Short Call: SRF, Manappuram Finance, why rate cuts are unlikely soon, bears like banks, US property pangs

SRF

The stock fell for the third successive day Monday, with trading volumes on the NSE being the highest in over 8 months. The company’s export figures for May disappointed the market, which partly explains the selling pressure. The stock price is around the same levels it was in October 2021. The market outlook on the speciality chemicals and fluorochemicals story remains bullish, but the issue appears to be more about valuations at this point. More so when the earnings growth in FY23 has moderated compared to the year before. Motilal Oswal feels the current price captures near term earnings upside while Amit Gupta,  portfolio manager at ICICI Securities feels the bank on air conditioners with refrigerants and the low penetration of ACs in India promise huge upside for players like SRF because of its dominant position in the fluorochemicals space. Trading in options contracts of near-term strikes surged, but volumes were higher in the put option. Open interest in SRF put options of 2300 strike more than doubled on Monday. If you think smart money is writing the put options, then downside in the stock could be limited.

Manappuram Finance

The stock appears to be making a gradual comeback after the ED raid on the promoter last month triggered a sell-off. Open interest in the futures rose sharply on Monday, indicating build-up of long positions. Gold loan NBFCs in general have had a tough time over the last couple of years as banks have become aggressive in this segment, and gaining market share. The contrarian view emerging is that competitive intensity is coming off a bit, and that has eased pressure on margins. Also, as gold prices start easing, established players like Manappuram will be in a better position as they have better experience in dealing with downcycles.

Crawling higher

Amid all the chatter about interest rates likely to fall, the situation on the ground seems to be different. Over the last few days,  Bank of Baroda raised one-year lending rate by 25 basis points, HDFC Bank has hiked overnight to six-month lending rate by 5-15 basis points, and UCO Bank has raised one-month lending rate by 5 basis points. Interestingly the list of top 10 stocks with maximum open short positions in NSE’s securities lending and borrowing (SLB) window is dominated by banks-IDFC First Bank, AU Small Finance Bank, Federal Bank, Maharashtra Bank and Kotak Bank. Two things don’t seem to be going in banks’ favour. Lower borrowing by corporates as they are flush with funds, and rising deposit rates.

Powell’s Catch 22

Equity and bond investors in the US are hopeful that peak interest rates are now behind, but US Federal Reserve Chair Jerome Powell’s troubles seem to be far from over. Powell is in a situation that his predecessors never had to face—having to stave off a credit crunch and simultaneously fight high inflation. The solution to the first problem is lowering interest rates, and the fix for the second problem is either raising rates, or keeping them at a high level

From the WSJ:

Fed officials don’t think a crisis is imminent, attributing recent troubles to idiosyncrasies at the three (failed) banks. But current and former central bankers say if stresses worsen, the Fed will face a more difficult trade off. Powell and his colleagues would have to choose between focusing on failing banks or high inflation.

2000 all over again?

AI may be the flavour of the season in stock markets globally, but more voices are now beginning to caution against the exaggeration of AI’s prowess. A few days back Citadel founder Ken Griffin said that proponents of AI were doing everybody a huge disservice with the level of hype they were creating, and that the threat of AI eliminating a wave of skilled professional jobs is far from reality. And now James Penny, chief investment officer of TAM Asset Management and a veteran ESG investor, says the current mood is reminiscent of the early days of the tech bubble that burst in 2000 and wiped more than 70 percent off the Nasdaq.

Property pangs

Goldman Sachs is set to markdown its commercial real estate holdings as the property market—commercial in particular—grapples with higher interest rates, and falling occupancy levels.

From CNBC.com

While the write-downs are “definitely a headwind” for the bank, they are “manageable” in the context of Goldman’s overall business, CEO David Solomon said. They may be less manageable for smaller banks, however. About two-thirds of the industry’s loans are originated by regional and midsize institutions, Solomon said.

Step-fatherly treatment?

Sometimes the cure may be worse than the disease. At least for those who have to swallow the bitter pills. UBS, which on Monday finally completed the takeover of Credit Suisse, has imposed tight restrictions on its one-time rival’s staffers. UBS bosses have drawn up nearly two dozen “red lines” that prohibit Credit Suisse bankers from a range of activities, including taking on clients from high-risk countries such as Libya, Russia, Sudan and Venezuela and launching new products without approval from UBS managers, reports FT.

The holier-than-thou tone is sure to sting Credit Suisse staffers, who may be wondering how UBS – which has been fined billions of dollars over the past few years for various misdemeanours – can paint itself as the paragon of virtue. Alas, corporate memos, like history, are written by the victors.

(Abhishek Mukherjee contributed to this article)