Indian investors’ interest in market fascinating, see rating downgrade: UBS
Indian retail investors’ interest in stock markets is “fascinating” as they have been pumping money into both the primary and secondary market despite experts cautioning against super-rich valuations, according to UBS.
The Swiss brokerage and financial services firm said that while offshore investors have turned cautious due to expensive valuations, Indian households have been on a buying spree.
The bullish sentiment is not just restricted to direct participation in the stock market by retail investors. Flows from domestic mutual funds have also turned positive after four quarters, it said.
It raised a question mark whether such a herd push can be sustained as net outflows by foreign institutional investors (FIIs) tend to buttress the fact that valuations have run up too high.
In the current quarter (July-September), FIIs have already encashed $1.1 billion on a net basis as against inflows of $800 million and $7.3 billion in the preceding two quarters.
Even as the FIIs are pulling out money, Indian households have been investing heavily in the market and had a net purchase value of $5 billion in equities in the April-June quarter. This has pushed up direct retail direct ownership at a 12-year high, UBS noted in a report.
UBS said that there is not much wiggle room for further positive re-rating of stocks and sectors given the expensive valuations. It added that if low absolute returns continue that could lead to a fatigue in retail flows and stop the locally fuelled momentum. This could be accelerated by the fact that bank deposit rates, which were sliding and had turned retail investors to look at higher returns from other channels, have likely bottomed out.
UBS also said that it projects the GDP growth rate for the Indian economy for the current fiscal year ending March 2022 at 8.9%, below the consensus estimates. The Reserve Bank of India has forecasted a 9.5% GDP growth for the current year, after trimming it from an estimated 10.5% earlier.
In its base case scenario, it expects India’s economic growth to gain momentum from October 2021. This will be due to pent-up demand (largely led by contact-intensive services, especially after more people are vaccinated), favourable external demand (on strong global growth) and higher government spending, UBS said.
UBS said it doesn’t foresee any meaningful rise in corporate investment in the next couple of years. It also expects inflation to average 5.5% in 2021-22. This will keep the RBI from raising monetary policy rates. Central banks typically raise interest rates when inflation rises beyond their comfort levels.
High debt, downgrade warning
UBS flagged that public debt has climbed to 88% of GDP in FY21, from 72% in the previous year, and said the GDP has to grow at 10% on a nominal basis to make it sustainable.
The brokerage house said that any lags in policy execution and implementation of growth-supportive reform to boost sustainable growth could lead to widening macro stability risks.
“In our base case, we foresee a risk of a downgrade in India's sovereign rating by one of the three rating agencies in the next 12-18 months,” it warned.
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How bad loans of Indian banks shot up during Covid-19
India’s banking system recorded an over 50% jump in the stock of bad loans during the 15months of the Covid-19 pandemic, adding to the gross stressed assets in the books, brokerage house Nomura Securities said in a report.
Stressed loans shot up by additional Rs 4.60 lakh crore between April 2020 and June 2021, catapulting the gross pressured loans ratio to 12.6% of the loan book from 8.2% of the total as of March 2020, it estimates.
Of this, the financial system added Rs 3.7 lakh crore in loans due for the previous 90 days on top of restructured assets after adjusting for recoveries and write offs.
This has taken the overall gross NPA and restructured loans of banks and non-banking finance companies (NBFCs) to Rs 13.2 lakh crore.
The report comes at a time when many investors in the stock market have been wary of picking banking stocks as they see a lack of transparency in the state of their loan books. “It would not be too out of place, in our view, to suggest that the entire increase in stressed asset pool is on the March 2020 asset base and stress contribution from incremental lending in FY21 would be rather limited,” Nomura analysts said in the report.
The stress levels in the books of the banks remains much higher although the jump in bad loans of NBFCs is equally alarming. The gross NPAs moved to 13.3% in June 2021 compared to 8.9% in March 2020 for banks.
