Good morning. Remember how the brokerage CLSA had coined the term ‘Modi stocks’? This was for the stocks that would have gained from Prime Minister Narendra Modi returning to power. Returned to power Modi has, but the stocks aren’t performing as they should. What’s the lesson from this? Read on to know more. 

In other news, banks trying to lure in customers with higher deposit rates isn’t a good thing in the long run. Meanwhile, Google has won an expensive antitrust case.

News break overnight: Ending months of speculation, the US Fed Reserve has cut benchmark rates by 50 basis point or half a percentage point. This is the first interest rate cut over a period of four years, signalling softer inflation and would bring down borrowing costs for consumers and businesses in the coming weeks, just ahead of the US Presidential elections in November.

THE TAKE

It’s Time For Brokerage CLSA To Rename The ‘Modi Stocks’

In a bull market, everything goes, including slapping the prime minister’s name onto a category of stocks as brokerage CLSA India did ahead of this year’s general elections that started in April and ended in June. What was CLSA thinking? Was this the outcome of serious research or an SEO-led clickbait option?

The stocks which the brokerage pulled together were mostly in the infrastructure space that would benefit from public spending. There were also stocks of state-owned or public-sector enterprises. There was nothing wrong except that the bet, even if it was only optical, was on an individual and politician magically pulling all these stocks to great heights in the future. Like nothing else mattered.

The problem is now the tide is turning. A report just out from Bloomberg says the index of the so-called Modi stocks, CLSA’s term, has climbed only 2% as the prime minister completed his first 100 days in office after winning a third term in early June. In contrast, consumer and software stocks have rallied 20% and 34%, respectively. 

That would mean that not only was CLSA drinking the Kool-Aid that it served to the larger world, but was also missing the woods for the trees. There’s no way of knowing whether the brokerage made money either way on other stocks including consumer and IT. It’s possible that it did.

The administration is “turning populist on the margin,” another disappointed-sounding strategist at Jefferies Financial Group Inc. wrote in a note quoted by Bloomberg adding that they expected the government could miss its target on capital spending. Incidentally, this is not to say the Modi stocks are not doing well. They are and are still on pace to outperform the nation’s main equity indexes for the fourth straight year. 

But the index of such stocks had rallied 24% in the first five months of 2024, as the prime minister prioritised building infrastructure capacity while retaining focus on driving efficiencies at the nation’s state-run companies, says Bloomberg. In another sign of turning tides, domestic mutual funds have apparently started cutting their exposure to companies making capital goods in each of the three months since the June 4 election result, says Bloomberg, citing a note by Motilal Oswal Financial Services Ltd.

Foreign funds have also turned net sellers in sectors like utilities, cement, metals and financials in August, according to a Bloomberg Intelligence analysis.

There are a few points to consider in this situation:

First, CLSA was not alone in pinning their hopes on an individual-politician, perhaps they were a little more clickbaity in their proposition. Second, while capital spending may slow down and be replaced by moves to uplift the bottom part of the population — including with expanded insurance schemes and other subsidies — there is nothing to say that capital spend will grind to a halt. A breather might be a good idea.

Third, there was nothing conceptually wrong in the government’s strategy — as a strategy — in putting their weight behind public expenditure to propel economic growth and prosperity. No one is saying that this should be at the cost of public expenditure on education and health for instance but the larger question is how much and how long? Maybe a 8-10 year solid run was good but it is time now to start moderating and balancing out. Whether that would have happened if the election results were different is anybody’s guess.

The final and renewed lesson is that stock markets are mercenary at the best of times and can change tunes overnight. Politicians also know this but somehow often seem to forget. Meanwhile, the stock markets continue to rise. Agree or not, the government of the day has the right to take some credit for it.

But as always, some stocks are in flavour and others are not. And the current wave may be a little different from the last one. Perhaps CLSA will come up with a new term now, if not already.

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CO:RELATION

A Banking Logjam

There is a problem with India’s banks. For some time now, loan growth has been faster than deposit growth, leading to rising deposit rates. While that is good news for savers, a rising cost of funds will not improve margins for the banking sector. At the same time, lending rates have to stay competitive. That dilemma probably explains the relative underperformance of the Bank Nifty in comparison to the Nifty 50 in 2024. Banks need to do something different to break the logjam. 

According to a new paper by the Bank of International Settlements (BIS), an overall credit gap in India’s MSME sector is estimated at INR 20–25 trillion. Banks find it difficult to assess their creditworthiness. As a result, they substitute the lack of information by asking MSMEs to put up high collateral or charge high interest rates. In a speech recently on Financing India’s aspirations, the Reserve Bank of India deputy governor Michael Debabrada Patra said that the MSME sector accounts for 30% of India’s GDP, 45% of India’s exports and 62% of employment in the business sector. That explains the urgency of fulfilling the demand for a more structured and formal credit to MSMEs.

CORE NUMBER

1.49 billion euro

This is the hefty fine tech giant Google avoided by challenging it and winning the case on Wednesday. In 2019, the European Commission started antitrust proceedings against Google for abusing its dominance to prevent websites from using platforms other than its AdSense program for advertisements. The General Court agreed with the EU’s assessment of the case but annulled the fine.  

FROM THE PERIPHERY

—🪧 A week after about 33,000 Boeing factory workers in the US walked out to strike for better-paying conditions, the union said that the aviation giant isn’t taking mediation processes seriously. The International Association of Machinists and Aerospace Workers said that the company was unwilling to address the key issues of wages and pension for calling off the strike. The strike is already impacting the company which has started taking cost-cutting measures such as a hiring freeze and reducing supplier spending. 

—💻 India’s top IT firms are expected to give out salary hikes between 5-8.5% on average this fiscal year, Business Standard reported. This comes even as the sector has been struggling with slow business and layoffs in the last year. So far, Tata Consultancy Services is the only top IT company that has announced average salary hikes of 4.5-7% for FY25. Other companies like Wipro, Infosys, HCLTech and Tech Mahindra haven’t announced hikes yet. Industry experts pointed out that hikes this year could be moderate due to the high increments offered in 2022. 

—💎 India's diamond industry is in crisis, with imports and exports dropping drastically over the past three years, according to the Global Trade Research Initiative. In Gujarat alone, over 60 suicides highlight the financial toll, with defaults, factory shutdowns and layoffs. Despite rising export values, weak demand and competition from lab-grown diamonds are leaving the industry with excess unprocessed rough stones. Rough diamond imports fell 24.5%, and polished exports dropped 34.6%, while the gap between rough imports and polished exports widened from US $1.6 billion to US $4.4 billion.

—🛒 Reverse logistics, once a customer-friendly perk, could cost Indian e-commerce firms US $20-30 billion by 2025, according to Return Prime. The Core reported how reverse logistics is an expensive problem. According to The Mint, returns during this festive season for fashion, home decor and kidswear look difficult. Companies like Flipkart and Amazon are tightening return policies that jump around 30% during festivals, to protect profits by eliminating return logistics costs. Strategies include shorter return windows, fees for frequent returners and offering store credit. Myntra last year started charging Rs 199-299 for frequent returns. sing incomes and demand for affordable fashion, especially from Gen Z.

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