Why World Markets Are Looking For Bad News From Wall Street

A market fall on Friday was blamed on a news report suggesting that there may be increased capital gains taxes on incomes from sale of shares

6 May 2024 12:00 PM GMT
On Episode 285 of The Core Report, financial journalist Govindraj Ethiraj talks to Ajai Chowdhury, earlier co-founder of HCL Tech and now a member of the India Semiconductor Mission.

Our Top Reports For Today

  • (00:00) Stories Of The Day
  • (01:00) Why World Markets Are Looking For Bad News From Wall Street
  • (04:31) Kotak Bank CEO Says He Is Worried About Reputation Because Of RBI Move
  • (07:35) Why Home Loans Have Jumped Dramatically In Two Years
  • (08:56) Where Will India’s Multi-Billion Semiconductor Subsidies Stop?
  • (22:26) Warren Buffett Meets Shareholders At The Annual Berkshire Hathaway Meeting Without Charlie Munger For First Time

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 Are Jittery, Oil Is Down

A market fall on Friday was blamed on a news report suggesting that there may be increased capital gains taxes on incomes from sale of shares.

This is not a new thought and politicians regardless of hues tend to consider it often. More so because capital markets have seen considerable appreciation in recent years.

The specific rumour was that the IT Department would impose uniform treatment for all asset classes.

The Finance Minister was quick to deny this and it is possible she is either not aware of some thinking down the line or it is an active thought in the ministry but only a thought which is why a television channel picked it up.

Any effort to increase taxes on stock market gains will obviously defeat the whole hope of continuity which is also economic continuity apart from the political continuity.

Markets tend to get upset when there is the slightest suggestion of more taxes.

Current tax rates are 15% for short term gains or profits which is less than year and 10% if the shares were held for more than a year, if over Rs 1 lakh.

So stocks staged an about turn on Friday, with the Sensex falling over a thousand points and then closing down 733 points to end at 73,878.

The Nifty50 closed at 22,476, down 173 points.

The BSE MidCap and SmallCap indices declined 0.2 per cent and 0.55 per cent.

Wall Street is actually waiting for bad news, if you look at it or think about it.

Everytime the jobs market is too hot, inflation too high or growth too strong, interest rate cuts by the Federal Reserve become more distant.

The only hope is that one of these factors reverses which could cause the Fed to cut rates or at least start which in turn would make flows into equities stronger, not just in the US but also globally, either directly or as triggers. India is part of the pack that could benefit obviously.

On Friday, stocks jumped after a softer-than-expected April jobs report.

The Dow Jones Industrial Average gained 450.02 points to settle at 38,675.68. The S&P 500 was up and so was the Nasdaq Composite.

Friday’s non farm payroll report showed fewer jobs gained than was expected by economists, said CNBC and the unemployment rate edged up to 3.9%, versus 3.8% in the prior month. Wage figures also came in less than expected, an encouraging sign for inflation.

The primary market will see major offers this week from three companies -- Blackstone-backed Aadhar Housing Finance, healthcare tech firm Indegene and travel distribution firm TBO Tek -- poised to float IPOs aiming to collectively raise nearly Rs 6,400 crore, Business Standard reported which also pointed out that since 2004, there hasn't been a single IPO launch during May in the last four general election cycles.

Meanwhile oil prices were quoting below $83 a barrel over the weekend, suggesting even lower demand expectations that there would be some peace moves in the middle east though there was no outward sign of that happening.

Kotak Bank CEO says he is worried about reputation hit because of RBI move

The Reserve Bank of India's (RBI) regulatory order on Kotak Mahindra Bank has impacted the private lender's franchise and reputation even though its financial impact is expected to be minimal, Reuters reported its CEO Ashok Vaswani who took over in January saying.

Last week the RBI asked Kotak to stop adding clients digitally and issuing credit cards due to gaps in its IT infrastructure.

"The Reserve Bank of India order, obviously, has had an impact both on our franchise (and) our reputation, which does not feel good," Ashok Vaswani told a media briefing in Mumbai on Saturday.

"...we are committed to coming back strongly; that's our number one priority."

The bank will double its efforts, resources and money in addressing IT-related issues, Vaswani said, adding that the bank currently spends 10% of total expenditure on IT.

Kotak is already working with the RBI to appoint an external auditor for IT systems and the process should be completed soon, he said.

Kotak Bank also saw a sudden exit of joint managing director KVS Manian last week, all of which led to a 16% drop in its share price over the past six trading sessions.

Kotak Bank’s CEO was technically right to acknowledge there is a greater reputation impact as opposed to a business impact.

Which is true. For various reasons including the bank’s own competency levels, most people would expect it to get back on track as far as business goes, as did let's say HDFC Bank when the RBI in December 2020 asked the bank to stop issuing fresh cards and cease digital transactions, quite similar to Kotak actually.

A full return to normalcy happened only in March 2022 for HDFC Bank at which point it plunged back into the market with a vengeance.

There is a small nuance here though.

Referring to a reputation impact directly sounds almost like you are standing outside the arena rather than within it.

The thing to do is to own upto the mistake, let's say in this case not having invested in sufficient infrastructure to keep pace with growth or pushing growth without investing in infrastructure.

