It took a longer time to come, almost 52 sessions for the last 1,000 points, but the Nifty 50 reached the milestone of 20,000. But, while the markets rejoiced on Monday, there was a brief scare on Tuesday, which turned the tide for PSUs a bit.
Having said that, inflation data in India is a bit more benign than in the U.S. What is not benign is the quandary for small-cap funds, which are getting money in droves and posing a potential problem for scheme managers.
Speaking of problems, Huawei has created some issues for U.S. policymakers and chip companies. We talk about all of that below.
The Tide Turned Briefly After 20,000
PSU banks were shouting that rail PSUs can be so expensive—so, what’s wrong with us? Banks like Canara Bank, Bank of Baroda, and Bank of India are trading less than 1 times P/B, and it was only a matter of time before it was noticed. It took the Nifty to come in at 20,000, a scathing note on small caps by Kotak, and some rumours to bring about a scare in the markets.
The scare was short-lived. However, it paused the unrelenting rally in select PSUs. One can argue that it was known that the fall in PSUs was around the corner, but no one was ready to accept that the party was ending. It came like a tsunami, turning many upside down in a single day. However, the upmove continued post the scare, and towards the end of the week, not only did the index settle comfortably atop 20,000, but the small and mid caps continued their upmove. It looks like the bulls don't want to give up their control, and the party will continue.
Small Is Big
The number of folios for small-cap funds has gone up by 2.6 times (to 1.3 crore) in the past two years. For the first time, the number of mutual fund folios in small-cap funds is equal to the number of mutual fund folios in large-cap funds. That is a sea change in investor appetite for small-cap funds.
As an aside, the number of folios in small-cap funds is greater than the number of folios in mid-cap funds. The only catch here is that we are not finding any small-cap scheme that has outperformed its relative benchmark for FY24, at least from the 24 funds listed on AMFI's website. Granted, it is too short a time frame to measure performance effectively, but it is a point to monitor, more so at a time when a large pool of money will be chasing the few investable stocks in the small-cap universe.
Also Read: 'Mad-Cap Dash': Kotak Drops Mid- And Small-Cap Recommendations Citing 'Irrational Exuberance'
Hope Around Lower Inflationary Pressures, But Oil Is A Drag
India’s retail inflation eased to 6.83% in August from 7.44% in July as vegetable prices cooled somewhat as compared with the previous month.
After August CPI inflation was surprisingly lower, falling to 6.8% YoY from 7.4% in July, Nomura's early estimates suggest inflation will fall further in September to ~5.5%, moving back to within the RBI’s tolerance band (4% +/- 2%). Their belief is that the contraction in vegetable prices is likely to deepen due to a steep fall in tomato prices that should more than offset higher onion prices.
Do note that, post policy, when asked about vegetable inflation, Michael Patra expressed 'hope' that vegetable inflationary pressures will abate. The government’s recent LPG price cut of Rs 200 per cylinder should lower fuel inflation as well. And if oil prices don't wreak havoc despite the output cuts, then the fast reversal of inflation to below 6% should come as a relief for policymakers. But yes, oil is a clear and present danger. One hopes that it does not spoil the party.
Huawei Impact On U.S. Chip Stocks
Last week, Huawei Technologies—China's leading smartphone provider—released a device with a chip so advanced it caught industry experts off guard. A breakdown of the smartphone revealed the processor was created by Chinese chipmaker Semiconductor Manufacturing International Corp.
Huawei's Mate 60 Pro included a new 5G Kirin 9000s processor based on advanced 7-nanometer technology. This is big. A Japan Times article said the development "isn’t just impressive—it was thought to be impossible. A chip of that size is near the frontier of new technology, and the U.S. export controls to prevent sales to Huawei were intended to slow its acquisition of that very technology. If the new phone has those chips and is that good, then the U.S. and its partners have to look again at their strategy".
The aftereffects of this immediately reverberated through the tech industry. This signals advances in China's chipmaking technology that many believed weren't possible—or technology that skirted U.S. sanctions. The stunning revelation prompted two U.S. congressmen to request additional restrictions, further curtailing or eliminating semiconductor exports to SMIC. Are measures meant to break the Chinese semiconductor industry making it stronger?
By The Way
As we end, I bring out an interesting piece I read on Bloomberg.
The Colombian government is taking a more lenient policy regarding drugs, so the production of cocaine is expanding. According to Bloomberg Economics, 2022 exports were worth an estimated $18.2 billion. Oil exports posted a drop of 30% in the first half of this year. Bloomberg economist Felipe Hernandez believes that cocaine can become the number one export of Colombia by the end of 2023.
Niraj Shah is Executive Editor at BQ Prime.
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