to a lesser extent.
The Wall Street Journal says universities reporting crypto holdings in the third quarter included Brown with $14 million and Emory with $52 million. Still, Harvard's ill-timed bet is a reminder of how Bitcoin has worked its way into the mainstream with institutional investors and how many of them were placing healthy bets on the cryptocurrency after the huge run-up this year, says the Wall Street Journal. So the more fundamental question, of course, is should long-term investors put money into crypto, whether that investor is Harvard or someone else? Well, Jay Hatfield, Chief Executive of Infrastructure Capital Advisors, told the Wall Street Journal, when you're gambling, you need to sell it, not hold it.
