Flatline? or not?
In this edition: Understanding the market's stabilisation, important annoucnements from the world over, an outlook to indian growth and Moti Vaato as always
During the week ending July 28, the markets paused their upward momentum and record-breaking performance of the past four weeks. The monsoon's development, foreign institutional investors' (FIIs') shift to net selling, mixed earnings reports, and interest rate increases by both the European Central Bank (ECB) and the US Federal Reserve all contributed to the week's volatility. The Federal Reserve indicated the possibility of further rate hikes depending on economic data. As a result, the BSE Sensex declined by 0.78%, or 524.06 points, closing at 66,160.20, while the Nifty50 dropped by 0.50%, or 99 points, ending at 19,646.
During the week ending on July 28, the BSE Mid-cap Index saw a gain of 2%, while the BSE Small-cap Index increased by 1%. However, the BSE Large-Cap Index experienced a decline of 0.22%. On the sectoral front, there were notable gains, with the Nifty Realty Index rising by 5%, the Nifty Pharma Index by 4.8%, and the Nifty Healthcare Index by 4.3%. The Nifty Media and Metal Indices also showed similar growth of 3.5% each. Conversely, the Nifty Bank, IT, and FMCG sectors faced losses of 1% each.
In terms of currency, the rupee weakened against the US dollar, falling by 30 paise, closing at 82.25 on July 28 compared to 81.95 on July 21. Foreign portfolio investors (FPIs) continued their buying trend in July, infusing a net amount of Rs 45,365 crore into Indian equity markets. However, the pace of buying slowed down as FPIs turned sellers in the two trading days before the US Federal Reserve meeting on July 26.
The data indicates that FPIs have been consistently investing in Indian equities since March, with a total investment of Rs 45,365 crore in July alone. This marks the third consecutive month where net flows have exceeded the Rs 40,000 crore mark, with Rs 47,148 crore in June and Rs 43,838 crore in May. Over the past three months (May to July), FPIs have invested a total of Rs 1.36 lakh crore in Indian equity markets. Before March, there was a collective outflow of Rs 34,626 crore from overseas investors in January and February.
International Markets
The primary U.S. market indices ended the week up as optimistic Big Tech earnings, economic data, and central bank statements suggested that the U.S. economy may experience a gentle landing. In June, the country's annual inflation slowed significantly, possibly leading the Federal Reserve to consider ending its aggressive interest rate hike cycle, the fastest since the 1980s. The PCE price index rose by 3.0% in the 12 months through June, the smallest increase since March 2021, following a 3.8% rise in May.
During the week, the Dow Jones Industrial Average increased by 0.5% to reach 35,459.09 points, the S&P 500 gained 0.99% to close at 4,582.17 points, and the Nasdaq Composite added 1.9%, ending at 14,316.66 points. Over the course of the week, the Nasdaq climbed 2.02%, the S&P rose 1.01%, and the Dow gained 0.66%, leading the S&P 500 to achieve its highest close since April 4, 2022.
More than half of the S&P 500 businesses reported their second-quarter earnings over the course of the week, with 78.7% of them exceeding analyst projections, according to Refinitiv data. Additionally, Federal Reserve Chair Jerome Powell expressed optimism about the economy, stating that the Fed did not anticipate a recession and did not rule out the possibility of another rate hike, depending on future economic data.
Market Movers
1. India's GDP To Double To $6 Trillion By 2030
Amid concerns of a global economic slowdown and potential recession, Standard Chartered Bank's research report suggests that India's gross domestic product (GDP) is expected to double and reach USD 6 trillion by the end of this decade. This growth would make India the world's third-largest economy. The report highlights that India is undergoing a transition from a low-middle-income country (LMIC) to an upper-middle-income country (UMIC), which is likely to boost domestic and global demand from the manufacturing and services sectors.
