Why Are The Markets Rising Right Now?
Financial stocks are leading the rally right now taking the markets up for the fourth consecutive se
On Episode 697 of The Core Report, financial journalist Govindraj Ethiraj talks to Vandana Hari, Founder & Chief Executive Officer at Vanda Insights as well as Sachin Shah, Executive Director & Fund Manager at Emkay Investment Managers Ltd.
SHOW NOTES
(00:00) The Take
(05:38) Why are the markets rising right now?
(06:13) Gold hits fresh records even as futures are pointing higher
(07:47) Decoding the outlook for the latest earnings season and expectations
(16:10) Why is everyone suddenly talking about a glut in the oil market?
(24:58) Prices of potatoes, onions and tomatoes fall sharply, bringing down the cost of a thali
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 [email protected].
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Good morning, it's Wednesday the 8th of October and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital and Mumbai is set to see the inauguration of two new infrastructure projects, the extension of the South Mumbai Metro line and of course the Navi Mumbai International Airport, the second airport which the city has been waiting for for decades and of course the Metro line which is a newer project but nevertheless will quite smartly link North and South Mumbai in a manner not done all these years.
The Take
LG Electronics 1.3 billion initial public offer was fully subscribed on the first day of bidding on Tuesday. Now this IPO marks the culmination of one phase of a journey that began a few decades ago.
The Koreans came to India, rather Hyundai did first in 1996 at a time when the Indian car market was quite nascent. It launched its first model, the Santro, in 1998. LG India, the consumer durables giant came exactly a year later in 1997.
At that time both Hyundai and LG as brands were barely seen or recognised on the global stage. If they were, it was often not for the right reasons particularly Hyundai whose image took considerable beating in the more advanced auto markets like the United States. But both Korean brands have done something which few international brands or companies have done in recent decades which is to go public and list on Indian bosses.
Hyundai listed a year ago in October and LG will list later this month as its IPO raise now concludes. Most international companies and brands that have listed in India did so decades ago. Some of them were forced to do so by the Foreign Exchange Regulation Act of 1973 which mandated a maximum shareholding of 40%.
Though some companies were ahead like Hindustan Unilever which went public in 1956, Bata in 1973 itself and Nestle in 1978. Other MNCs went public in the 1980s, 90s and after the 2000s it essentially slowed down to almost nothing. Maruti Suzuki, the Japanese auto company was amongst the last major MNCs to list in 2003 though it set up shop in India in 1981 as a joint venture with the Government of India.
So the question to ask actually is why are more overseas companies not listing in India and what does it say about those who are like LG and Hyundai. Now sticking to automotive and noting the departure of companies like General Motors and Ford from India, at least the domestic market, it would appear that not only is India a tough market to do business but going public calls for an additional level of commitment which may not be easy or feasible at an earlier stage. So could one say it takes about 20 to 25 years before a global MNC reaches a level of comfort to take its roots deeper by going public? At least that seems to be the case with both LG and Hyundai.
Many more companies have of course set up shop in India in the last 30 years and more. It is also not a necessary corporate strategy that companies with a large local presence will also list here as well. It is also not feasible that a company that's leaning on India as an offshoring base rather than as a market would list here.
Conversely, it's only brands or companies that have really immersed themselves with Indian consumers, individual or institutional over years that would consider and have done an IPO. Now doing an IPO is of course a tough process. It calls for considerable preparatory work and more importantly a level of disclosures which you're otherwise not obligated to make and these have to be made every quarter and you're now answerable to shareholders in India and of course to Global HQ.
But the advantages to the economy are several. An MNC listing in India like LG and Hyundai is good for the Indian market and economy apart from, as we said, reflecting a more permanent stake in the country's growth story. Willy-nilly, these Korean majors will grow the domestic business and thus the economy and of course repatriate the profits and maybe some royalty too which is also part of the game.
Now there is another reason such listings must be welcomed. MNC stocks and companies have generally scored higher on governance and returns to shareholders than the average and they've also set benchmarks to follow. Their stock prices have reflected both business growth, brand strength, and of course high quality management talent and pools.
