Short Call | Operators have a field day as passive funds scramble to rebalance portfolios, Kotak Bank, Sona BLW, Vedanta

Changes in MSCI Indices had Dalal Street on its toes.

Bull markets and bear markets last long enough that the average trader is likely to forget by the time the climax is approaching that any sort of movement is possible. — Philip Carret

One man’s meat is another’s poison, so the saying goes. This is true of the relation between market operators and fund managers of passive schemes when the latter must rebalance their portfolios because of changes to benchmark indices.

For a while now, the street has been agog with the chatter of how some market operators have been benefitting whenever there are changes announced to MSCI Indices. These operators load up on the stocks which are likely to be added to the indices, or whose weightages are set to rise, and then sell them to passive funds looking for these stocks on the day at marked-up prices when the revised weightages become effective.

Fund managers have little choice but to buy the stocks at the prevailing prices. In some cases, say market observers, there is also a tacit understanding between the operators and fund managers since the funds can justify having the higher prices paid for the stocks.

Some of the stocks which witnessed heightened volatility on May 31 as a result of the MSCI Index rejig were Kotak Mahindra Bank and Sona BLW Precision Forgings. Both stocks saw a sharp rally in the last 15-20 minutes of trade on the day, which brokers say was a clear sign of desperate buying by the funds.

Kotak Mahindra Bank

In the case of Kotak Bank, interestingly there was frenetic activity in the securities lending and borrowing (SLB) window as well. SLB is a mechanism where investors bearish on a stock borrow shares from those willing to lend it for a fee, and then sell them in the market.

Dealers tracking the stock said that most of the deals in the SLB window were struck at higher than usual rates, though it is not clear if the heavy buying was to soak up available supply in the system or if it is by someone very bearish on the stock.

Typically, stocks get a bump up when they benefit from an index rejig, but then plateau or drift lower unless there is a strong trigger for the stock to maintain its uptrend. Open positions in Kotak Mahindra Bank jumped from 10 lakh shares to 50 lakh shares between May 30 and May 31.

The jump in short positions apart, even more puzzling was the steep discount in Kotak Bank futures intra-day on May 31. At one point, the futures were trading at a Rs 40 discount to the cash market price, which is highly unusual for a large-cap stock like Kotak Bank. The wide cap indicated that buyers of the shares were willing to pay any price during the last half an hour of trade on May 31. The stock gave up much of its gains the following day as the buying frenzy abated.

Sona BLW Precision Forgings

The stock witnessed a huge bulk deal early in early trade on May 31, with a promoter group entity selling 1.9 crore shares at Rs 503 apiece. Around 1.18 crore shares of that lot were picked up by institutional investors. The stock traded around Rs 530 levels for much of the day and then surged in the last half an hour to hit the day’s high of Rs 573.

Short Call

Market chatter is that some well-informed traders who were aware of the impending bulk deal cornered a sizeable chunk of the shares by bidding slightly higher than the institutional buyers.

At the fag end of the session, they offloaded the position to passive funds looking to rebalance their portfolio. Like Kotak Bank, this stock, too, fell sharply the following day in the absence of following up buying interest.

Vedanta

Parent Vedanta Resources has said that it has paid all its maturing loans and bonds due in May and June 2023, but bears appear to the of the view that there is some money to be made going short on the stock. Open positions in the securities and lending window now stands at 1.73 crore shares. This was less than 50 lakh shares at the start of May.

Seeing Red

For Western companies, perhaps it’s easier to do business on the red planet than in Red China.

CDPQ, one of the top Canadian pension funds, has stopped making private deals in China, the latest foreign major to pull back from the country amid ratcheting up of geopolitical tensions with the West.

The $295-billion group is closing its Shanghai office, though it still has investments in the country, including in Hong Kong, reports FT.

This comes less than two years after CDPQ’s chief executive Charles Emond said the pension giant was planning to more than double its exposure to China to 10 percent of its portfolio in the years to come.

Neal and Nikkei

An interesting trend is underway in Japan. While foreign investors have rediscovered their love for Japanese stocks, sending the benchmark Nikkei to heights not seen since the asset bubble collapse in 1990s, domestic investors are on a selling spree.

In April and May, domestic outflows totalled around 2 trillion yen (USD 14.81 billion) for individual investors and over 2.2 trillion yen for Japanese institutions.

Foreign investors say they are excited about the prospect of a new era of growth in corporate Japan, but their domestic counterparts — no strangers to a disappointing market — are eager to book profits. Headline-grabbing purchases from marquee investors, including Warren Buffet, have propelled the Nikkei by 18 percent so far in 2023, making it Asia's best performing stock market.

Pricey burgers

Hamburger and steak lovers in the US may have to shell out more for their favourite meal, which are already at near record-level prices

From a WSJ report:

“The culprit is a rapidly shrinking supply of cattle. Years of persistent drought conditions, which make cattle more expensive to raise, pandemic disruptions and widespread cost increases have prompted ranchers to sell off livestock, bringing the number of cattle in the U.S. to its lowest level in nearly a decade. With costs rising for nearly every aspect of raising cattle, ranchers say they are running out of reasons to replace the livestock they send to slaughter, let alone enlarge their herds.”

The ongoing cattle shortage is reflected in the prices of live cattle futures that reached a new all-time high Thursday of $1.72 a pound.

(Abhishek Mukherjee contributed to this article)