Expert Analysis of the Global Macro Events & News affecting the Indian Markets
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Credit where it’s due: Story of Credit Suisse
Credit Suisse, the second-largest Swiss bank, is facing a crisis of confidence and as a result, its share prices have fallen sharply in the last week.
Credit Suisse is facing a liquidity crisis, deposits fell by forty percent, whereas total assets dropped by thirty percent last year. Since then, the road for CS has not been smooth, it even reached out personally to more than 10,000 wealthy customers to reassure them of the bank’s health.
So, this was going on since last year. But the fall of Silicon Valley Bank raised concerns over financial institutions, and Credit Suisse already had one leg to stand on.
Investors started to buy protection against the bank defaulting on some of its debt. The cost of insuring against default on five-year Credit Suisse senior debt is double what it was at the start of the week.
What’s happening now?
UBS, the largest Swiss bank, is acquiring struggling competitor Credit Suisse for nearly $3.25 billion. This acquisition was arranged by regulators to prevent any additional disruptive turbulence in the global banking industry.
Credit Suisse is among the 30 financial institutions known as globally systemically important banks, and authorities worried about the fallout if it were to fail.
Swiss President Alain Berset said the deal was “one of great breadth for the stability of international finance”.
Why comparing Indian markets to the Emerging Market Index is delusionary?
We’ve had many many international news outlets and journalists attribute the adjective expensive to define the Indian markets when they compare it with the Emerging Market Index. On a price-to-earnings basis, India seems to be ridiculously expensive, with a 70% premium compared to MSCI EM Index.
But what does this Index constitute?
32% of China, and many of these Chinese companies are state-owned enterprises. Chinese companies have faced their challenges – exclusively – regulatory crackdowns, the government imposing fines and charitable donations on private enterprises, and drug affordability regulations. The discount they deserve in light of escalating tensions with the US and Taiwan is another topic.
15% Taiwan, and most of the companies are in the semiconductor space. This sector is highly cyclical and currently facing severe headwinds.
5% Brazil and 12% South Korea – these two markets, once again, are dealing with their issues.
Hence, comparing the EM index with the Indian markets must be done with caution. The above-mentioned economies are facing their challenges, and these are disproportionately larger compared to the challenges India is facing. China + Taiwan + Brazil + South Korea makes us nearly 64% of the index!
News that caught our attention
The most anticipated and dramatic economic announcement, the Fed Interest rate decision is due on Wednesday. Just couple of weeks back, the markets were expecting and pricing in a 50-basis point hike for this meeting, and that has now fallen to 0 basis points. The credit goes to the banking crisis panic in the US and the EU region.
There is now a 51% probability that Fed wouldn’t be rising interest rates. We have explained in our previous newsletter how these rates effect households and markets.
Extract from one of our previous newsletters:
“As interest rates increase, the cost of borrowing money becomes more expensive. This makes buying certain goods and services, such as homes and cars, more costly. This in turn causes consumers to spend less, which reduces the demand for goods and services. If the demand for goods and services decreases, businesses cut back on production, laying off workers, which increases unemployment. Overall, an increase in interest rates slows down the economy and curbs inflation”.
Update on Portfolio Companies: KPR Mills (NSE: KPRMILL)
- This week we would be discussing KPR Mill. It is a part of our High-quality right price smallcase. It is a vertically integrated textile company producing yarns to readymade garments. Several textile names have fallen 50% from their recent peaks thanks to volatility in cotton prices and a slump in export demand. KPR Mill has been an outlier – owing to its sugar and ethanol business, the company was able to sustain overall margins and make up for the loss in the textile business.
- Due to its well-diversified business, they have been able to mitigate the downturn in the textile industry occurring due to subdued demand in the international market and duty on imported cotton.
- Ethanol has been in the spotlight due to the transition towards flex fuel which would ensure demand for the ethanol produced by the company in the long run.
- Since entering into the sugar and ethanol business, they have constantly been expanding their capacity. In their recent quarter, management mentioned they were en route to adding further capacity in their ethanol, yarn and garment verticals. We have been covering KPR since 2020, and from what we know, they walk their talk.
- The FTA (Free Trade Agreement) with Australia and the undergoing FTA talks with the UK and EU zone would further benefit the textile business in the medium term.
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Green Portfolio is a SEBI Registered (SEBI Registration No. INH100008513) Research Analyst Firm. The research and reports express our opinions which we have based upon generally available public information, field research, inferences and deductions through are due diligence and analytical process. To the best our ability and belief, all information contained here is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable. We make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use. This report does not represent an investment advice or a recommendation or a solicitation to buy any securities.