Owning up to the mistake and then speaking about remedial actions which the CEO did is fine, more specifically, stepping up investment in IT infrastructure and having a proportion of investments.

The context is finer, the company is saying the hit on reputation is more than it is on business.

My next question would be, does that mean you can fix the business but reputation not so easily ?

That is not what I would like to hear from leadership however true it might be.

Home Loans Jump

All the figures we have been seeing from the property consulting firms on shooting housing sales in the big metros particularly are reflecting in RBI numbers.

Sales have of course jumped post Covid at levels and rates not seen before, led by cities like Mumbai and Delhi which are seeing supply and demand for larger transactions as well.

Credit outstanding to the housing sector rose by nearly Rs 10 lakh crore in the last two years to reach a record Rs 27.23 lakh crore in March this year, according to RBI's data on 'Sectoral Deployment of Bank Credit'.

According to the data of the Reserve Bank of India (RBI) on sectoral deployment of bank credit for March 2024, the credit outstanding to the housing (including priority sector housing') stood at Rs 27,22,720 crore in March 2024, up from Rs 19,88,532 crore in March 2023, and Rs 17,26,697 crore in March 2022.

By any stretch, this is a significant jump and possibly in one way good news because these loans are linked to hard assets as opposed to unsecured loans.

India’s Chip Race. How Many Billions Can We Afford?

There is a chip race going on and it's a global one, something we have referred to in The Core Report periodically.

First, let us come upto speed on India.

Construction of three semiconductor plants worth Rs 126,000 crore rupees ($15.2 billion) by firms including Tata Group and CG Power on Thursday has kicked off.

Roughly half of this cost, let's say around $7 billion will be in the form of direct subsidies from the Government.

The Tatas are setting up 2 of the 3 major plants, one in Assam and the other in Gujarat.

Very broadly, chips range from 3 nanometer chip which could be used in the latest iPhones to 28 nanometer mature or legacy chips used for automobiles, consumer electronics and defence.

Chips are now considered akin to defence equipment in terms of sensitivity because breakages in supply chains whether for physical or political reasons can cause havoc in a country’s economy as we saw during Covid where for example, auto production slowed down because chips were not available.

The poser for today is the subsidies race.

Now, back to the world, or the USA where the Chips Act has set aside $39 billion in grants — plus loans and guarantees worth $75 billion — to entice chip companies to build factories on American soil.

And they have already started.

Intel will take $8.5 billion in grants and as much as $11 billion in loans to help fund an expansion of its semiconductor factories. This in turn will drive some $100 billion of investments from Intel at large-scale plants in Arizona and Ohio.

Last month, Taiwan Semiconductor Manufacturing Co, the giant of them all, was set to take in $6.6 billion in grants and as much as $5 billion in loans to help the factories in Arizona.

Bloomberg reported the package will support more than $65 billion in investments at three plants by TSMC in the US, the go-to chipmaker for companies such as Apple Inc. and Nvidia Corp.

There are two questions. First, while India needs its semiconductor capacity for strategic reasons, how much of it can it afford, in a global race with rich countries lavishing subsidies of the kind we just spoke of.

There are other arguments which say India should focus these large sums of money going as subsidies for chips into more basic services like health and education.

I actually feel the more pertinent question is how much and to what extent rather than a binary should we invest or not ?

For this, I reached out to Ajai Chowdhury, earlier co-founder of HCL Tech and now a member of the India Semiconductor Mission and a keen supporter of the Government’s efforts in this direction.

I began by asking him for a status of the projects announced so far.


Berkshire Hathaway’s First Annual Meeting Without Charlie Munger

Berkshire Hathaway’s annual meeting drew thousands of Warren Buffett devotees, including many from India who make it an annual pilgrimage to see the sage of Omaha as Buffet is called.

This was the first meeting without Charlie Munger, Berkshire’s vice chairman and Buffett’s long-time investing partner, who died at 99 in late November.

Meanwhile Berkshire Hathaway Inc.’s cash pile hit yet another record as Warren Buffett held back from big-ticket deals, Bloomberg reported adding operating earnings also rose, buoyed by his collection of insurance businesses.

The firm’s cash balance increased to $189 billion at the end of the first quarter, topping the record it set at year-end. The company also reported first-quarter operating earnings of $11.2 billion, versus $8.07 billion for the same period a year earlier.

As Berkshire’s annual meeting kicked off in Omaha on Saturday, Buffett said that “it’s a fair assumption” that its cash pile will hit $200 billion at the end of this quarter with few opportunities for needle-moving acquisitions on the horizon.

“We’d love to spend it, but we won’t spend it unless we think we’re doing something that has very little risk and can make us a lot of money,” he told the crowd of thousands.

Buffet sold some of its Apple Inc. shares in the quarter, reporting a $135.4 billion stake at the end of March, down from $174.3 billion at the end of the year.

Despite that, Buffett praised Apple, saying it’s an “even better” business than two others it owns shares in — American Express and Coca-Cola, Bloomberg said.

Apple will likely remain its top holding by the year-end, Buffett said. Tim Cook, Apple’s chief executive officer, was in the audience.

Updated On: 6 May 2024 6:00 AM GMT
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