For NBFCs, together with loans given via the government-sponsored Emergency Credit Line Guarantee Scheme (ECLGS), this more than doubled to 6.7% from 3.1% in the same period.
At a micro level, LIC-controlled IDBI Bank is believed to have the most pain with over a third (36.7%) of its loans under stress. Private-sector lender HDFC Bank, the most valued local lender, is in the best spot with 6% bad loans and ahead of Axis Bank that has 6.8% of loans under stress together with restructured loans.
Among the private lenders, Yes Bank and Bandhan Bank are under the most stress with NPA levels of 20% or more.
State-owned banks have restructured a good proportion of loans under the Covid-19 one-time restructuring schemes, corporate debt restructuring schemes and the RBI’s MSME restructuring scheme.
“Between Mar’20 and Jun’21, state-owned banks’ share in incremental restructuring across all schemes is 78%, and the balance is with private sector banks,” the Nomura report noted.
Sensex today climbs above 57K, Nifty breaches 17K; Indices at record high
Indian stock markets touched new highs on Tuesday, defying a broader fall in Asian markets as China continued to crack down on private companies.
The 30-stock benchmark BSE Sensex today touched a new record high of 57,625 while the Nifty50 index hit 17,153 in morning trade. The indexes fell a tad on profit-taking, before climbing again in intraday trading. The Sensex ended at 57,552.39, up 1.16%, while the Nifty index ended up 1.19% at 17,132.20.
Rise and Rise of Sensex and Nifty
The Sensex index has now jumped almost 120% since crashing to 25,638.90 in March 2020 due to concerns related to the Covid-19 pandemic. The non-stop rally has prompted many analysts to sound a note of caution and warn about a possible correction.
Top Gainer and Loser Stocks Today
Bharti Airtel stock was the top gainer, up 2.5% from Monday after it decided to raise Rs 21,000 crore via a rights issue to strengthen its balance sheet and after founder Sunil Mittal said the company won’t shy away from raising tariffs.
State-run Indian Oil Corp, Adani Ports, Bajaj Finserv and Shree Cement were among the other top gainers on the 50-stock Nifty. Tata Motors, Reliance Industries, Nestle, IndusInd Bank, and Mahindra & Mahindra were the biggest laggards.
Midcap, Smallcap and Sectoral Indices Today
In the broader markets, the BSE MidCap index was 0.7% higher at noon while the BSE SmallCap index gained 0.85%.
Among sectoral indexes, the BSE Healthcare Index was up 1.2% while BSE Metals gained 0.88%. The auto index was flat, weighed down losses in Tata Motors and Mahindra & Mahindra.
GDP grows 20.1% in Q1 but shows impact of second Covid wave
India’s gross domestic product (GDP) grew 20.1% in the April-June quarter of 2021-22 from the low base of last year when the country was under a strict lockdown for almost two months to control the Covid-19 pandemic. The GDP had contracted 24.4% in the first quarter of 2020-21, the deepest quarterly contraction India ever recorded.
The GDP print for the first quarter is on a par with estimates in a Reuters poll of 41 economists, which had projected a 20% expansion. But it was a tad below the Reserve Bank of India’s projection of 21.4%.
According to data released by the National Statistical Office on Tuesday, the real gross value added for Q1 rose 18.8%.
Trade, Hotels, Transport and Communication Services Grew Fastest
Trade, hotels, transport and communication services recorded the fastest growth, at 68.3%. This sector had contracted 48.1% in the April-June period of last year. The manufacturing sector grew 49.6%, bouncing back after shrinking 36% in April-June last year.
While the comparison with year-earlier numbers shows the economy has rebounded strong, the impact of the devastating second wave of Covid-19 is clearly evident. The second wave hit India hard during April-
May this year, leading to several localised lockdowns and hurting business activity. This is obvious from the fact that India’s gross domestic product in absolute terms was Rs 32.38 lakh crore during April-June this year, down from Rs 38.96 lakh during the January-March period.
