Short Call | Defence orders, conservative diagnosis, retail in retreat

To an extent, the irrational pricing seen last year back because of the entry of deep pocket players in the sector has now corrected.

“People would rather believe that they have been robbed than that they have been fools on the advice of fools.” -  Fred Schwed Jr

Was Friday’s trade powerfully driven by local mutual funds wanting to show a healthy NAV at the end of the financial year? Or, have bulls regained their confidence? The strong market breadth (five gainers for every two losers) seems to indicate the latter. But it is still early to say, given that concerns over the banking crisis and rising interest rates have not fully disappeared.

On the offensive

Defence stocks are back in favour, thanks to the rash of orders announced by the government last week. The sector is still among the best stories in the market at this point, with many companies having earnings visibility for the next two-three years, thanks to their bulging order books.

Investors had been indifferent to defence stocks for the last few months, as orders from the government for the third quarter was below what the market has pencilled in. Now that the order flow concerns have been addressed, it remains to be seen how much of it has already been priced into the stocks.

The flipside of being one of the most popular stories is that the stocks are over-owned by institutions. Also, order wins are a good thing. But execution too needs to be watched, given that supply change wrinkles still remain.

A conservative diagnosis

Covid is in the air, but investors are not rushing to load up on diagnostics stocks. For one, investors are aware that windfall earnings from Covid tests are a thing of a past and margins are unlikely to go anywhere near the levels seen in 2020-21 when the pandemic was at its peak. Recent commentary by the leading diagnostic companies indicate that the worst of price wars may be behind.

To an extent, the irrational pricing seen last year back because of the entry of deep pocket players in the sector has now corrected. But it is a mixed picture. Wellness testing, or preventive testing, where diagnostics companies make most money, continues to see disruptive pricing. Illness testing, the low margin business, is seeing normalcy return.

Retail in retreat

US retail investors are losing their appetite for equities, with stock purchases at a 15-month low. This has deprived the market of a dependable leg of support, reports the Wall Street Journal.

"As individual investors’ enthusiasm for stocks wanes, professional money managers are also keeping U.S. equities at bay. That leaves corporations buying back their own stock as a remaining support in the market."

Something similar is playing out in India as well. This is evident from the drop in pace of opening of broking accounts, demat accounts and of inflows into equity mutual fund schemes. Strong retail participation was a key pillar of strength for the stock market over the last many months as foreign institutional investors were persistently dumping shares.

That has changed of late as rising interest rates and flagging stock prices are prompting investors to look for alternative avenues. Retail apathy is most evident in the performance of mid and small cap stocks.

Crude shock

Saudi Arabia and other OPEC+ oil producers on Sunday announced further oil output cuts of around 1.16 million barrels per day, which could boost crude oil prices near term. Oil prices have already spiked $5 a barrel at Monday’s open and some analysts estimate they could go up by $10 per barrel over the next few days.

Short-covering in the options contracts market could amplify the rise in crude prices, just like they aggravated the decline on the way down recently. If prices rally beyond a point, traders who have sold call options expecting crude prices to weaken or stay flat, may be forced to buy futures to offset losses on their options trades. Crude prices could surge because of this. Costly oil could dampen sentiment for equities especially if it is being caused by production cuts rather than strong demand.

AI + medicine

Venture capitalist Jim Breyer tells CNBC.com that the intersection of AI and medicine may be the biggest investment opportunity he has ever seen, as big technology company are planning to scale up health efforts exponentially. And it will also throw up highly rewarding career opportunities.

“As computer science is combined with biology, chemistry and physics, “bilingual” workers and teams able to cross over from computational science to the other scientific branches will be crucial and one of the biggest career opportunities to come out of the mega-cap tech companies,” says Breyer.

Meaning, ‘bilingual’ individuals—those who possess skills and knowledge in both computer science and the other sciences--will become highly valuable. These workers will be able to bridge the gap between computational science and other scientific fields, leading to major breakthroughs in the process.

Lithium = Coal

Australia sees its booming lithium sector matching thermal coal’s importance within five years as the world increasingly shifts from fossil fuels to clean energy, reports mining.com website.

“Exports of the battery metal are seen at A$19 billion ($13 billion) in the year to June 2028, matching the record seen for the current financial year, according to government projections. Meanwhile, the value of power station coal shipments will drop 71 percent in the period.”