While the narrative of India becoming the third-largest economy is well known, the report emphasises that the country's potential transition to an upper-middle-income economy is an underappreciated theme. It predicts that the size of household consumption by 2030 will be comparable to India's current GDP. Moreover, more than nine states in India are expected to have per capita income above USD 4,000 by 2030, compared to only one currently.
The report notes that such transitions in other countries have led to increased demand across various sectors, locally and globally. Additionally, several Indian states are projected to have significantly higher wealth than the national average by 2030, with household consumption expenditure reaching levels similar to India's current GDP.
Key factors driving this positive economic outlook include ongoing reforms, macroeconomic stability, a robust financial sector, corporate sector deleveraging, and increased public spending on capital projects. However, the report highlights the need for swift action to create more employment opportunities and enhance the employability of the young population, especially in the era of artificial intelligence.
2. NBFC Sector In India Sees Significant Changes After HDFC Merger
The Non-Banking Financial Companies (NBFCs) sector in India has undergone significant changes, mainly due to the merger of HDFC and its potential impact on the securitization market. ICRA, a rating agency, has revised the growth outlook for FY2024 to 18–20%, up from the previous estimate of 12–14%. The rise of the unsecured loan segment, which represents a favourable change in the Indian financial scene, is the main driver of the growth surge. This growth is attracting both traditional NBFCs and newer players to explore innovative opportunities in the market.
The absence of HDFC creates a notable void in the credit and liquidity space, benefiting traditional NBFCs with established risk profiles. On the other hand, new-age NBFCs are still in the process of establishing their presence in the capital markets. Instruments like pass-through certificates backed by credible credit enhancements and higher ratings may see increased demand.
SEBI's regulations, providing incentives for private credit funds through the AIF route, and the rising demand for higher-yielding assets also contribute to the changing dynamics and are not solely reliant on HDFC's departure. As the market adapts, different players will navigate and capitalise on the emerging opportunities.
In line with the growth estimates for NBFCs, the securitization market is expected to be robust for the unsecured loan segment, particularly for small enterprise loans and microfinance loans. Over time, the securitization market for personal and consumption loans will also mature and attract more interest from lenders based on the pool's performance, assuming no adverse events.
3. The Centre Formulates In-Principle Approval To Set Up 21 New Greenfield Airports
On Thursday, the Ministry of Civil Aviation officially announced the Center's in principle approval for the establishment of 21 new greenfield airports under the Greenfield Airports (GFA) Policy, 2008.
As per the policy guidelines, any developer, including State Governments, interested in building an airport must identify a suitable site and conduct a pre-feasibility study for the project. This involves submitting a proposal to the central government for 'site clearance' and subsequently obtaining 'in principle' approval.
Out of the 21 new airports, seven of them, namely Mopa (Goa), Navi Mumbai (Maharashtra), Noida-Jewar (Uttar Pradesh), Bhogapuram (Andhra Pradesh), Karaikal (Puducherry), Dholera, and Hirasar (Gujarat), are green international airports.
The development of Hirasar and Dholera airports, with project costs of Rs 1,405 crore and Rs 1,305 crore, respectively, has already been undertaken by the Airports Authority of India (AAI) using its own resources. The financing for the remaining greenfield airport projects is the responsibility of the respective airport developers.
The other 14 airports included in the approval are Shirdi and Sindhudurg in Maharashtra, Kalaburagi, Vijayapura, Hassan, and Shivamogga in Karnataka, Dabra (Gwalior) in Madhya Pradesh, Kushinagar in Uttar Pradesh, Dagadarthi and Orvakal (Kurnool) in Andhra Pradesh, Durgapur in West Bengal, Pakyong in Sikkim, Kannur in Kerala, and Hollongi (Itanagar) in Arunachal Pradesh.
The Airports Authority of India (AAI) and the appropriate airport operators upgrade airports to international status based on variables like commercial viability, traffic demand, and land availability.
Research?
