Week ending 26th Oct 2024
# 1 Markets
A month-long slide in Indian stocks intensified Friday, with Sensex plunging for the fifth straight session to crash below 80000 level caused by record selloffs by overseas investors. September-quarter earnings pointing to a definitive slowdown in demand across sectors and rising treasury yields in US prompted large outflows with Nifty settling below to near two and half month lows to 24200. Monthly outflows of FIIs cross Rs. 1 lakh cr. for the first time while DII inflows touch Rs 97000 cr. The decline in the long-short ratio from 80% to 32% along with selling by FIIs indicates continued bearish pressure in the market and may take more time to stabilise. GoldmanSachs, is first foreign brokerage to downgrade Indian equities to ‘neutral” from ‘overweight” citing slowing economic growth and weak corporate earnings.
All the three US Broad indices were flat last week due to fading expectations of higher rate cuts following release of robust data – US Composite PMI rose to 54.3 in Oct. from 54 in Sept signalling solid business activity growth, weekly jobless claim falling by 15000 from the previous week to 227000 on the period ending October 19th. For the same reason, US Bond yields hardened across maturities with 10Y yield closing at 4.23% on Friday.
China’s central bank on Monday said it had cut two key interest rates to historic lows, in the latest move by Beijing to boost sluggish spending and kickstart the world’s second-largest economy. The one-year Loan Prime Rate (LPR), which constitutes the benchmark for the most advantageous rates lenders can offer to businesses and households, was cut from 3.35% to 3.1%. The five-year LPR, the benchmark for mortgage loans, was cut from 3.85% to 3.6%. Back home, pull out by FPIs from sovereign bonds hardened yields in India as well with 10Y yield closing at 6.84% on Friday.
# 2 Banking
2.1 As per ICRA report released last week,
- a steady slowdown expected in credit growth for banks and non-bank financial companies (NBFCs) on account of regulatory measures and tighter funding conditions in the domestic markets.
- incremental bank credit growth to slow down to 12% y-o-y at Rs 19-20 lakh crore in 2024-25, compared to 16.3% previous fiscal at Rs 22.3 lakh crore.
- the high credit growth in the retail segment has potentially resulted in overleveraging and slower credit growth, impairing the refinancing ability of some of these borrowers during the last two years.
- Unsecured loan segments, which have high lending rates or marginal borrower profiles, like microfinance, personal loans, credit cards or unsecured business loans, are already showing a rise in delinquencies, likely to be hit higher.
- Growth in assets under management (AUMs) is expected to slow down sharply to Rs.16-18 per cent in the current financial year from 25 per cent in 2023-24.
2.2 According to analysts at S&P
- Rising delinquencies in India’s MFI sector are expected to increase credit costs to more than 5% in the current fiscal, as risks that borrowers will default, has increased
- Credit costs may ease in next fiscal, but will still stay high at more than 3%, impacting profitability of MFIs
- Return on average assets (ROAA) will fall by 60 to 65 basis points to 3.85%
It is evident that higher cost of borrowings for non-banking finance companies (NBFCs) due to increase in interest rates and higher risk weightage by banks is likely to impact their profitability.
2.3 As per CRIF High Mark report released last week,
- Loan portfolio of MFIs reduced by 2.3 per cent QoQ to Rs 4.32 lakh crore in April-June while NPAs surged.
- There was 31.2 per cent QoQ drop in the amount disbursed in the first quarter of FY25 at Rs 79,000 crore while the number of loans disbursed fell 32.1 per cent to Rs. 1.62 crore.
- Over-leveraging is flagged as key aspect as there was 17.2 per cent increase in the borrowers having more than five active loan accounts in June when compared with the year-ago period, with highest growth seen in West Bengal and Karnataka.
Lenders seem to be preferring higher ticket size loans as the over Rs 50,000 amount loans showed the strongest growth, working against the industry’s sustainable growth models.
# 3 SEBI
3.1 SEBI on Wednesday asked regulated entities (Banks, NBFCs including recognized stock exchanges, clearing corporations, and depositories)
- to terminate any existing contracts with unregistered financial advisers like financial influencers within three months.
The latest circular follows SEBI’s earlier decision of June 27 to bar association with unregistered content creators who offer advice or recommendations or make claims on the performance of any security. This any way excludes associations made through a specified digital platform which has a mechanism in place to take curative action to prevent actions prohibited by EBI.
Since majority of finfluencers have stopped affiliations with regulated entities already, they would not be affected much, anyway.
3.2 SEBI last week strengthened the regulatory framework relating to prohibition of insider trading in units of mutual funds.
- AMCs shall now disclose the details of the MF units’ holdings (above the threshold amount) of Designated Persons of AMCs, trustees and their immediate relatives on an aggregate basis from November 1, 2024, on quarterly basis.