Hindustan Unilever or Nestle are good examples when viewed over time and that's a plus for shareholders looking for good companies with strong franchises to invest in for the longer term. India must thus encourage more MNCs to list in India and thus also, as we've said, develop deeper roots. There is a feeling that the current IPO rush, about five billion dollars this month alone, is seeing some good quality IPOs but also not so good ones.
Now that's also part of the course but more blue chip MNC listings are desirable and must be welcomed. The Reserve Bank's move to ease up financing for investing in IPOs appears to acknowledge this or is responding to it implicitly. And then Japanese brands like Honda, Toyota, and Sony also arrived in the mid-90s amongst many others.
As you look back you can see what the opening up of a market, in this case India, after decades of isolation can do in terms of attracting capital, technology, and talent and of course creating wealth for everyone including shareholders in India. We're hopefully on the next stage of this immersion, absorption, and expansion.
And that brings us to the top stories and themes now.
Why are the stock markets rising right now?
Gold hits fresh records even as gold futures are pointing higher.
Decoding the outlook for the latest earning season and expectations.
Why is everyone suddenly talking about a glut in the oil market?
And prices of potatoes, onions, and tomatoes fall sharply bringing down the cost of a thali.
Why Are Markets Rising?
Financial stocks are leading the rally right now taking the markets up for the fourth consecutive session based on guidance that credit growth has started to pick up over the weekend. HDFC Bank reported a credit growth of 10%. Kotak Mahindra Bank reported a loan dispersal growth of 15.8% all of this during the September quarter according to Reuters.
The Sensex was up 136 points to 81,926. The NSE Nifty 50 was up 30 points to 25,108. In the broader markets the Nifty Mid Cap 100 was up 0.4% and the Nifty Small Cap 100 was up 0.3%. And of course gold prices continue to rise hitting a fresh record high on Tuesday just $22 short of the $4,000 per ounce milestone thanks of course to a persistent safe haven demand.
US gold futures for December delivery have already crossed the $4,000 mark at about $4,090 and thus crossed the $4,000 per ounce mark for the first time according to Reuters. Spot gold is or rather was about $3,978 after hitting an oil time high of $3,985 per ounce. Analysts told Reuters that strong ETF or exchange traded fund demand remains key, driven by a sense of FOMO or fear of missing out and eroding trust in traditional safe havens.
They also said that ongoing central bank demand and lower funding costs were also keeping bullion prices high. Bloomberg reported Citadel's Ken Griffin saying investors are starting to view gold as a safer asset than a dollar and that's a development that's really concerning. He told Bloomberg on Monday that we are seeing substantial asset inflation away from the dollar as people are looking for ways to effectively de-dollarise or de-risk their portfolios vis-a-vis US sovereign risk.
So the dollar is of course one part of the and of concern to those who are watching that currency but in general when so many people start buying gold I would also think it's a matter of some concern. The Indian rupee ended mostly unchanged on Tuesday closing at 88.77 against the dollar which was quite close to 88.78 in the previous session according to Reuters figures. So the earning season is upon us.
How are things looking from a market's perspective in terms of expectations given that the last two months have been somewhat disruptive to sales of several consumer facing companies and actually disruptive in both ways to be fair both up and down that is. Also while we are seeing some good quality IPO listings what will this rush that we are seeing right now of about five billion dollars this month do to liquidity. I spoke with Sachin Shah, whole time director and executive director and fund manager at MK Investment Managers and I began by asking him how he was looking at the next few weeks of the earning season.
INTERVIEW TRANSCRIPT
Sachin Shah: So yes, we'll see the earnings season sometime early next week itself. We will see results start and then of course we'll have a short break because of Diwali and then we'll see the resumption of these results again. If you personally ask me, I think July, August, September, it's going to be a mixed bag of results, particularly because if you see from 15th of August, since the announcement of the GST, there was a lot of pause in terms of the consumption demand and which will have its own impact across.
You know, somebody might think, why would financial services have, but I think a lot of retail credit would have also got a bit paused out there. That's one part of it. Second, we've also had some challenges on the tariff side and a lot of uncertainty on the customer's mind and all of that.
Of course, there would also be some bit of pre-buying which would have happened in the first half of this quarter. Overall, it's going to be a mixed back. So more importantly in this earning season, more than the numbers, actually it's going to be management commentary.