T+1 Settlement Cycle
On January 27, 2023, India became the second country, following China, to adopt the T+1 (trade + 1) settlement cycle. The Securities and Exchange Board of India (SEBI) introduced this new cycle to enhance operational efficiency, expedite fund remittances and share delivery, and facilitate seamless trading for investors in the stock market. This article provides a detailed explanation of what the T+1 settlement entails.
The T+1 settlement cycle requires all trade-related settlements to be finalized within one day from the date of the transaction. For example, if you buy a share on Tuesday, it will be credited to your Demat account by Wednesday. This is a departure from the previous T+2 settlement cycle, where settlements took a maximum of two days from the transaction day.
Prior to 2001, the Indian stock market operated on a weekly settlement system. Subsequently, it transitioned to a T+3 settlement cycle and then further advanced to the T+2 cycle in 2003. The recent move to the T+1 settlement cycle marks another step in streamlining and expediting the settlement process for investors in the Indian stock market.
The implementation of the T+1 settlement cycle is designed to enhance the efficiency and speed of trading in the stock market. By reducing the settlement period from 2 days to just 1 day, it offers significant time savings for both buyers and sellers, leading to increased trading volume.
Moreover, this new system will assist traders in lowering their capital requirements. As margins will be released on the T+1 day and funds will be received within 24 hours of selling shares, it enables easier rolling of funds and stocks in the market. Overall, the T+1 settlement cycle is expected to streamline operations, improve liquidity, and provide traders with greater flexibility in managing their investments.
The new T+1 settlement cycle faced opposition from foreign investors, primarily due to the time zone difference. Foreign investors also raised concerns about the information flow system and foreign exchange issues. One of the main issues cited by these investors was the difficulty they might encounter in hedging their net exposure in India at the end of a day under the T+1 system. They have formally communicated their apprehensions in writing to both the Finance Ministry and SEBI. Notably, in 2020, SEBI had previously deferred the implementation of this idea for the same reason.
SEBI has highlighted several benefits of the new T+1 settlement cycle for the Indian stock market, with safety being one of the key advantages. In addition to saving time, T+1 increases capital flow and lowers capital requirements for collateralizing risks, according to a report released by the regulator.
The rationale behind this reasoning is strong. With a shorter settlement cycle, there are fewer unsettled trades at any given time, resulting in a 50% reduction in unsettled exposure to the Clearing Corporation. The shorter settlement cycles also minimise the timeframe for a counterparty's bankruptcy to impact the trade cycle. As a result, the T+1 settlement cycle is expected to enhance safety and reduce potential risks associated with unsettled trades, contributing to a more secure and efficient functioning of the Indian stock market.
In addition to saving time, T+1 increases capital flow and lowers capital requirements for collateralizing risks, according to a report released by the regulator.
Motabhai Ni Moti Vaato
The market experienced a reversal of gains for the first time in the past five weeks and concluded a week of rangebound movement on July 28 with a negative outcome. Several factors contributed to this sentiment, including mixed Q1 earnings, rising oil prices, foreign institutional investor (FII) outflows, an increase in the US dollar and bond yields, and signals from the US Federal Reserve about the possibility of another rate hike after a 25-basis point increase in the Fed funds rate during the July policy meeting.
Despite these developments, experts remain optimistic and do not express significant concern. They view the recent decline as a natural profit-booking after a substantial market rally and note that the overall market breadth has remained relatively stable. In the coming week, they expect consolidation to continue, and market sentiment will be influenced by factors such as corporate earnings, manufacturing data, global economic indicators, oil prices, and monthly auto sales.
As we enter the second half of the corporate earnings season, over 350 companies are set to release their June FY24 quarter numbers next week. Notable names to focus on include State Bank of India, Maruti Suzuki, GAIL, Power Grid, UPL, Titan Company, Adani Enterprises, Bharti Airtel, Eicher Motors, Sun Pharma, and Mahindra & Mahindra.
