In this edition, we explain why foreign debt investors are flocking to India’s bond market and how it will impact the economy. We also talk about why SEBI is probing Quant Mutual Fund, growing regulatory concern about F&O trades, and all the latest corporate action that you should know about.
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Another week, another stock market high. While the Sensex is just a whisker away from the 80,000 mark, the Nifty has zoomed past 24,000. And as we approach the Union Budget in July, the two indices may just climb to new peaks.
Stock markets are soaring thanks in part to the $3.2 billion that foreign institutional investors have deployed in equities this month after pulling out over $4 billion. But stocks are not the only asset class foreign investors are bullish about. You see, there is significant activity going on in India’s bond market, too, with overseas investors pouring money into this segment as well.
Starting Friday, India’s government bonds became a part of JPMorgan’s widely tracked emerging market debt index. To be sure, the change was announced in September last year. But its implementation this week sets the stage for billions of dollars to flow into India.
But why are foreign debt investors looking at India?
Well, global investors are attracted by India’s high GDP growth, the government’s commitment to keeping fiscal deficit under control, the rupee’s low volatility, and the Reserve Bank of India’s focus on bringing inflation down to its medium-term 4% target. Bond market investors also anticipate to gain from the predicted interest rate cuts that may begin later this year or early next year.
So, what kind of inflows do we expect in the bond market? Since September last year, India’s bond market has received inflows totalling $10.5 billion. This is almost six times the amount received from early 2021 to August 2023.
Market observers say Indian bonds will likely receive $2 billion from index-tracking funds over the next few days. This will be followed by a similar amount each month. Total inflows could top $20 billion over the next 10 months as India slowly reaches its maximum weight in the index.
The growing inflows will have some trickle-down effects, too. For one, the massive dollar inflow will strengthen the rupee. More importantly, it is also likely to keep India’s balance of payments in surplus. That, in turn, will support the Indian economy and give investors another reason to be optimistic. So, here’s a loud cheer to the Indian bond!
Walk Before You Run
As a retail investor, the markets on a lifetime high are not something to be particularly excited about. After all, as the good old Warren Buffet advises every investor: “Be fearful when others are greedy, and be greedy only when others are fearful.”
But many retail investors, always looking out for that quick buck, would much rather follow Gordon Gekko, the Wall Street movie character played by Oscar winner Michael Douglas who espoused “greed is good”. And then some investors chase performance—essentially investing in a fund to build wealth for the future based on its past returns.
The is may have, perhaps, helped balloon Quant Mutual Fund’s assets under management from just Rs 2,400 crore in 2019 to a whopping Rs 93,000 crore currently.
And all of this was for good reason. Quant Mutual Fund, which manages 21 schemes, came to be known for its impressive schemes across various periods within the equity categories. One noteworthy example is the Quant Small Cap Fund. Over the past five years, this fund achieved an exceptional absolute return of approximately 495%. Similarly, the Quant Mid Cap Fund provided investors with a return of 349% over the same time frame.
But as impressive as Quant’s performance was, something was missing at the fund house, or so thinks India’s capital markets regulator, which swooped in on its executives and began probing them on charges of front-running this week.
Wait, what is that you ask?
Well, front-running is a prohibited strategy where fund managers and dealers exploit advanced knowledge of significant trades to profit from price fluctuations. Regulatory bodies strictly monitor and penalize such unethical practices to maintain market integrity and protect investors’ interests.
Quant’s investors were shocked after the Securities and Exchange Board of India (SEBI) initiated a probe against the asset management company. Although few details of what exactly transpired are available, the regulator reportedly identified trading behaviours indicating potential front-running activities by an individual connected to the fund.
In response, Quant has acknowledged the SEBI probe and said it is cooperating with the regulator. But investors are understandably worried and have withdrawn nearly Rs 1,400 crore from Quant’s schemes over the past three days.
Incidentally, Quant is not the only entity being probed by SEBI on charges of front-running. The regulator is also investigating Sanjiv Bhasin, who has been associated with IIFL Securities, for his part in alleged market manipulation through a so-called ‘pump and dump’ scheme.
According to news reports, investigations indicated that Bhasin would direct a private company to buy certain stocks after which he would recommend these stocks on TV. This would generate retail interest and pump up the stock price. And then the private company would dump the stock.
This action comes months after similar investigations were initiated against several other stock market “experts” and TV anchors of business news channels on charges of market manipulation.
So, what should you do as a retail investor? If you ask us, we’d say, don’t be worried, but be vigilant. You must know where you are putting your money, and should always watch your back for signs of any trouble.
Also, if something seems fishy, it probably is, so stay miles away. And do remember that greed is never good and that past performance doesn’t guarantee returns in the future.
More Alarm Bells
The stock market regulator is not just looking into market manipulation. This week, SEBI said that brokers and mutual funds should stop using unregulated financial influencers, or finfluencers, for marketing and advertising campaigns.
Finfluencers are usually unregistered investment advisers or research analysts providing catchy content, information, and advice on various financial topics to their social media followers. The number of these unregulated finfluencers increased as the stock market witnessed a bull rally in recent months.
In a board meeting this week, SEBI also revamped the inclusion criteria for futures and options (F&O) and introduced a fixed price delisting process. This move would weed out stocks with consistently low turnover from the F&O segment. The regulator has also set up an expert group to look into the F&O category and assess three dimensions—market development, investor protection and risk parameters, SEBI Chairperson Madhabi Puri Buch said.