Because from 22nd of September till now, particularly for the domestic economy, domestic consumption, domestic demand, how is it playing out from 22nd September when the GST cut has happened, plus we've entered the festival season, you know, basically we are already hearing a lot of good commentary as far as the auto demand is concerned, consumer durables is concerned, as far as the retail finance is concerned. So all of that, how is that fructifying, how is it that really playing out in the first one month or the first 30 to 45 days from 22nd of September, I think that's the commentary that we are more eager to hear because that will really set the ball rolling for not only the third quarter but I would think third quarter, fourth quarter and at least the first half of FY27, effectively four quarters from here on, four to six quarters if I can extend that also. Because that is something that is going to probably lift the market in terms of giving us the earnings growth which we have been not so good for the last 12 to 18 months.
And also in this period, if we see some relief or some certainty or some clarity on the tariff side, that again we are hearing some murmurs now that things might get better from here on.
Govindraj Ethiraj: From what you've talked about, I mean I can sense that the sectors that you've referred to like automotive and retail finance, consumer durables and consumer products, so what are sectors that have not been affected which you feel or could have escaped any earnings pressure in the last quarter or the last few quarters, if there are any?
Sachin Shah: Yeah sure, so say for example, if you look at the domestic pharma business, they are absolutely not impacted and they would continue to do very well. If you see the domestic pharma IPM growth has been good high single digit to low double digit kind of a growth which is a good growth for all the domestic formulation companies. We are also seeing some decent traction on the export side over there in terms of the pricing destruction or the pricing collapse that we had seen on the US generic market doesn't seem to be happening as badly off late so that could be another good thing.
So that's definitely one of the big sectors that I would say. Even I would say in IT services which has nothing to do with the current GST or anything of that sort but there are the challenges in terms of the global uncertainty not only the tariffs or anything but I think the overall uncertainty in the minds of the customers out there can create some of the challenges right. So those are a few sectors but I think the most important is to see how the domestic demand revival is happening.
Govindraj Ethiraj: Right, so you're saying the last quarter or the quarter that went past is more like a staging ground to see how things could pan out in the coming quarters and you seem fairly optimistic. Okay, the spate of IPOs that we've been seeing and October is said to be a record month with over five billion dollars worth of IPOs to be raised and we've got two big ones going on that's Tata Capital and LG. Are you feeling that this is sucking out liquidity from elsewhere, putting pressure or is there enough demand for everyone?
Sachin Shah: If you take a really broader picture I think there is enough liquidity particularly for quality businesses. Of course we are in a very bit of a bull market which is where there is demand even for non-quality IPOs it will always have an impact. For example if you see the last one year broadly if you see Nifty, Sensex or even most of the other indices the returns have been broadly flat right.
If you see the last one year itself the IPO, OFS all of these primary issues or offers for sale from promoters have been in the range of good four lakh crores. So there has been some absorption of money out there so clearly that has some impact in the near term but what we have observed over a period of time is that if there are quality businesses the market has enough depth and breadth to absorb all of it. So important thing is that we should have quality businesses coming up for IPOs we should have businesses which can scale up very large for example if you see some of the new age businesses when they came they got a good run then they all fell but then a few of them which have actually scaled up very well which are on the path to profitability are seeing significant amount of wealth creation for the investors out there. So I think as and when the IPOs which are quality businesses and when we see them scaling up there's enough breadth and depth for more and more liquidity to come into the market.
Govindraj Ethiraj: This has happened in the past as well that if it's a good quality IPO so let's say an IPO from Atata group would be considered good quality is not going to crowd out or not going to get crowded out by poor quality regardless of whether there are many poor quality IPOs good ones will continue to attract capital.
Sachin Shah: Yeah absolutely so what we believe is that the quality of companies which come for the offering have to be good second the growth has to be good and third also important they have to come at a reasonable valuation because some of the times we have seen that some of the businesses get too highly priced and not leaving too much for the investors on the table then those stocks don't really give you great returns and we have seen this multiple times in the recent past in the distant past all of that.
So I think even in the current environment there will always be certain IPOs which are more than perfectly priced so from that perspective that's a little bit of a challenge. The important thing is that we get quality businesses at reasonable valuations.