The upcoming week will also see the announcement of auto companies' July sales numbers, which are expected to show a 2-10% growth compared to the same period last year. Early indications suggest a sustained recovery in domestic two-wheeler demand in July, with retail sales expected to grow by 8–10% year-on-year, driven by stable demand in urban markets and a gradual recovery in rural areas. Passenger vehicle retails are projected to grow by 5% year-on-year, supported by order book execution and an improved supply chain, while medium and heavy commercial vehicle (MHCV) retails are expected to improve by 5-7% as the CV cycle remains positive.
Market participants will closely watch manufacturing and services numbers, with S&P Global Manufacturing PMI data for July set to be released on August 1 and S&P Global Services and Composite PMI data on August 3.
In India, manufacturing sector activity for June remained strong at 57.8, albeit slightly lower than May's 58.7, indicating robust demand for Indian-made products. Similarly, the services sector's demand remained strong in June, though the PMI dropped to 58.5 from May's 61.2. Other key data to watch out for includes fiscal deficit numbers for June on July 31 and foreign exchange reserves for the week ending July 28 on August 4.
Globally, investors will also keep an eye on manufacturing and service numbers for July. Additionally, the US unemployment rate, non-farm payrolls, and weekly job data will be crucial in guiding the Federal Reserve's decisions for the September policy meeting.
Other events to watch include the Bank of Japan's monetary policy meeting minutes on August 2 and the Bank of England's interest rate decision on August 3, with expectations of a possible interest rate hike of at least 25 basis points to tackle elevated inflation.
The flow of Foreign Institutional Investment (FII) will be a crucial factor to monitor, as there has been a reversal in the flow after several weeks, leading to a downward movement in the equity markets. However, domestic institutional investors (DIIs) have managed to offset this outflow by investing a larger amount, thereby limiting the market losses to a significant extent.
In the past week, FIIs have sold shares worth more than Rs 3,000 crore in the cash segment. On the other hand, DIIs have bought over Rs 5,200 crore worth of shares during the same period.
Another significant concern for investors last week was the sharp increase in oil prices. Given that India is a net oil importer, any surge in crude prices results in increased expenditure to purchase oil, putting fiscal pressure on the country and raising concerns about inflation and economic growth.
Brent crude futures, the international benchmark, continued to rise for the fifth consecutive week with a 4% rally, driven by supply constraints and indications of an improving global growth outlook. Additionally, hopes that central banks may be approaching the end of their policy tightening measures have also contributed to the oil price surge.
Furthermore, there will be significant activity in the primary market next week, with five Initial Public Offerings (IPOs) scheduled to hit Dalal Street.
Word Wise
Clearing Corporation
A clearing corporation is an entity associated with a stock exchange that plays a vital role in managing the confirmation, settlement, and delivery of transactions. It is also known as a Clearing Firm or Clearing House.
Business entities typically raise long-term capital in the capital market, which can be categorised into primary and secondary markets.
In the primary markets, bonds and shares are initially issued without any intermediaries. This market is also known as the 'New Issue Market, since private entities looking to go public offer their shares for the first time through Initial Public Offerings (IPOs). Primary markets are well regulated and ensure transparency in the sale of shares to investors.
On the other hand, the secondary markets deal with securities that have already been issued. Here, prospective investors trade with existing investors as opposed to dealing directly with the issuing company, like in the primary market. The secondary market, often referred to as the stock market, is where the majority of stock trading takes place.
In 2001, the Clearing Corporation of India Limited (CCIL) was established to manage trading, clearing, and settlement of transactions in the secondary stock market. Besides handling stock market operations, CCIL also oversees activities in the derivatives market, government securities, foreign exchange markets, and money markets.
CCIL also focuses on risk management to safeguard investors from significant procedural losses in transactions, particularly in the event of an investor default.
In addition, CCIL addresses liquidity risk, a common concern during the settlement of transactions. To ensure adequate liquidity for both securities and funds, CCIL has established channels for credit from banks. This setup helps compensate for any potential shortfall that may arise due to an investor's default.
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Motabhai.