Another example is Private Final Consumption Expenditure, which indicates household consumption. Private Final Consumption Expenditure as a rate of GDP was 55.1%in the first quarter of this fiscal year compared with 55.4%a year earlier. The silver lining, however, is the increase in Gross Fixed Capital Formation to 31.6%from 24.4%.
IPO flood to continue in September as nearly a dozen firms get ready for share sales
India’s primary markets are already set for a record year with a large number of companies floating initial public offerings (IPO) to take advantage of the bullish investor sentiment. And after a busy August, almost a dozen companies are preparing to hit the market with their share sales in September.
Banking and financial services companies will likely lead the IPO bandwagon in the coming month while a handful of healthcare, chemicals and industrials companies will also launch their offerings to raise more than Rs 12,000 crore.
Sensex and Nifty at New Highs
These IPOs come even as India’s benchmark stock market indexes climb to record highs, with the BSE Sensex racing past the 57,000-mark on Tuesday and the Nifty 50 crossing 17,000.
Vijaya Diagnostics and Ami Organics will start the month with their IPOs opening on September 1. The pathology chain’s IPO aims to raise as much as Rs 1,895 crore while the size of Ami Organics’ share sale is Rs 570 crore.
The banking and financial services companies that have lined up their IPOs include Aditya Birla Sunlife Asset Management Company, Utkarsh Small Finance Bank, Fincare Small Finance Bank, Jana Small Finance Bank, ESAF Small Finance Bank and Arohan Financial. Another company is mortgage lender Aadhar Housing Finance, which had filed draft documents for its IPO in January but has yet to receive regulatory approval.
Other companies that have already received approval from the Securities and Exchange Board of India are low-cost airline Go First (earlier known as GoAir), Shree Bajrang Power &Ispat, Seven Islands Shipping and Shriram Properties.
These apart, Sansera Engineering, Penna Cement, Paras Defense, SupriyaLifescience and Bajaj Energy are also waiting for hit the market with their IPOs.
The bullish sentiment aside, some market watchers paint a picture of caution especially after some companies listed on the bourses in August at a discount. As many as 10 companies listed their sharesin August. However, CarTrade, Aptus Value Housing, ChemplastSanmar and Windlas Biotech made weak trading debuts. This, along with global cues, could introduce slight nervousness in the market despite the gush of liquidity.
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Raghuram Rajan warns US Fed’s slow tapering may keep it behind the curve
Former Reserve Bank of India governor and noted economist Raghuram Rajan thinks that the US Federal Reserve could be moving slower than it should in removing the monetary stimulus it had put in place in the wake of the economic crisis brought on by the Covid-19 pandemic.
Rajan, who in 2013 had said that the Fed had moved too fast in tapering the stimulus, now says that the current crisis is different from the global financial crisis eight years ago, in that this time around there is an “enormous amount of fiscal spending”.
The university of Chicago economist, who also has an IIT-IIM-MIT pedigree to boot, said he is concerned that if the Fed does not fully account for the changed reality, “they may be behind the curve”.
“The Fed thinks it has time to slow-walk the tightening process, especially given longer-term disinflationary forces like aging, automation and globalization,” Rajan said in an interview to Bloomberg Television.
Rajan was the RBI chief from 2013 to 2016, a period that saw the US Fed swiftly remove the economic stimulus, which hit emerging market economies such as India hard, as foreign institutional investors began pulling out hot money from these capital markets.
Rajan’s views concur with those of former US treasury secretary Larry Summers, who also thinks that if the Fed continues to go slow, it will have to act fact later, which could have a destabilizing impact on emerging economies.
Rajan said that even though the Fed chairman Jerome Powell continues to stress on a gradual withdrawal, emerging markets remain cautious about an “abrupt change in stance” from the US central bank.
Although Powell has said that the Fed could begin tapering the stimulus later this year if the US job recovery continues, he has been non-committal on when the pullback might actually begin.