Chief Economist at the National Stock Exchange of India
No conversation on conflict zones across the world can afford to ignore the Israel-Palestine issue. The terror attack on Israel on October 7th brought its unresolved nature back in into the limelight, after nine years of relative calm. Two weeks into the episode, a protracted war seems inevitable, as are its humanitarian consequences. Rational thoughts are needed in an increasingly divided world and while history points to clues, easy answers may not be easy to find. That said, the only way there might be through dialogue and cooperation.
For global markets though, rising interest rates in the US remain a bigger fear than rising uncertainty in the Middle East, with implications for capital flows that have been visible in local markets as well. A stronger-than-expected US economy and undiminished inflationary concerns translate into a higher-for-longer view on rates, supported with increased issuance from the US Treasury.
The sell-off in global equities intensified in September, as concerns that a strong US economy will keep interest rates higher for longer weighed on the global risk appetite. Further, the ongoing weakness in the Chinese economy and stress in the property sector added to the dampened sentiments. Developed equities (MSCI World Index) fell 4.4% in September (YTD: 7.2%, As on October 20th , 2023), while Emerging equities outperformed with a marginally lower loss of 2.8% (YTD: -3.2%). Accentuated geopolitical tensions following the Hamas attack on Israel early this month that culminated into a full-blown war has added fuel to the fire, resulting in riskier asset classes remaining on sidelines. Gold—considered a safe-haven asset and a good hedge against currency devaluation in times of uncertainty and geopolitical instability—has risen by 7.5% in October thus far.
Notwithstanding an unfavorable global backdrop, Indian equities outperformed its emerging as well as developed counterparts and ended the month with modest gains, benefiting from a strong and steady macroeconomic landscape. The benchmark Nifty50 Index rose by 2% in September (YTD: +7.9%), aided by strong domestic participation by mutual funds and retail investors that more than made up for foreign capital outflows. Interestingly, small, and midcaps continued to rally, ending the month 3.8% and 4.1% higher respectively.
In terms of market activity, the average daily turnover in NSE’s cash market segment rose for the fifth month in a row to an all-time high of Rs 835bn in September. Individual investors remained the dominant player with a 35% share of overall cash market turnover in this fiscal year, even as it has come off from the post-pandemic high of 45% in FY21. Their share of the equity derivatives segment turnover was much lower but steady at about 27% in FY24, with proprietary traders taking 59% share.
Even as the retail share in overall cash market turnover has been tapering, the influx of new investors and consequently higher participation in terms of number of active investors1 has gathered pace over the last few months. New investor registrations at NSE rose to a near 20-month high of 1.6m in September, with the overall unique registered investor base reaching 8 crores by September-end. Interestingly, the addition of 1 crore to the investor base took just eight months. In terms of activity, the number of active investors in NSE’s cash market segment crossed 11m in September for the second time ever.
Global debt sold off sharply in September, as a resilient US economy, persistence of global inflation way above target levels and a hawkish rhetoric by most central banks weighed on investor sentiments. The increase in yields was far more pronounced at the long end, reflecting the impact of fading concerns of a recession, and expectations of rates remaining higher for longer. Indian debt outperformed, thanks to the announcement of India’s inclusion in JP Morgan Emerging Market Bond Index, resulting in yields remaining fairly stable during the month, only to harden in October amid global sell-off and hawkish RBI policy. Rising US bond yields and strengthening dollar continued to weigh on EM currencies including the INR, that rose to a record low level last month. That said, the INR has remained one of the most stable currencies, as reflected in relatively lower annualized volatility and falling forward premia.
Our Story of the Month explores ownership trends and patterns in NSE listed companies since 2001. The analysis shows a steady pick-up in FII share over the last three quarters ending June 2023, corroborating with strong foreign capital inflows during this period. The share of domestic mutual funds dropped marginally from a record high in FY23, as heavy redemptions negated the impact of sustained inflows via the SIP route. Retail ownership of the NSE listed space remained steady in the June quarter amid net outflows.
On the macro front, a double-digit growth in industrial production in August, persistence of Manufacturing PMI well within the expansion zone, front-loaded capex spending by Centre and states and improvement in business expectations to pre-pandemic levels point to resilient manufacturing activity and upbeat business sentiments. Rural consumption demand, that was not out of woods yet from the pandemic-induced woes, now faces headwinds from erratic monsoon. This is reflected in rising demand in the rural job guarantee scheme (MGNERGS), that remains much higher than pre-pandemic levels. On the external front, while weak global demand is hurting India’s exports, continued dollar strengthening amid rising US bond yields and accentuated global risk-off environment are weighing on EM currencies including the INR. On the positive side, inflation eased sharply to 5% in September, beating market expectations, even as a rate cut possibility has advanced to the second half of next year after a hawkish policy.
The world we live in today seems increasingly fraught with uncertainty, with an unending series of seemingly unanticipated events and crises following each other. We have had the Syrian crisis for the past ten years, Brexit in 2016 followed the Sino-US trade wars. The Abraham Accords, US leaving Afghanistan were steps forward, while oncein-century event like the pandemic, followed by the Russia-Ukraine war, then global inflation and rates rising to fourdecade highs, in line with an across-the-board rise in geopolitical conflicts, not so much. Israel-Palestine today follows Nagorno-Karabakh earlier this year, Sino-Indian border conflicts in 2020.
A multipolar globe prefers protectionism, resulting in inward-looking policies, when the need of the hour is cooperation. The IMF finds that any change in the status quo in global value chains towards either ‘friendshoring’ or ‘reshoring’ models would lead to significant drags in growth from current levels. The G20 Delhi Declaration acknowledges the headwinds to global economic growth and stability, and the myriad other challenges facing the world today, and resolves to strengthen international economic cooperation that can be the only way towards sustainable, balanced and inclusive growth. In other words, the need for working together is the highest when the world around us seems to be getting more fragmented. That might be the only way to face the bigger challenges like climate change.