Short Call | Large US banks on rescue mission and the buzz in ICICI Prudential Life, Zee shares

“It would be silly to expect every bear market to turn into the Great Depression. It would be equally wrong to expect that a fall from overvalued, to more fairly valued, couldn't badly overshoot on the downside.” ~ Seth Klarman

Equities just about snapped a 5-day losing streak on Thursday, but a cautious undertone prevails. The buy-on-dips approach has now been replaced by a flee-on-rise mindset. Remember the famous torture-by-liquid oxygen remark by Bollywood villain Ajit? (Oxygen won’t let you die and liquid won’t let you live).Well, something similar is at play in the stock market right now, remarked a fund manager.

“You have a situation where domestic institutions are steady buyers, and that is providing a floor to the market. At the same time you have a steady supply of shares coming in from the big investors, including promoters, which is not letting the market rise.”

Shares of ICICI Prudential Life Insurance soared 7 percent in a lacklustre market after the company named Anup Bagchi as MD & CEO as replacement to outgoing boss NS Kannan. Bagchi comes from ICICI Bank where he is Executive Director. ICICI Pru Life shares have been struggling for the last 18 months since peaking in September 2021. Not that the problem is specific to ICICI Pru as the market has been cold to life insurers in general. Over the last few years, the company has managed to improve the margins of the Value of New Business (VNB) by changing its product mix to a higher share of term plans and annuity products. But growth has been a sticking point with the Street. As also the fact that ICICI Pru Life was not getting the most out of ICICI Bank’s bancassurance channel. Analyst commentary on the stock has turned positive after the third quarter numbers, and now investors appear to be hopeful that the low profile but all-weather insider Bagchi may be able to address the growth side of the equation.

Expect another roller coaster day in Zee shares. The company late last evening clarified that a news report of it agreeing to repay IndusInd Bank $10 million was speculative, and that it was still “exploring several strategies, including settlement.” Bears have had the upper hand in the stock since October, despite the Zee management’s periodic statements that the deal with Sony is well on track. That says something about the market’s conviction on how soon the delay is likely to be stitched up.

DLF has confirmed that it has grossed sales of over Rs 8000 crore in its luxury high-rise project Arbour. The stock jumped around 4 percent, but then realty stocks across the board did well on Thursday. Also, chatter about the strong demand for the DLF project had been doing the rounds on social media for the last couple of weeks. Experts say the rush for luxury homes could partly have to do with the new rule announced in the Budget that any reinvestment of the sale proceeds exceeding Rs 10 crore from the sale of a house will not be eligible for tax deduction from April 1. The bigger issue for the real estate sector right now is an uncertain outlook on jobs and disposable incomes.

Jubilant Foodworks in a panel discussion on CNBCTV18 said that consumers were still choosing entry level, lower priced products. There was a slight uptick in volumes, but consumers are still conscious of their spending, the company said. Maruti’s ED Shashank Srivastava said that there was a bit of a slowdown in booking momentum and enquiries over last few weeks. He also referred to high inflation resulting in lower disposable income and dampening sentiment.

Eleven of the biggest US banks have come to the rescue of the troubled First Republic Bank by depositing $30 billion. Does that fix the problem in the banking system. Not quite, argues a piece in WSJ, for three reasons. One, it sharpens the divide between megabanks and the rest of the banking sector. Two, large banks cannot keep coming to the rescue of every small bank.

“It also doesn’t address banks’ longer-term challenges with rising interest rates. The structure of this deal also highlights that megabanks are hardly in need of another tidal wave of deposits. Already, the biggest banks were in some ways struggling with what to do with the surge of cash that came their way during the pandemic. More deposits lead to bigger size, which can raise capital requirements for global banks, and at times they haven’t seen sufficient loan demand to put that money to work very profitably.”

Investors looking to flee the storm in the global banking system could be seeking refuge in Chinese lenders, reports Bloomberg.

“A low correlation to the global rate environment and limited sovereign exposures are helping shelter Chinese banks from the brewing storm, according to HSBC Holdings Plc analysts including Gary Lam. “As global investors seek safety, large state-owned banks could become the preferred choice due to their track record as stable dividend payers with 8%-9% yields,” they wrote in a Tuesday note.”

Options trading has become a hit with retail investors worldwide since the start of the pandemic. This despite the fact that an overwhelming majority of retail investors have been losing money buying options.

“The Journal of Finance authors estimate that between November 2019 and June 2021, retail investors (in the US) collectively lost $2.1bn on options.”

And there is the issue of systemic risk as well when too many option writers think there is easy money to be made.

“In theory, if the investors selling them (options) do not hold positions in the securities underlying these contracts, an abrupt intraday price change could force them to trade vast quantities of those assets simultaneously.”