- Threshold amount is Rs. 15 lakhs in one transaction of series of transactions in any calendar quarter and is applicable per PAN across all schemes.
- All employees of the AMC shall refrain from profiting from purchase and sale or vice versa of any security within a period of 30 days from the date of their personal transaction.
It is interesting to note that MF industry has come off age that SEBI has recognised need for insider trading in MF units. This guideline is issued to protect the interest of investors in MF securities and to promote the development of, and to regulate the securities market, though operationally challenging for AMCs to implement.
# 4 Economy
4.1 As per HSBC flash Index release last week,
- India Composite PMI Output Index, combining manufacturing and services, increased to 58.6 in October from 58.3 in the previous month.
- Manufacturing PMI Output Index rose to 60.1 in October, up from 59.8 in September and India Manufacturing PMI stood at 57.4 in October, up from 56.5 in September.
- The India Services Business Activity Index stood at 57.9 in October, up from 57.7 in September
- Business activity picked up momentum in October, defying price pressures
- Jobs continued to grow faster in the services sector.
It is important to note that this seasonally adjusted index that measures the month-on-month change in the combined output of India’s manufacturing and service sectors—was in growth territory (above 50) for the 39th successive month.
4.2 As per CRISIL report released last week,
- The revenue growth of Indian companies for the July-September quarter is estimated to be 5-7 per cent year-on-year (Y-o-Y), marking the slowest growth in 16 quarters.
- The analysis is based on 435 companies that account for almost half of the listed market capitalisation, which reported an 8.3 per cent growth in the April-June quarter.
- The overall earnings before interest, taxes, depreciation, and amortization (EBITDA) for all 435 companies grew by 10 per cent Y-o-Y
Slow growth attributed to stagnant performance in the construction vertical, which accounts for a fifth of India Inc’s revenue, besides a decline in the industrial commodities vertical and subdued growth in investment-linked sectors.
4.3 IMF in its report last Thursday,
- Kept growth forecasts for India unchanged at 7% and 6.5% for FY25 and FY26
- See India as the strongest growing major emerging market economy this year
- See in the coming years scope for even higher growth with more structural reforms.
The 7% growth reflects the expectation of stronger private consumption after a favourable monsoon season that would strengthen rural demand.
4.4 As per SBI report released last week,
- India’s crorepati taxpayers club has increased fivefold to 2.2 lakh taxpayers in Assessment Year (AY) 2024, up from 44,000 in AY 2014, signalling a significant shift in the country’s income dynamics
- ITR filing has increased sharply to 86 million in AY24 as against 73 million in AY22 and could possibly exceed 90 million for AY 2025 by end March 2025.
- There has been a cumulative 74.2 per cent decline in income disparity coverage for those earning up to Rs 5 lakh annually between fiscal years 2013-14 and 2022-23
- For people with income up to Rs 3.5 lakh, the share in income disparity has reduced from 31.8 per cent in FY14 to 12.8 per cent in FY21, signifying share of this bucket group has increased by a sharp 19 per cent income in comparison to their population.
A comparison of disparity in income during AY15 and AY24 shows that there is a clear rightward shift in the income distribution curve, signifying people in lower income brackets are increasing their income to converge towards their share in population. This shows the continuous efforts of Govt are reaching the bottom of pyramid that is leading to increase in income of ‘lower income group’ people.
4.5 As per report released last week by Magic Bus India Foundation and Bain & Co, titled ‘From Aspiration to Action: Building India’s 400 million Workforce’
- India is poised to become a $30 trillion economy by 2047, backed by ambitious structural changes and a focus on innovation, sustainability, and inclusivity
- It outlines a roadmap to double India’s female labour force participation rate (FLFPR) to 70% by 2047 from 35-40% now for the country to reach its $30 trillion GDP target.
- Despite a favourable demographic dividend and supportive policies, India’s workforce projects to add only 110 million women to its workforce, reaching an FLFPR of 45% at 255 million women, by 2047 leaving a gap of 145 million ‘missing women’ who need to be integrated into the workforce
While the challenges confronting rural and urban women are known, India’s growth story is unlikely to play out fully without enhanced women’s participation in the labour force which is below its potential.
# 5 PE VC
Surprising but true!!
India’s PE/VC sector is staring at an embarrassment with 60 out of 100 executives failing in an exam mandated by SEBI last year. The exam, conducted by the National Institute of Securities Management (NISM) – NISM XIX C- is mandatory for one executive per firm to secure or keep their registration.
- Test was introduced to replace the requirement of 5 years of investment experience which was seen as a deterrent for new Fund Managers.
- The new measure to replace experience is an attempt by the regulator to level the playing field and encourage new talent and the growth of the industry.
We may not say that it casts a doubt on their experience or knowledge of the fund industry-more likely that it may have been quite a while since they last prepared or appeared for an examination. Needless to add that this may not have any impact on the quality of investment and returns thereof.