Small Caps Are Powering Back

On Episode 277 of The Core Report, financial journalist Govindraj Ethiraj, talks to Ajit Dayal, Founder of Quantum Mutual Fund.

Our Top Reports For Today

  • (00:00) Stories Of The Day
  • (01:00) Small Caps Are Powering Back In Sign That Confidence Levels Are Rising Again
  • (02:39) Gold Prices Take A Big Knock But Macro Demand Indicators Still Strong
  • (07:01) India’s Business Activity Grows At Fastest In 14 Years
  • (08:05) Adani Wants To Settle An Allegation With Sebi Which It Denied
  • (09:57) Apple China iPhone Sales Crash, India Matters More
  • (11:39) Index Hits 75000, Is It Safe To Invest At New Peaks?

NOTE: This transcript contains only the host’s monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.

Broad Markets Steady, Small Caps Are Zooming

Indian equity markets stayed range-bound on Tuesday, giving up most of their gains in the fag-end. The S&P BSE Sensex settled the day at 73,738, up 89 points while the Nifty50 closed at 22,368, up 32 points.

Bharti Airtel, Tata Motors, HCL Tech, Maruti Suzuki, Nestle India, NTPC, HUL, Asian Paints, and Titan Company supported the benchmark indices today as they added between 1 percent and 3.4 percent. 

We have not spoken of mid and small caps for a while, except to acknowledge the fact that they were already bouncing back after the February and March fall induced by some regulatory noises.

Well now that the markets have recovered from or adjusted to the twin factors of middle east tensions and shifts in capital flows because of high US interest rates, they are back on the run.

On Tuesday, the BSE Smallcap index was around 46,426, inching back to the record high of 46,821.39 touched on February 7. 

In percentage terms, the index has recovered 14 per cent from its low of 40,641.67 hit on March 13.

But here is the amazing bit.

Some 18 stocks from the index were locked in their respective upper circuits with only buyers seen on these counters. 

The list includes Tejas Networks, Lloyds Enterprises, Shakti Pumps, Transformers and Rectifiers (India) (TRIL) and Inox Wind Energy.

Which obviously means that investors are still hungry for value stocks, in price if nothing else.

And of course funds are still flowing into the stock markets.

Gold Takes A Hit, All Signals Are Still A Buy

Gold is referred to as a safe haven asset. This is where you run to when the world in general or specific looks shaky.

Prices have risen along with middle east tensions and conversely with the prospect of falling interest rates.

The theory once again is that if interest rates are low, on debt or bonds, then gold offers better capital appreciation though it does not offer any interest itself.

Tensions have abated for now though they are still lurking in the background. The other reason gold prices were rising is because of insatiable demand from countries like China where the Government and consumers were and are both buying.

The reason is a little different here. Countries like China and for that matter India want to reduce their dependence on dollar deposits they hold and in both cases promote and propagate their own currency as a reserve currency.

That is of course a long journey.

To return to the present, gold prices saw their biggest fall in almost two years on Monday of around 3%, falling toward $2,300. 

As we mentioned in The Core Report in Monday’s edition, both Iran and Israel are playing down their attacks on each other, obviously because of severe backchannel pressure to do so.

Bullion is still up about 16% since the middle of February, says Bloomberg, adding gold prices have risen despite advances in the dollar and Treasury yields on signs the Fed will delay its much-anticipated pivot.

The question is of course what does this all mean for gold prices going ahead ?

It’s tough to comment on the margins since that is best left to experts. 

But apart from the major signals on interest rates or some conflagration in the middle east which can send prices up or down, there are no clear signals except for one thing.

Which is the central bank buying we referred to and that seems to be a constant that is different this time around, particularly with China. 

Incidentally, silver is also dropping, as it has been following gold up and now down, though again, demand for silver is driven by some independent factors, like electronics industry growth, including battery and the overall renewable space.

So it is quite interesting how a multitude of factors are driving prices of the most critical commodities in the world and they all seem to be moving in a somewhat linear manner.

Which brings us to oil.

Oil prices have edged up again after dropping to $86 a barrel, a surprise drop. It is currently quoting at $86.56 reflecting a relatively risk premium still priced in.


India’s sugar consumption this year is poised to hit a record high as demand during the peak summer season gets a boost from heat waves and the mobilisation of millions for elections in the scorching temperatures, Reuters is reporting.

Higher consumption would lift local prices and boost margins of sugar producers such as Balrampur Chini, Shree Renuka Sugars, Bajaj Hindusthan and help them in making cane payments on time to farmers.

Consumption of cold drinks and ice cream, and as a result demand for sugar, rises in India during summer months but this year demand is above average as heat waves and election rallies boost consumption of ice-cream and soft drinks, a senior official at Balrampur Chini Mills told Reuters.