Govindraj Ethiraj: And yeah I guess price is an important thing which Tata Capital seems to suggest that they've spent a lot of time thinking about. Okay last question so given that we are coming close to the end of the current Sambath I mean not the calendar year and as you mentioned it we've been a largely flat year so far what's your sense for the rest of the calendar if not ahead?
Sachin Shah: Yeah so we are fairly fairly optimistic and I'll tell you where we are coming from right because if you see from the last six to seven months now or in fact now almost eight months from February when the budget was announced till as recent as this September we've had so many positive interventions by the government by the regulator and also if I can add from the nature side so it started with the tax concessions in the budgets then we had a good liquidity ease then we had interest rate cut we've had a very good monsoon and now we've had a GST bumper bonanza right so all of this should actually start playing out beautifully for the domestic demand to come out so our sense is that the earnings growth should be very very strong in the next 12 to 18 months and because of that that will drive the stock market prices and returns.
I would be very comfortable in saying that in the next quarter to maybe four quarters we should see good double digit returns as far as the Nifty or the Sensex is concerned.
Govindraj Ethiraj: Sachin, a pleasure talking to you and thank you so much for joining me.
Sachin Shah: Thank you.
Why A Glut?
OPEC plus oil producing countries opted for only a modest rise to November output thanks to concerns about a potential global glut, sources within that group told Reuters as non-OPEC supply also rises while fuel demand growth slows. So oil prices are hovering around 65 dollars a barrel right now. They're down lower than of course the 82 dollar peak that we've seen this year.
Reuters also quoted analysts saying the market could see a growing surplus in coming months as the summer driving season and northern hemisphere autumn harvest ends and supply grows from OPEC plus as well as non-OPEC producers like the United States, Brazil and Guyana. The Paris-based International Energy Agency has also forecast a 2026 surplus. OPEC's latest available forecasts however suggest a deficit for 2026 if the group maintains output flat at August levels according to Reuters again.
So why is there almost suddenly talk of a glut and what could that mean in terms of demand and supply? I spoke with Vandana Hari, founder of Singapore-based Vanda Insights and I began by asking her what was driving this talk.
INTERVIEW TRANSCRIPT
Vandana Hari: You've picked up a really key topic, pretty much I think that's on the lips of everybody in the market, stakeholders and participants right now. Where is the glut?
It's become a topic of considerable debate. You're asking why? Let's call it why is there an anticipation of a glut?
So a few reasons, I would say chief among them being that a few very credible closely watched agencies have predicted a glut. They have an especially growing glut. The likes of the International Energy Agency, to some extent the US Energy Information Administration in general think that this year was an oversupplied year and then after OPEC plus began unwinding its cuts and then accelerated them.
To some extent these agencies and several other analysts including Wall Street banks have doubled down on those predictions. Now what has made the situation a bit peculiar is that usually you don't have to wait on the edge of your seat so long if there is a glut. There are countless ways, I mean these are very efficient markets we're talking about right, there are many many signals that start appearing all of them pointing to the same thing that there is more supply than demand.
Some of those signals are obviously in the prices and the forward structure and we look at the futures curves in crude and sometimes in refined products. You look at the differentials at the premium or discounts in the physical market that buyers are having to pay and then you look at what stock levels are doing on land and on the sea. Now what has made this curious, the phenomenon of waiting for the glut is that these signals are really either transmitting very very weakly or simply not all of them combining to very categorically say, let alone a glut, glut is an extreme oversupply but that there is even a considerable oversupply in the market.
Govindraj Ethiraj: Right, so if you're saying that essentially the signals are mixed and not clear, what is then the missing factor here which is causing people to maybe reach this conclusion or jump to this conclusion?
Vandana Hari: It's hard to say definitively, Kovind. I can only speculate. It could be that the projections, predictions based on a certain number of barrels of global demand and certain number of barrels of global supply, these are always difficult things to do anyway, right.
There's a possibility that these projections are a bit off. So you know some agencies are calling for as much as three to four million barrels per day, some even more of excess supply. That may not be the case.
Now there may be some excess supply and I would completely anticipate that to be the case with the group of eight unwinding. First the 2.2 million barrels per day of cuts which they did in an accelerated manner, all crunched into six months instead of 18 months and now they've started on a second tranche of phase out of cuts with all of it boosting supply. So yes I would anticipate that perhaps the fourth quarter of going into the first quarter of next year we're going to have an excess of supply but perhaps it's the three, four, more than four million barrels per day ends up being a bit of a miscalculation.
