Our goal with The Daily Brief is to simplify the biggest stories in the Indian markets and help you understand what they mean. We won’t just tell you what happened, but why and how. We do this show in both formats: video and audio. At the end of every week, we will curate the biggest stories during the week and publish a weekly brief, and here’s the first issue.
Check out the audio here: Spotify and Apple Podcasts
And the video is here
Today, we look at 5 big stories:
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Madness in thematic and sectoral mutual funds.
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RBI’s new guidelines on interest payments that could hurt banks and NBFCs.
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Uttar Pradesh makes hybrid cars more attractive
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China stupidly bans short-selling
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After a decade of underperformance real estate is booming.
Madness in thematic and sectoral mutual funds.
Thematic and sectoral mutual funds have seen a significant rise in popularity since the second half of 2020, coinciding with a raging bull market. While bull markets often lead to exciting and sometimes irrational behavior in the market, the surge in inflows to thematic mutual funds and ETFs stands out as both fascinating and concerning. Thematic funds focus on specific market segments such as defense, healthcare, and auto, making them highly volatile.
Bull Market Behavior and Inflows
- The ongoing bull market has driven investors toward high-risk, high-reward opportunities. From January 2022 to June 2024, thematic funds have attracted massive investments.
- Sectors like real estate, infrastructure, and commodities have historically underperformed the Nifty since 2008. Despite this, the allure of high returns during bull markets leads to increased inflows.
Thematic Fund Mania
- The number of thematic schemes increased by nearly 50% between January 2022 and June 2024. This surge is reminiscent of the closed-ended fund craze of 2006-07.
- Motilal Oswal’s Defense Index Fund: Launched in June 2024, it collected Rs 1,676 crore during its NFO period, showcasing the intense interest in thematic funds.
- In the first half of 2024 alone, thematic funds raised Rs 33,670 crore.
- HDFC Defence fund, which launched in 2023, stopped accepting fresh SIPs due to a significant rise in defense stocks, which surged between 100% to 700% in one year.
- For defense stocks to justify their current prices, they would need to achieve implausibly high earnings growth.
Risks and Warnings
- Thematic funds can experience rapid gains but often do nothing for extended periods.
- Investing based on historical performance is like driving while only looking in the rearview mirror.
RBI’s new guidelines on interest payments that could hurt banks and NBFCs.
The Reserve Bank of India (RBI) has introduced new guidelines that are set to impact banks and Non-Banking Financial Companies (NBFCs) significantly. These changes focus on when interest payments should begin, aiming to make the process fairer for borrowers but potentially reducing profitability for lenders.
Understanding Loan Interest Payments
When you take out a loan, the process generally follows these steps:
- You apply for a loan.
- The bank reviews your documents and sanctions the loan, providing a sanction letter detailing the loan amount, repayment period, and interest rate.
- You review, sign the sanction letter, and return it to the bank.
- Additional paperwork and the signing of the loan agreement take place.
- Finally, the bank disburses the loan amount to you. For loans like home loans, this can happen a few months after the initial sanction.
Traditionally, you would expect interest to be charged only after the loan disbursement. However, some lenders began charging interest at earlier stages, such as right after the loan sanction or when a check was signed, not when the funds were given to the borrower. This practice allowed banks to collect extra interest, which the RBI deemed unfair.
RBI’s New Circular
In April, the RBI issued a circular instructing banks and lenders to charge interest only once the funds are released to the borrower. This change is excellent news for borrowers, as it prevents them from paying interest on money they haven’t received yet.
Impact on Banks and NBFCs
- With interest starting later, lenders will see a dip in their profitability in the June results.
- The difference between the interest they pay for funds and what they charge borrowers will likely decrease, putting further pressure on their margins.
- As we discussed last week, banks are already in fierce competition for funds, and this new rule adds another layer of challenge.
RBI’s Broader Regulatory Crackdown
This change is part of a broader effort by the RBI to maintain monetary stability and address concerns over new financial risks. Over the past few years, the RBI has tightened regulations on various aspects of banking and financial services, including:
- Stricter know-your-customer requirements.
- Regulations on how and when interest is charged.
- Rules on the timing and transparency of loan disbursements.
- Oversight on collaborations between banks and fintech companies.
Since the beginning of this year, the RBI has taken action against 161 entities, highlighting its rigorous approach. For instance, it banned Kotak Mahindra Bank from adding new customers due to IT issues and imposed severe restrictions on Paytm Payments Bank.
