Week ending 5th Oct 2024
# 1 Markets
Both the Sensex and the Nifty posted significant losses on Friday. The correction was fuelled by rising fears over the Iran-Israel conflict, the attractiveness of Chinese stocks due to government stimulus, and concerns over high valuations in Indian equities. Nifty 50 fell by 0.81%, marking a weekly drop of 4.45%, while the Sensex fell by 4.54%, dropping over 3,300 points in four sessions. Foreign portfolio investors (FPIs) withdrew nearly ₹30,613 crore in three trading sessions, including ₹15,243 crore on Thursday, the largest daily outflow in four years. This market decline was the largest weekly drop since June 2022, wiping out ₹16.68 lakh crore in market wealth.
Chinese markets extended a historic rally, further diverting investor attention. Despite this, Indian indices remain up 25% over the past year. Long-term investors continue to fare well, and a market correction may help restore valuations unless the Middle East conflict worsens.
In the U.S., job growth accelerated in September with 254,000 new jobs, easing pressure on the Federal Reserve to implement more interest rate cuts. All the three broad indices – Dow Jones, Nasdaq and S&P 500 ended positive with 0.5% weekly gain on Friday. Bond yields hardened due to Israeli conflict and rise in Oil prices and 10Y Treasury yields ended the week, higher by 20 bps at 3.96%
Foreign portfolio investment in Indian bonds has surged by $7.5 billion following India’s inclusion in the JP Morgan bond index. While inflows continue, RBI conducted its largest auction of a new government bond maturing in 2034, last week, with a coupon rate of 6.79%. This would be the new 10Y benchmark. Current benchmark security hardened and ended the week higher at 6.82% due to escalating west Asia crisis.
# 2 RBI
2.1 RBI directed on Friday
- That group entities of banks shall not be used to circumvent guidelines applicable to the parent for carrying on business activities that are not otherwise permitted.
- Banks will now require prior approval of the RBI to undertake any new activity through a group entity.
- Additionally, no bank can hold more than 30% of equity capital of investee company along with its other group entities.
While Indian laws permit banks to undertake various forms of business in addition to core business of banking, the present directive is aimed at ring fencing banks’ core business from other risk bearing non-core business to provide level playing field to all banks.
2.2 Most ratings firms continued to see an improvement in the credit ratio, or the proportion of upgrades to downgrades, indicating an improvement in Indian firms’ credit quality.
- For CRISIL there were 506 upgrades and 184 downgrades with credit ratio improving to 2.75x in H1FY25 from 1.79x in H2FY24.
- For CareEdge Ratings there were 215 upgrades and 133 downgrades with credit ratio moderating to 1.62 times in H1FY25 from 1.92 times in H2FY24.
- For India Ratings and Research (Ind-Ra) there were 202 upgrades and 62 downgrades with downgrade-to-upgrade (D/U) ratio low at 0.31 for H1FY25 from 0.38 in H1FY24.
- For ICRA, the credit ratio stood at 2.2x in H1FY25 vs 2.1x in H2FY24.
This highlights the sustained strengthening of India Inc’s credit quality, as a result of
benign operating environment, demand buoyancy in select sectors, improvement in risk profiles as assets transitioned from project-stage to operational-stage, and a broader trend in deleveraging. But concerns like rise in unsecured lending and household debt, and stress in export-oriented sectors need close watch going forward.
# 3 SEBI
3.1 SEBI last week in consultation paper has proposed that
- Registered stockbrokers may participate in G-Secs market
- Stockbrokers may offer these services as a Separate Business Unit [SBU] of the entity itself on an arm length basis, to leverage existing infrastructure. The SBU need to be therefore segregated, and ring fenced from securities market.
- Inspection, enforcement, claims etc. for stockbrokers to transact on NDS-OM would be specified under the regulatory framework
Stockbrokers have an extensive outreach with clients and this move is likely to facilitate greater retail participation in G Sec market.
3.2 SEBI last week drastically reduced the trading lot size of privately placed infrastructure investment trusts (InvITs) to ₹25 lakh in a bid to boost investors’ participation and raise liquidity of such investment vehicles. The current trading lot for secondary market trading for privately placed InvITs is set at ₹1 crore. Further, if the InvIT invests at least 80% of its asset value in completed and revenue-generating assets, then the trading lot is ₹2 crore.
3.3 SEBI last week, has introduced several investor friendly initiatives:
- Timeline for rights issues cut to 23 working days from the date of approval by an issuer from the current average of 317 days. Draft offer letter to be filed directly with stock exchange instead of with SEBI.
- Investors in AIFs to have rights and returns proportional to their investments (pro-rata), to ensure fair treatment for AIF investors. This may increase administrative efforts for AIFs.
- specified differential rights to certain investors, without affecting the rights of others could be offered.
- Large-value funds, however, may retain the flexibility to offer differential rights via side-letters, but will need explicit waivers from investors.
- Definitions related to insider trading broadened to include the entire firm where a ‘connected person’ trading in stocks is employed, as well as individuals sharing a household or residence with the ‘connected person’. The term ‘relative’ now includes spouses and their parents, siblings and their spouses, and children and their spouses aligned with IT Act.
- This is a highly retrograde step and operationally challenging as covered in our earlier blog.
- MF Lite – as a new product introduced. One of the key benefits of the MF Lite framework is that it lowers the barriers for new companies – like net worth, profitability and track record to start offering passively managed mutual funds.
- The lowered requirements may enable smaller or newer firms to enter the market and could lead to increased competition in the market and more choices for investors who prefer passive funds.
- Net worth criteria removed, and other Eligibility criteria relaxed to attract more individuals to become registered investment advisors (RIAs) and research analysts (RAs)
- Will enable higher participation of RIAs and Ras.
