Short call | Point 16,800 on Nifty, MFs buying MFs, city gas stocks, and bailout fallouts

Safety of capital first, profits later - that seems to be the mantra for most market participants right now.

MFs calling MFs

Stocks of asset management companies have had a miserable run over the last 18 months or so. This is despite mutual funds becoming increasingly popular with retail investors as the best vehicle to play the stock market. For some time, the popular view was mutual funds would be the automatic beneficiaries of rising retail investor interest in the stock market.

That theory soon lost appeal when the market noticed that burgeoning assets under management (AUM) was not exactly translating into bumper profits for the asset management companies.

One reason has been the growing popularity of passively managed funds, where the fees charged by AMCs are much lower than those for actively managed funds. But the bigger worry now, say industry officials, is the threat to AMCs’ profitability because of the regulator’s drive to lower costs for unitholders. There were two big deals in two major AMC stocks yesterdays - one in HDFC AMC for around 4.8 million shares and the other for over 1.1 million shares in UTI Asset Management.

The interesting thing to note here is that buyers for both blocks were domestic mutual funds. SBI MF was the buyer in HDFC AMC and Parag Parikh Mutual Fund the buyer in UTI AMC.

Sentiment for AMC stocks in general appears to be at its worst considering that the stocks did not participate in the biggest bull market. And the latest big buyers in the sector are mutual funds themselves, who would know a thing or two about the industry that may not be obvious to the rest of the market. Could this market the bottoming out of AMC stocks?

Relief for CGDs

Like AMCs, gas distribution has been the other unloved story of recent times. Stocks of city gas distributors Gujarat Gas, Mahanagar Gas and Indraprastha Gas have been among the worst performers as rising gas price has hurt demand and profit margins.

That may be set to change, now that spot LNG prices have started to soften. According to CLSA, spot LNG prices at $14 mmbtu are almost half of the levels seen in December 2022. This should boost margins of city gas distributors. Besides, demand for both Indian gas as well as LNG has rebounded 2/3 percent month-on-month CLSA says.

Considering that the stocks have been hammered for months on end, a temporary rebound looks likely. And while a longer-term rerating could still be some way off, gas stocks still may fare better in a turbulent market as they have got valuations on their side.

Bailout fallout

Global macro expert Louis Gave in his note has highlighted the two unintended consequences of the Swiss government-backed acquisition of the embattled Credit Suisse by its rival UBS. Under the deal, Credit Suisse shareholders will get shares in UBS (although at a steep loss), while AT1 bondholders in Credit Suisse will see their investment getting wiped out.

“For equity holders (of Credit Suisse) to get 'something' and AT1 bond holders to get 'nothing' raises serious questions about the real value of AT1 bonds. This  means that in the next crisis banks will have to fund themselves in new ways, or shareholders will simply face massive dilution. Emerging market savings will increasingly stay at home. I exaggerate for effect, but if I was a Saudi banker today, I might feel that, like the Russians last year, my assets had just been seized. This means that emerging market bonds will continue to outperform developed market bonds, and gold is likely to continue outperforming both.”