Uttar Pradesh makes hybrid cars more attractive
The Uttar Pradesh government has made a significant move to encourage the adoption of eco-friendly vehicles by waiving the road tax on strong hybrid electric vehicles until October 2025. This policy aims to make hybrid cars more affordable and attractive to consumers, aligning with India’s broader goal of reducing pollution and combating climate change.
With EV penetration in India is barely 5%, such initiatives are crucial for sustainable growth and the gradual shift away from internal combustion vehicles.
- UP typically charges an 8-10% road tax on petrol and diesel cars. The waiver could make hybrid cars up to 10% cheaper, potentially saving buyers up to 3.5 lakhs.
- This reduction in cost is likely to make hybrid vehicles much more appealing to consumers.
- RC Bhargava, Chairman of Maruti Suzuki, emphasized the need for alternative technologies beyond electric cars to achieve zero emissions and reduce oil dependence. He highlighted the role of CNG, hybrids, biogas, and ethanol.
- In FY24, around 90,000 hybrid vehicles were sold in India, making up about 2% of total car sales. Major manufacturers include Maruti, Toyota, and Honda.
- The tax waiver is expected to significantly boost hybrid car sales in UP and could inspire similar policies in other states.
China stupidly bans short selling
Just a few years ago, China appeared to be on a strong economic trajectory. However, recent developments have made it a tricky place to invest. Several issues have contributed to this downturn, including overinvestment, low domestic consumption, and a heavy reliance on real estate. As the Chinese economy grapples with these challenges, the government has taken steps that may not address the root causes, such as targeting short-sellers in the stock market.
Key Issues in China’s Economy:
- China has invested excessively to maintain high growth rates, even when investments were unproductive.
- Suppressed wages and minimal spending on social welfare have prevented China from becoming a consumer-driven economy like the US, leading to a heavy reliance on exports.
- Significant investments in real estate created a bubble, which burst, causing people to lose their savings and leaving construction companies in debt, spreading economic gloom.
- Chinese companies have seen no earnings growth, and the stock market has lagged behind global markets over the past five years.
Government Interventions and Their Impact:
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To prop up the stock market, state-owned companies have been ordered to buy stocks. A state fund supposedly bought $41 billion worth of blue-chip stocks in Q1 2024, yet the market continues to decline.
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The Chinese CSI 300 index posted its seventh straight week of decline, wiping out a trillion dollars in value, while the Hong Kong stock exchange also saw significant drops.
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In an attempt to manage the market downturn, China reduced the leverage for short-sellers and prevented the state-owned China Securities Finance Corp. from lending shares to them. This move is seen as a PR stunt since short-sellers constitute only 0.05% of the market’s value but play a crucial role in market stability by addressing overvaluations and fraudulent practices.
Looking Ahead:
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Investors are closely watching the Third Plenum meeting, starting Monday, where top Chinese policymakers will convene to make significant decisions. This meeting could indicate whether China will address its fundamental economic issues.
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China’s approach mirrors recent actions by South Korea, which made short-selling punishable by life imprisonment. Research indicates that such measures can be dangerous, potentially leading to market crashes when bad news finally emerges due to a lack of downward pressure from short-sellers.
After a decade of underperformance, real estate is booming.
The Indian real estate market is experiencing a resurgence after a decade of sluggish growth. Knight Frank published a report for the first half of 2024 looking at the trends in residential and commercial real estate in 8 major markets. Here are some highlights:
Residential Real Estate Market
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Sales volumes have grown by 29% since 2020, hitting a 10-year high in 2023 and an 11-year high in the first half (H1) of 2024, with an 11% year-on-year increase.
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There’s a shift towards premium properties. Houses priced above Rs 1 crore make up 41% of sales, growing by 51% YoY in the first half of 2024.
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Sales in the Rs 50 lakh to 1 crore and below Rs 50 lakh categories dropped by 8% and 6% YoY, respectively. This points to economic distress among these segments of the population.
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Overall inventories of unsold houses grew by 3% YoY, with a 27% increase in the Rs 1 crore+ category. However, sales velocity remains strong so high inventories are not a cause of concern.
Commercial Real Estate Market
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Commercial real estate sales volumes hit record highs in 2023 and continued strong in H1 2024, registering a 33% growth in transactions, the highest ever for a half-year period.
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Leasing by Indian Businesses increased by 35% in H1 2023 and 41% in H1 2024, showing strong expansion.
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Foreign companies leased 48% more space in H1 2024.
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New commercial project completions are subdued, leading to low inventories and rising rents in key markets.