3.4 SEBI has unveiled a new investment product last week, bridging MF schemes and PMS services, under the existing mutual funds framework.
- While Portfolio Management Services [PMS] often comes with a threshold of Rs. 50 lakhs, this new asset class specifically targets between ₹10 lakhs and ₹50 lakhs to invest. It’s for those who are willing to embrace a bit more risk than traditional mutual funds allow.
- And just like mutual funds, this new asset class will have its structure, but with a slightly different approach. Instead of categorising funds based on the type of stocks like large-cap or small-cap schemes, it will instead be organised based on the different investment strategies fund houses employ.
- Illustratively speaking the investment strategy could be
- Long-Short Equity Funds: These funds profit from both rising and falling markets by going long on sectors expected to rise and short on sectors expected to decline.
- Inverse ETFs/Funds: Designed to profit when the market or index declines, offering a unique hedge against downturns.
- Withdrawal Flexibility: Investors can choose customizable withdrawal frequencies (daily, monthly, or annually) for better liquidity management.
- Exchange Listing: Units of these strategies could be listed on stock exchanges, providing more options for liquidity through trading.
While these strategies offer a middle ground between mutual funds and PMS, they are not a guaranteed path to higher returns. Actively managed funds come with higher costs, raising questions about their ability to deliver better returns.The success of these funds depends on skilled active management, but many actively managed funds struggle to outperform market indices. Liquid alternatives globally, have historically underperformed, averaging less than 2% annual returns in the 2010s.
The new product is well intended and aims to curtail the proliferation of unregistered and unauthorized investment schemes/entities, which often promise unrealistic high returns and exploit investors’ expectations for better yields, leading to potential financial risks.
3.5 SEBI in a bid to protect the interest of small investors has tightened the norms for the equity derivatives (futures and options) segment.
- Requirement for upfront collection of premiums from option buyers. Instead of paying premium at the end of trading day, traders are required to pay the full premium at the time of placing an order.
- the removal of calendar spread treatment on the expiry day of contracts, thus removing margin offsets, earlier available while taking positions in contracts with different expiry dates.
- To control over-leveraging, SEBI has also introduced intraday monitoring of position limits instead of end of day basis.
- Minimum contract size for index derivatives increased from Rs. 5 lakhs to Rs. 20 lakhs thereby making them less accessible for small retail traders.
- Limit weekly index expiries to just one per exchange. The introduction of multiple weekly expiries had increased speculative trading and amplified market volatility.
Since cumulative effect has made F&O trading, capital intensive, speculative trading activity is likely to decrease, particularly among those who are undercapitalized. Likely to impact as much as 60% of overall F&O trades. assuming that those trading weekly don’t move on to trading monthly.
The motivation behind these changes’ stems from the growing concern that retail investors are consistently losing money in the derivatives market.
# 4 Economy
4.1 As per Annual Survey of Industries [ASI] released by Govt. last week,
- Gross Value Added [GVA] of manufacturing industry grew 7.3% at ₹ 22 lakh cr. much lower than 27% in previous year
- Job growth at 7.43% (annualised) in FY 23 reached 12 years high from 1.95% in FY 2008– 18.5 million workers engaged in manufacturing in FY2023 vs. 17.2 million workers in FY 22.
- Lower growth of 4.4% in worker per factory compared with 7.9% in the previous year, reflecting that even as capital investments are picking up, jobs growth is lagging behind.
- Decline in GVA per worker at Rs. 11.9 lakh (down from 25.3% in FY 22 to 13.1% in FY23) indicating lower productivity despite rise in employment
- Wages per worker also saw a slower rise of 5.5% in 2022-23 as against 10% increase in 2021-22.
- The total invested capital by factories in 2022-23 saw a significant year-on-year growth of 10.7% as against 6.8% in 2021-22 depicting a sustained rebound in economic activity post the pandemic.
4.2 As per data released by Govt last Monday,
- The output of eight core infrastructure industries shrank 1.8% in August from a year earlier, the first contraction in 42 months, compared with 6.1% expansion in the preceding month,
- Apart from steel and fertilisers, six of the eight industries—coal, crude oil, natural gas, refinery products, cement and electricity–remained in the negative zone in August.
- With this, core sector growth in the first five months of the fiscal year touched 4.6%, against 8% a year before
- As per HSBC India Index released on October 4,
- Composite output index fell to 58.3 in Sept from 60.7 in August.
- Services activity Index declined to a 10-month low of 57.7 in September from 60.9 in the previous month
- fierce competition, waning export demand and cost pressures weighed on activity; margins in services sector also got squeezed as input inflation outpaced charge inflation.
- Major services firms saw solid job creation, strengthening of business confidence and the slowest uptick in selling prices in over two-and-a-half years during September
- The manufacturing activity index slipped to an eight-month low of 56.5
- tepid exports and a slowdown in output growth as the expansion rate in factory production and sales receded, while international orders rose at the slowest pace in a year and a half.
- Growth was reportedly curbed by fierce competition, cost pressures and changes in consumer preference (i.e., switch to online services).
# 5 PE/VC
5.1 As per Venture Intelligence report released last week,
- PE-VC funds invested $7 Billion (across 205 deals) in India-based companies during the quarter ended September 2024 (Q3’24)
- The investment amount represents a 9% rise over the $6.4 Billion (across 193 deals) invested in the same period during 2023 (and 6% higher in volume terms).
- However, the figure was as much as 20% lower (and 10% lower in volume terms) when compared to the immediate previous quarter (which witnessed $8.8 Billion being invested across 228 deals).
- Q3’24 witnessed 20 mega deals ($100 M+ rounds) worth $5.1 Billion, compared to 17 such investments (worth $4.7 Billion) in Q3’23 and 24 such deals (worth $6.4 Billion) in the immediate previous quarter.