Along with SEBI, the Reserve Bank of India (RBI) has also been closely monitoring high F&O trading volumes. “Options and futures volumes are larger than the nominal GDP of the country. We have discussed this matter with SEBI, and they will address it,” RBI Governor Shaktikanta Das said recently.
The RBI Governor’s comments come when the derivatives volume on the Indian stock exchanges is on a steady rise and the Indian bourses account for more than 80% of the global equity derivatives volume.
Data from Futures Industry Association (FIA), a global trade organisation for the derivatives market, shows that the NSE and BSE occupy the top two positions in terms of the number of options contracts traded.
In April, NSE saw a total of nearly 8.5 billion contracts being traded with options contracts accounting for the bulk of the share. BSE saw 2.2 billion contracts being traded in April. The global volume was 13.25 billion contracts.
Deal Street
Moving on to corporate developments this week, some of India’s companies struck large transactions to tap into new market opportunities, strengthen their business, and maintain their dominance in the wake of growing competition.
This week’s biggest deal was the acquisition by drugmaker Dr Reddy’s Labs of British consumer healthcare company Haleon plc’s nicotine replacement therapy business outside the US for 500 million pounds (about Rs 5,267 crore).
Dr Reddy’s will acquire the Nicotinell brand of nicotine gum, lozenges and patches in over 30 countries across Europe Asia, Latin America, as well as local brand names of the product in Australia, Canada, and New Zealand.
The purchase of Nicotinell, the second-biggest nicotine replacement brand globally, excluding the US, will help Dr Reddy’s Labs build its portfolio of over-the-counter (OTC) consumer healthcare products in dozens of countries.
In another big transaction, billionaire Sajjan Jindal-led JSW Infrastructure Ltd signed a deal to acquire Mumbai-based Navkar Corp to expand its logistics business at an enterprise value of Rs 1,644.03 crore.
JSW will acquire 70.37% of Navkar from its promoters for Rs 1,012.6 crore and will make an open offer to buy up to 26% from public shareholders for Rs 412 crore. Navkar operates container freight stations, a cargo terminal and an inland container depot in Maharashtra and Gujarat. It also has a container train operator license.
JSW Infrastructure is India’s second-largest private-sector port operator after Adani Ports, which too has expanded rapidly through acquisitions over the past few years.
The most interesting deal this week was, however, the purchase of a 23% stake by Aditya Birla Group company UltraTech Cement in India Cements for Rs 1,885 crore.
So, why was it interesting?
Well, it’s because the deal heats up a battle between billionaire Kumar Mangalam Birla with billionaire Gautam Adani, whose eponymous Adani Group is challenging Ultratech’s position as India’s biggest cement maker.
UltraTech has dominated India’s cement market for decades and successfully fended off competition from foreign companies such as Lafarge and Holcim. But Adani’ entry into the sector in 2022 with the purchase of ACC and Ambuja Cement has challenged the domination. Since then, Adani has also bought the cement business of Sanghi Industries and inked another deal earlier this month to buy Penna Cement for $1.25 billion.
Adani has now become the second-biggest player in the cement industry. To protect its turf, UltraTech bought Kesoram Industries’ cement business for $645 million last year and has now bought a large stake in India Cements.
But will it be enough or are Birla and Adani preparing for a bigger face-off? Stay tuned.
Market Wrap
Over the past few weeks, the markets have been going up, up and away. In fact, the bull run in India’s stock markets has been on for more than a year now, with the Sensex having returned 22% and the Nifty doing even better at 25%.
This week, the Sensex rose nearly 3.3% and came within sniffing distance of the 80,000 mark. The Nifty rose more than 3.1%, as it was perched well above 24,100.
The week’s top gainers include NTPC, Dr. Reddy’s Labs, LTIMindtree, Ultratech Cement and Reliance Industries. Other Nifty counters that led the rally were Bharti Airtel, Grasim, Shriram Finance, ICICI Bank and IT majors Tata Consultancy, Infosys and Wipro.
Nifty counters that ended the week in the red were Bharat Petroleum, Titan, Tata Consumer Products, ONGC and Maruti. Other Nifty losers included HCL Technologies, Apollo Hospitals, HDFC Life Insurance, Sun Pharma, IndusInd Bank, Bajaj Finserv and Tata Motors.
Other Headlines
- Monsoon overcomes delay, set to cover entire India on time
- Reliance Jio Infocomm, Bharti Airtel to hike mobile tariffs by up to 25% from July 3
- Bharti Airtel, Jio, Vodafone Idea bid for spectrum worth Rs 11,340 crore
- RBL Bank to raise Rs 6,500 crore via institutional placement of shares
- Infosys CEO Salil Parikh settles SEBI’s charge of lacking controls to prevent insider trading
- Whisky maker Allied Blenders’s IPO oversubscribed 23 times
- Health insurer Niva Bupa plans $360 million IPO
- Banks’ gross NPAs fall to 2.8% as of March from 3.2% in September last year: RBI report
- SEBI considers relaxing some disclosure norms for listed companies
- Canada’s Fairfax sells 9.7% stake in CSB Bank for Rs 595 crore
- Govt allows imports of corn, milk powder, vegetable oils at concessional duty
- Megha Engineering bags nuclear power generation contract worth Rs 12,800 crore
- Adani Group to increase capex to Rs 1.3 trillion in fiscal 2024-25, says CFO
That’s it for this week! Until next week, happy investing!
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