Speculation Sahi Nahi Hai

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Good morning. A study by regulator Securities and Exchange Board of India (SEBI) has again pointed to a nagging problem we’ve written about earlier — F&O and options trading. The study found that Indians lost money in lakhs and crores in speculative bets in the last three years. Perhaps it’s time for a ‘speculation sahi nahi hai’ campaign to dissuade investors. Read on to know more. 

In other news, Indian markets are at risk of a bubble if companies don’t improve their EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation). Meanwhile, India’s business activity isn’t doing so great. 

Editor's Note: The Periphery section in the edition sent out this morning had news from an older edition due to a technical glitch. This email has the corrected version of the Periphery for September 24.

THE TAKE

F&O Trading: Time For A ‘Speculation Sahi Nahi Hai’ Campaign

There are several reasons why people may gamble. It could be because of the rush that one gets, combined with the skills they have ( if elevated skills are involved), or it is to make money. There are distinctions between gambling and speculating, but it is quite clear that for millions of Indians, it is more of the former than the latter.

After all, the essential principle of gambling is that you bet a small amount on something that could become bigger — whether in the stock market, crypto or a gaming app. It's turning out that those small bets are running into hundreds of thousands of crores.

The aggregate losses of 11.3 million individual traders exceeded Rs 1.80 lakh crore over the three years between FY22 and FY24.  In FY24 alone, individuals incurred about Rs 75,000 crore in net losses. In FY24, nearly 7.3 million individual traders lost money, with an average net loss of Rs 1.2 lakh per person, inclusive of transaction costs.

In contrast, foreign portfolio investors (FPIs) and proprietary traders booked gross trading profits of Rs 28,000 crore and Rs 33,000 crore respectively in FY24, a new study by regulator SEBI found. It’s clear that there are winners here, but it’s the big guys who make the money while the small guys lose it, almost consistently. The sad part of the story is that algo traders, or those who use algorithms powered by high end computers for trading took the larger share of the pie.

“Most of the profits were generated by larger entities that used trading algorithms, with 97 per cent of FPI profits and 96 per cent of proprietary trader profits coming from algorithmic trading,” the SEBI report pointed out. In all, 93% of retail traders in derivatives trading incurred an average loss of Rs 2 lakh per trader during the last three financial years. Daily turnover in the F&O segment often exceeds Rs 500 trillion.

SEBI has now proposed several measures to curb retail participation and speculation. It is likely to get pushed through in an upcoming SEBI board meeting this month, said a Business Standard report. The report said that despite consecutive years of losses, more than three-fourths of the loss-making traders continued their activity in F&O. There are more and more grim and depressing statistics.

It is clear that people are losing their shirts, in derivatives, crypto or mobile gaming apps. It is equally clear that technology, particularly through the mobile device, is accelerating the process with almost no friction. Frictionless transactions are a virtue and something to boast about but only up to a point. It is no longer a virtue if it cannot introduce even a split second pause that might make you think twice before moving your earnings or savings into a speculative instrument. Not that a split second is enough but we have to start somewhere.

For years, India’s mutual fund industry ran a campaign called ‘mutual funds sahi hai’. Whether because of that long running campaign or despite it, retail investor flows into mutual funds have hit record highs of over Rs 20,000 crore a month, mostly through the systematic investment plan route. It is time to now say that ‘speculation sahi nahi hai’, or speculation is bad for your health. You might rightfully think that such public service messages won’t work. But no one thought that ‘mutual funds sahi hai’ would work either.

CO:RELATION

Equity Bubble Risk For Indian Markets

Stock markets could see a flood of foreign money if the Indian rupee continues to appreciate as it has done over the past month. Usually, the rupee flows are neutralised by the high imports. With global commodity prices softening and oil prices at 10-12% below last year, imports may not be able to match the flood of money that awaits Indian financial markets. Foreign portfolio investors have registered a net inflow of over Rs 2.27 lakh crore in 2024.  However, two-thirds of that money is in the secondary bond market. They have refrained from investing in Indian equities due to sky-high valuations. There are other cheaper options available to global and regional fund managers. 

But, India’s weight in global and regional benchmark equity indices is at the highest level. Funds that manage passive money will have to allocate more money to Indian equities sooner rather than later. The surge in liquidity would inflate asset prices significantly. According to the data published in the latest NSE bulletin, the EBITDA growth of the Nifty 500 universe was 1.3% for the quarter to June 2024 over the year-ago period. It was the slowest pace of growth in the last six quarters. We could move to a bubble if companies do not report a more robust EBITDA growth over the next few quarters.

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FROM THE PERIPHERY

—❌ Amid an ongoing antitrust probe into Chinese phone maker Xiaomi allegedly colluding with Flipkart to launch its products, the company has reportedly asked the Competition Commission of India (CCI), the antitrust regulator, to recall it’s report. Xiaomi claims it has “secret information” regarding the business. Reuters said in a report citing unnamed sources that Xiaomi has told CCI that the information was supposed to be redacted in the report. Earlier this month Reuters had reported that mobile phone makers such as Samsung, Xiaomi and others had worked with Amazon and Flipkart to exclusively launch products. The CCI reportedly found that Amazon and Flipkart violated local competition laws by giving preference to select sellers.

—📉 India’s business activity hit a nine-month low in September, dropping to 59.3 from 60.7 in August, according to HSBC's flash India Composite Purchasing Managers' Index (PMI) by S&P Global. Slower growth was driven by softer demand and rising costs, though services sector jobs surged at their fastest pace in two years. Both manufacturing and services saw a similar slowdown, with firms reluctant to pass on higher costs to customers due to muted demand. Despite this, overall activity remained strong, extending the expansion streak past three years.

—💸 Top executives of American financial company JP Morgan Chase have said that global companies and investors are eager to tap into India’s economic boom through mergers, acquisitions, and IPOs. There has been strong interest in services like insurance and banking. IPOs have already raised nearly US $9 billion this year, and deal volume is up 28% to US $77 billion, The Economic Times reported. Major deals include stakes in Yes Bank and IDBI Bank, with interest from Japan and the Middle East, and Zurich Insurance’s acquisition of Kotak General Insurance. M&A volume has doubled since 2021, reaching US $140 billion annually. More investments are expected in clean energy and infrastructure. 

—🍀 According to an annual "stocktake" released on Monday, over 40% of major corporations, cities and regions still lack targets for cutting greenhouse gas emissions. The Business Standard reported that according to the annual report by Net Zero Tracker, a coalition of research organisations based at the University of Oxford, despite a surge in net-zero pledges last year, global turmoil has created a “commitment gap.” While 60% of publicly listed companies have set net-zero goals, nearly 1,700 entities are yet to act. Notably, the number of companies without targets has dropped from 734 to 495, but big names like Tesla, BYD, Nintendo, and Berkshire Hathaway are still lagging.

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