Market Perspective: A weekly article on stock market
Stock markets react to various factors, be it economic, political, natural calamities, social or other. Indian stock markets started weak, dropping 6 per cent from the high on September 21 to 36,642 points on September 24, thanks to SAR, or ‘Suspicious Activity Report’. This is a report that banks are expected to file when they suspect any suspicious payments.
Stock markets fell because the ICIJ (International Consortium of Investigative Journalists) reported that global banks, including HSBC, JP Morgan, Deutsche and others, had, between 1999 to 2017, moved USD 2 trillion of suspicious funds (including terror or drug related). Some of the banks failed to file the SAR with authorities within the 60-day limit for doing so, thus facilitating illegal activities. They did this to earn the transfer fee.
Markets then recovered, with the Sensex ending at 37,340 points, when investors took advantage of the fall to hunt for bargains.
To better appreciate this, consider how vast the financial industry is. Globally, the financial assets under management stood at $378 trillion in 2018.
Global debt is at USD 255 trillion (more than 3 times global GDP), which has risen 40 per cent since the 2008 financial crisis.
In order to be able to service this pile of debt, which is unsustainable, central banks have lowered interest rates on deposits to zero and, in some countries, negative. The depositor has to pay the bank to keep his money. This is ironic because given the penchant of global banks to easily flout laws, and manipulate LIBOR, or SAR rules etc, they can’t really be the safe haven for depositor money to demand a fee for keeping it.
Such low or negative rates are kept for two reasons. One, to encourage consumption, through borrowing, since consumption drives GDP growth of most economies and two, to service the debt pile of USD 255 trillion.
But low/negative interest rates have consequences. For example, 70 per cent of Americans have less than USD 1,000 in savings. Hence, in this pandemic, the priority of President Trump was to open up the economy earlier. As a result, America leads the world in infections and deaths.
The other consequence of low-interest rates is that savers look away from fixed-income investment, which earns nothing, and towards assets such as equity, or gold, in order to earn a return. Thus, when the stock market dropped 6 per cent investors rushed in to buy. Remember, the global pool of financial assets is USD 378 trillion.
Given this huge pool, companies are seeking to raise money. For example, as per the September 19, 2020 IFR magazine, two Chinese companies which were in the US Department of Defence list classified as Chinese military companies managed to raise debt money nonetheless. China National Chemical Company raised USD 3 billion and China Three Gorges Corporation raised USD 1 billion and US institutional investors invested in them.
Some Indian companies/banks have also raised money including Axis Bank and HDFC Bank, through QIP (qualified institutional placement) sale.
The most successful at raising resources is Reliance. It raised huge resources by selling just under 33 per cent equity stakes in Jio to the likes of Facebook, Google, Qualcomm and others.
As per Nutgraf, Jio has become a unique company to build a complete stack including Technology (chips to be developed with Qualcomm), Telecom operator, Device (phone to be developed with Google), Operating System (with Google), Product and Services (Facebook) and Infrastructure (cloud with Microsoft).
The risk factors now are the US elections and any likely conflict scenario with China. Selective buying on dips, and diversification of the portfolio, would be the best course.
Mulraj has been writing a weekly column on stock markets for 38 years. He is India Head for FinanceAsia, a part of Haymarket Media group. The views are personal.
