Short Call | A take on stocks of banks, realty and rail when market looks set for a swing

“Now and then large profits are realised on no better foundation - merely proving that sometimes luck laughs at logic.” -  Benjamin Graham

The market appears poised for a rebound following the rally in global equities. Expect it to be a short-lived one, say traders.

Rating agency Moody’s has downgraded its outlook on the US banking system from 'stable' to 'negative' to reflect "the rapid deterioration in the operating environment" following deposit runs at Silicon Valley Bank, Silvergate Bank, and Signature Bank.

Back home, market experts are advising investors not to hurry in buying shares. A stark contrast to the ‘buy the dip’ strategy that was popular till a couple of months back.

Supply side bounty

It is not just rising rates, subdued earnings growth and inflation that is worrying the street. As my colleague Ravindra Sonawane writes, supply of shares is on the rise with many private equity funds, venture capital funds and promoters paring stakes through open market sales. One could argue that these large blocks of shares are getting absorbed. While there were fewer owners of large blocks earlier, there will now be multiple owners of small blocks, that are more easily likely to find their way into the market.

Foreign institutional investors continue to be net sellers of equities as well with their short positions in Nifty futures reaching up to 73 percent.

Too much of a good thing

Bank stocks, PSUs in particular, continued to get pummelled. Short-term interest rates are now anywhere between 7.7 percent and 8.25 percent for companies looking to raise funds in the money market.

As my colleague Abhishek Kothari from CNBCTV18 points out, rising rates initially benefit banks, but after a point, become a cause for concern. “Liquidity is tight, rates are high and there is inflation as well—a toxic cocktail for banks and NBFCs. High rates affect demand for loans, and besides banks too become wary of lending aggressively when rates are high.”

No takers

At the start of 2023, most realty bosses were unfazed by rising rates, saying it would not affect the demand for residential property. But the market seems to think otherwise, with realty stocks figuring among the worst performers. On the face of it, there seems to be a case for bargain buying in real estate stocks. Their balance sheets are strong, new project line-ups impressive, execution capability better, and valuations reasonable, according to Morgan Stanley.

Given these factors, it is puzzling as to why investors are dumping these stocks. Since the market is known to anticipate future trends, the sell-off could indicate that peak realty sales are just around the corner, or may be past for the time being.

Besides, most real estate firms are known to borrow outside the balance sheet as well, at rates higher than what financial institutions usually charge. So rising rates will hurt one way or the other, Mr Market thinks.

Rail stocks

Raitel Corporation has bagged a Rs 288-crore order from the Centre For Development Of Advanced Computing. Of late, many railway-related companies have been announcing order wins, but the secular uptrend in the sector appears to be done for the time being. Most stocks have been struggling since December, but a few have done exceeding well. The story does look promising, but investors need to choose with care

SBI

State Bank of India informed the stock exchanges that it had a one-on-one meeting with Malaysia-based ESG fund Kumpulan Wang Amanah Persaraan(KWAP), which manages the retirement funds of that country’s civil servants. It is not known if KWAP already owns shares in the banking behemoth or is looking to make a fresh investment. In addition, Morgan Stanley will be hosting an in-person meeting for select institutional investors and analysts with the bank today, where they will be provided with “only information available in public domain.”

Interesting

Russia was able to save abroad about $80 billion abroad through windfall earned last year from its commodity exports, reports Bloomberg. This is scattered across holdings of cash, real estate and investments in affiliates abroad.

“Due to Europe’s delay with targeting Russia’s energy sector, the Kremlin was able to accumulate one of the largest current-account surpluses in its history,” said Maria Shagina, an economist at the UK-based International Institute for Strategic Studies. “This has de facto negated the effect of freezing the central bank assets in March 2022, as Russia could recoup what it lost.”