Short Call | Will the bears loosen the grip on midcaps and is rising uncertainty taking toll on realty shares?

“Liquidity does not exist unless someone else is willing to give you cash in exchange for the piece of paper you want to sell.” ~ Peter Bernstein

There is clear lack of confidence among bulls. That was evident from the way in which the market floundered after a firm start on Wednesday. Some rules of the market never change, one of them being that high interest rates is bad news for equities. Even Dalal Street veterans are talking about moving a part of their portfolio into fixed income mutual funds and bank FDs. “Why lose sleep over stock prices when you can easily make 7 percent or more at a much lower risk,” is the chorus among market players.

Net short positions by FIIs in index futures has risen to 76 percent, the highest in the last couple of weeks. Net long positions of retail investors in single stock futures has spiked to 82 percent. Given the worsening mood in global markets, most likely that the weak hands will be forced to liquidate their positions.

Realty shares had another bad session on Wednesday. The bearish outlook is despite the companies’ fundamentals looking much better in many years.

“High interest rates is only one part of the reason,” Delhi-based investor Manoj Dua tells Short Call. “Anybody taking a home loan will know that over a 15-20 year cycle, rates will rise and fall. More than interest rates, it is the uncertainty over jobs and income that could hurt demand for residential property. Given what is happening around the globe, the market is worried is about lay offs coming in the IT sector, which so far has been the biggest driver of demand.”

Bears are said to be going after midcaps trading at price to earning multiples without the earnings growth to back them.

“High PE large caps like Asian Paints, Nestle, Titan will struggle, but the drop won’t be vertical. Not so with midcaps, where the disappointment will be severe,” said an old timer.

Stock exchanges have frozen around 80% of the promoter holdings in Patanjali Foods as the company has not complied with the minimum public shareholding (MPS) rule of 25 percent. Public shareholders currently own 19.18 percent in the company. Finding buyers may not be so much of a problem as much as getting a good price (from the promoters’ perspective) in this market. The company has not yet given a firm deadline as to when it plans to offer additional 5.82 percent to the public. In its statement, Patanjali Foods said that it was “confident of achieving mandatory MPS within next few months.”

Takeaways from SBI’s meeting with analysts and fund managers, according to a Morgan Stanley note.

• Loan growth trends to remain healthy
• Margins to improve over next couple of quarters
• No capital raise near term
• Asset quality remains benign
• Return on Assets to sustain in 1-1.1 percent range
• Momentum strategy

Momentum investing was the rage between 2020 and 2022 as stock prices broadly moved higher amid periodic corrections. But now momentum investors are finding the going tough.

Manish Dhawan of Mystic Wealth told Short Call about the strategy he is adopting.

“Momentum portfolios are by design supposed to suffer in a range bound market. If you don’t want to move into cash altogether, one way of way of tackling this problem is equity curve trading. Create a trendline over the NAV (equity curve) of your portfolio, it could be something as simple as a 10 month moving average. Go into cash if your equity NAV line is below that moving average and redeploy when its comes back up.”

“No matter what you do, There is always a trade-off. While equity curve trading reduces big drawdowns, it comes with increased churn, and occasional whipsaws, not to mention the extreme unemotional discipline to pull the trigger.”

Would a stress test of SVB by the regulators have avoided the collapse of the bank? No, write Joseph R. Mason and Kris James Mitchener in Wall Street Journal. That's because the stress tests were asking the wrong questions:

"In its February 2022 Stress Test Scenarios, the Fed’s “severely adverse scenario” asked banks to assess their riskiness over a three-year horizon in a hypothetical world in which the three-month Treasury rate stays near zero while the 10-year Treasury yield declines to 0.75% during the first quarter of 2022. By February 2023, the Fed still hadn’t changed its regulations to match its monetary policy. While FOMC’s December 2022 projections show its policy rate reaching 5.1% by the end of 2023, the February 2023 severely adverse scenario was almost identical to that used in February 2022."

Payment processor Stripe raised $6.5 billion at a $50 billion valuation, the company said Wednesday, a sharp discount from its record valuation of $95 billion in 2021.The money is not for daily operations, but to provide liquidity to “current and former employees” and tax obligations associated with equity awards, the company said.