Speaking of weather and food… 

Extreme weather events along with prolonged geopolitical tensions could pose a risk to India’s inflation trajectory, even as growth exhibits an uptrend, the Reserve Bank of India (RBI) said in its latest bulletin on Tuesday.

“…food price pressures have been interrupting the ongoing disinflation process even as shocks from adverse climate events and geopolitical tensions add uncertainties to the outlook,” the RBI staff said in a ‘State of the Economy’ article.

India is likely to experience more heat-wave days than normal between April and June, the country’s weather office said earlier this month.

While alignment with the inflation target is gradually occurring, incoming data will provide greater clarity and confidence on the disinflation path, the RBI said.

India’s retail inflation eased to a five-month low of 4.85% in March from 5.09% in the previous month

Manufacturing Rises

India’s business activity expanded at its fastest pace in nearly 14 years this month thanks to robust demand, according to a survey released on Tuesday that also showed easing input inflation and positive jobs growth.

HSBC’s flash India Composite purchasing managers’ Index, compiled by S&P Global, rose to 62.2 this month from March’s final reading of 61.8.

These flash estimates are released approximately one week prior to the release of the Final PMI indices.

Services activity rose at the fastest pace in three months to 61.7. Meanwhile, manufacturing output rose at a slightly moderate pace in April, but remains much above long term average. Survey respondents attributed this to robust demand from both domestic and external clients. 

High labour costs in services brought margins under strain.

Adani Wants To Settle An Allegation It Earlier Denied

One of the key allegations against the Adani Group in the now famous Hindenburg Report was that there were offshore funds that owned shares in Adani group companies but indirectly controlled by the owners in India.

The larger point was that the offshore funds were tightly controlling the floating stock which in turn was pushing up share prices.

Interestingly, eight of these offshore funds have requested to settle charges levied by the Securities & Exchange Board of India by paying a penalty without admitting guilt.

The process of paying penalties is covered under existing law for certain types of transgressions.

Reuters says Sebi has uncovered that twelve offshore funds investing in Adani Group companies had breached disclosure regulations and exceeded investment limits.

Reuters had first reported that Sebi had discovered breaches of disclosure rules by listed entities and offshore funds exceeding investment limits in August last year.

Furthermore, it was investigating the Adani Group’s relationship with one of the funds to determine if there was potential coordination with the conglomerate’s primary shareholders, an allegation previously denied by Adani.

Earlier this year, the regulator reportedly issued notices to 12 offshore investors associated with the Adani Group, outlining the allegations and seeking clarification on violations of disclosure requirements and investment limits.

“The offshore funds were reporting their investment in Adani Group companies at the individual fund level. The regulator wanted the disclosure of holdings at the offshore fund group level,” Reuters reported, citing a source.

Previously, Sebi identified 13 foreign portfolio investors (FPIs) for failing to disclose information about their ultimate beneficial owners in listed Adani entities, with eight seeking resolution with the regulator on securities violation issues.

Legal representatives for 8 funds, all named, have collectively submitted 16 settlement applications to Sebi.

Apple’s China iPhone Sales Crash

Apple Inc.’s iPhone sales in China fell 19% during the March quarter, according to data from Counterpoint Research marking the gadget’s worst performance there since Covid struck around 2020, reported Bloomberg.

Apple fell to third, roughly on par with fast-rising rival Huawei Technologies Co., according to Counterpoint Research estimates. The market as a whole expanded about 1.5% as local brands including Honor Device Co. and Xiaomi Corp. led growth.

The iPhone weakness is stark as the first quarter, when China celebrates the Lunar New Year, usually sees heightened consumption. Huawei in contrast climbed almost 70%, underscoring its resurgence in the premium segment that Apple once dominated.

Counterpoint’s data follows analysis from IDC showing global iPhone shipments falling almost 10% in the first three months of 2024, raising concerns about Apple’s ability to sustain growth just as it prepares to report earnings May 2.

China remains one of the company’s biggest markets, but business there has grown harder after Beijing escalated a ban on foreign devices in state-backed firms and government agencies. 

Consumers are also embracing Huawei’s return to prominence after it debuted a made-in-China chip that US sanctions were meant to prevent.

The Markets @ 75

In our ongoing series of conversations around the markets @75,000, I reached out to Ajit Dayal, founder of Quantum Mutual Fund on whether it is safe for investors to enter today.

Of course while data shows that markets are always at peaks at some points, the higher they go, as they are now, it is a wise thing to pose the question and preferably to an expert who can reason why.

I asked Ajit his views on entering markets and why investments at these levels would hold and what was his philosophy of investing over the last two decades.

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