That would be one explanation.
Govindraj Ethiraj: Right. You also referred to seaborn crude and I mean there have been reports that seaborn crude is also high or almost record high perhaps. So why is that the case and what does that signify?
Vandana Hari: So without getting too technical about it, I think it is important for our listeners to be able to differentiate between the various terms that the market uses. Right. There is floating storage within which you have long-term floating storage and short-term floating storage.
The short-term floating storage is usually the one that moves up and down quite a bit and is a good indicator of whether there is excess supply or more demand than supply in the market. So what we're seeing in that story is that yes oil storage levels have grown. So basically this is oil put on ships which is like sitting around for a while instead of simply going from point of supply to point of production to point of consumption.
The other is essentially oil on ships which are basically on their way from the supplier to the consumer. Now that those volumes have grown and some analysts I see are clubbing it all together. I have my reasons for why they might be doing it.
Sometimes you know you sort of wed yourself to a theory, a thesis and then you go looking for data that will prove it. So it might be that but look to my mind how much oil there is on water as a result of ships simply having picked it up from the origin port and on their way to the destination port really tells you that there is more supply yes but also tells you there's enough there are also buyers. There's a market for that oil.
So I wouldn't club all of it together. So be careful when you see figures like about 1.2 billion barrels of oil on water that includes simply oil that has been sold and bought and is simply on its way from the supplier to the consumer. As far as the short-term floating storage oil is concerned, yes it's gone up but look over it's two-year highs.
That's nothing to write home about. So again as I said, is there oversupply? Probably there is but I wouldn't call a two-year high of short-term floating storage a glut situation.
Govindraj Ethiraj: Right and last question. So how's your outlook right now given that we slipped below $65 a barrel last week and we've also of course seen peaks of $82 and mostly oil above $60. So is there any sense on how it's looking for the next few months?
Vandana Hari: Yeah I think OPEC's decision to go with a 137,000 barrel per day hike which is what I call that nominal or token hike in target for November calmed down quite a lot of the bears who were heading for the exit doors last week. So we see that crude has stopped its sort of relentless tumble that we saw last week but at the same time you know compared with like rent almost nine percent down through last week's sell off it has clambered back up just a fraction of it. So maybe about $1.60 out of the $6 decline we saw last week. So what that is telling us is that there may be a temporary floor to the market. The worst fears of the bears or of the market let's say that OPEC plus is going to come out with another flood has not happened. But at the same time I see the upside quite limited.
For a long time now the upside has been mainly driven by supplier risk premium attached to specifically Russia. The US, the western, the G7 and the European Union are still wrangling over their plans for another sanctions package for Russia. I do expect something will come out there will be more sanctions but I think they will steer clear of very very stringent measures.
So I don't expect that to inject any substantial risk premium let alone curbing Russian oil flow. So all said and done then what that leaves us is probably mid to high 60s for Brent is where I see for the remainder of this quarter.
Govindraj Ethiraj: Vandana, it's been a pleasure as always. Thank you so much for joining me.
Vandana Hari: Thank you for having me, Govind.
Thali Prices Are Down
In September, the cost of a home-cooked vegetarian and non-vegetarian thali or a full plate Indian meal declined about 10 percent and 6 percent year-on-year respectively thanks to benign commodity prices according to Crisil.
The decline in the cost of that vegetable was led by a sharp drop in prices of vegetables and pulses and potato prices were down 31 percent because of dumping of stocks by cold storage units. Tomato prices fell eight percent on the back of higher supplies and onion prices have fallen 46 percent because of higher Rabi supplies entering the market and an increase in domestic supplies resulting from the bearish import momentum from Bangladesh which accounts for about 40 percent in India's onion export basket, says Crisil. Elsewhere, prices of pulses declined 16 percent, vegetable oil prices were up 21 percent due to higher demand at the start of the festive season and there's been a six percent increase in prices of LPG or cooking gas cylinders.
The increase in prices obviously ensured that the thalis could not be cheaper. Broiler prices which drive the overall cost of a non-vegetarian thali were mostly steady, only falling about one percent.
