Short Call | When Option loans cost less than home loans, IRCTC goes up, and Sebi irks active funds

Some of the PMS funds are said to be pulling their offerings out of the Small Case platform.

One of the biggest mistakes is to think overpriced and going down tomorrow are synonymous. Overpriced markets often keep going. - Howard Marks

Bulls continue to be in command even as there are murmurs that the market could be getting ahead of itself. Foreign funds continue to buy aggressively and concerns about the rupee weakness is not a talking point right now. Mid and small caps are in the thick of action and every rise is converting more fence-sitters among HNIs into faithfuls.

IRCTC

A good set of numbers for the March quarter, and the holiday season means that June quarter numbers are likely to be even better. That could explain the steady 15 percent rally in the stock over the last couple of months. IRCTC may evoke painful memories for many who jumped on to bandwagon during the bull run two years back. But even after being around 40 percent off its peak value, this is a stock that has rewarded long term investors. Question is: how better can things get from here?

The crazy valuations of FY22 may not be seen in the foreseeable future, so investors should not be hoping for a dramatic rerating. That then shifts the focus to medium term earnings. As my colleague and MC Pro research head Madhu wrote in February when the stock was at the same level (around Rs 640) a meaningful improvement in the contribution of the mainstay internet ticketing looks less likely. So, the financial performance will be modest with 15 percent kind of revenue growth and after-tax profit growth of 13 percent, which may not make a compelling case for premium valuations. Bulls can enjoy the ride for a while but may be better off switching trains before too long.

Options loan mela

Large high-profile broking firms may not be able to indulge in some of the shenanigans that lesser-known brokers have been doing to pull in options traders. But size and access to funds means that the larger brokers can ride the options mania in other ways. Short Call learns that some prominent

retail brokerages are offering funds to options traders at rates as low as 8 percent, through their NBFC arms. This is a pure funding arrangement and the traders who avail the funds does not have to necessarily trade through the lending brokers. That works well for the brokers as well since Sebi norms do not allow them to fund clients directly. The latest trend is accelerating what has become something of an options arm race in the stock market. “The funds are available only for options traders with a decent track record,” a market player familiar with the arrangement said. “If a trader is willing to put up Rs 1 crore of his capital, he can easily get Rs 5 crore of funds from the big brokers. On this he can take options positions of around Rs 50 crore assuming margin obligations of around 10 percent at the net level.”

This is turning to be a win-win proposition for large brokers as well as options traders. Options traders who are able to generate 12 percent through low risk strategies can make outsized returns through such an arrangement... as long as the market movements are favourable.

At the same time, some market players see this as yet another sign that the options trading mania is moving slowly towards a climax. Too many people have gone into the game, thinking there is easy money to made. And the bets are paying off because there have been no violent moves on either side for nearly two years now. Options guru claiming that even 13-14-year-olds can trade in options and videos of home makers funding overseas vacations through part time options trading is something to be worried about, say market old-timers.

Insult to injury

Last week Sebi whole-time director Ananta Barua said the regulator was working on a proposal to “provide greater flexibility for index funds and ETFs, enabling them to offer transparency, diversification, and lower costs to investors.”

This is making many of the established fund houses see red. One, it means more competition as many of the new entrants are coming in with passively managed funds. Second, this comes at a time when the regulator is steadily shrinking the total expense ratio for the industry in general. To match up, the incumbents will have to come up with passive offerings of their own, which does not move the needle for them since the fees are quite low.

The more vocal among the active fund management camp are going around saying that the proliferation of too many passive funds is not a good thing either because if all the funds are chasing the same set of stocks, returns will suffer.

Let bygones be…

Some of the PMS funds are said to be pulling their offerings out of the Small Case platform. One of the recent exits is by a PMS managed by an erstwhile fund manager of a leading fund house. Reason: the PMS providers are said to be unhappy at the Small Case platform displaying past returns of their schemes, as they feel this could land them in trouble with the regulator. From Small Case’s perspective, prospective investors won’t be enthused unless they see a track record to buy on the platform. And since it is a platform, they won’t be at risk of running afoul of Sebi rules binding on PMS providers. This seems to be a case of what is good for the goose not being good for the gander.

Uneasy Calm

Debt ceiling imbroglio, geopolitical feud with China, OPEC production cuts, Russia-Ukraine war, inflation, rate hikes, recession fears, banking crisis… the list of problems facing the US markets is longer than the Grand Canyon. Then why is Wall Street calmer than Lake Placid?

Because of the machines, apparently.

Quant funds, which rely on computer models and automated trading, have been doubling down on equity markets as other investors remain on the sidelines, reports WSJ. Quant funds’ exposure to US stocks is at the highest level since December 2021, according to data from Deutsche Bank. This has served as a key lifeline for the equity market. Mainstream investors, in contrast, have been pulling cash from stock funds and pouring it into money markets, ostensibly to cash in on the high interest rates.

Jobless in China

More bad news coming in from China. Urban employment among the 16- to 24-year-olds in China hit a record 20.4 percent in April – about four times the broader unemployment rate with many college graduates forced to take on low-paying jobs or settle for jobs below their skill levels.

From CNBC:

“This college bubble is finally bursting,” said Yao Lu, a professor of sociology at Columbia University in New York. “The expansion of college education in the late 1990s created this huge influx of college graduates, but there is a misalignment between demand and supply of high skilled workers. The economy hasn’t caught up.” The scourge of underemployment is another issue that Chinese youths and policymakers have to grapple with.”

Skin in the game

‘Capitalism if we win, socialism if we lose’ seems to be the unofficial motto of the financial world. It is refreshing, therefore, to see a firm crack the whip on wayward bets. Singapore's sovereign wealth fund Temasek Holdings has cut the pay of staff responsible for its $275 mn investment in FTX, the now bankrupt cryptocurrency exchange promoted by Sam Bankman-Fried.

“Although there was no misconduct by the investment team in reaching their investment recommendation, the investment team and senior management, who are ultimately responsible for investment decisions made, took collective accountability and had their compensation reduced,” Temasek said in a statement.

It did not, however, specify the amount of compensation cut.

Abhishek Mukherjee contributed to this article.