“In the stock market, the most important organ is the stomach. It's not the brain.” ~ Peter Lynch
The Nifty made a comeback after a weak start on Thursday, with traders attributing it to short covering on expiry day. Overall trading volumes continue to be lower than on the previous occasions when the market was heading for record highs. However, wealthy investors are more receptive to stock ideas than they were till a couple of months back. At least, nobody is talking about moving money from equity to fixed income instruments. That said, a mood of cautious optimism prevails, as investors are wary about chasing prices, according to dealers servicing HNI clients. Also, there is still a minority among HNIs who feel the rally is unsustainable. One of the red flags is that market is not punishing companies with poor quarterly earnings enough. “Companies reporting good numbers as well as those reporting mediocre numbers are being cheered by the market; that’s not a good sign,” says a stock market veteran. FII money continues to pour, but a good chunk of it could be passive flows through exchange traded fund (ETF) as most active fund managers are still not comfortable with valuations and the macro picture in the backdrop of a global slowdown, say brokers.
Too much of a good thing
Shares of Deepak Nitrite are struggling to hold at higher levels after a spike earlier in the week on news that the company has signed an MoU with the Gujarat government to invest Rs 5000 crore in that state over four years. When sentiment for the overall sector was bullish such an announcement would have sent the stock soaring for days on end. But the outlook for the sector in general has turned cautious with demand from key international markets slowing down. Morgan Stanley has rated the stock as underweight, with a target price of Rs 1714, highlighting that chemical companies across the board have stepped up capex plans over the last couple of years. That brings to mind what legendary fund manager Stanley Druckenmiller had said in his interview in the book ‘The New Market Wizards.’
“The ideal time to buy chemical stocks is after a lot of capacity has left the system and there’s a catalyst you believe will trigger an increase in demand. Conversely the ideal time to sell these stocks is when there are lots of announcements for new plants, not when earnings turn down. The reason for this behavioural pattern is that expansion plans mean that earnings will go down in 2-3 years, and the stock market tends to anticipate such developments.”
Still deemed as an ‘SIP’ stock by a section of market gurus because of its fantastic run between 2016 and 2021, the stock has been struggling since peaking out in October 2021. But bears looking for an easy picking have not had any luck as the stock has a shown a tendency to bounce back periodically even if the earnings growth over the last seven quarter have been nothing to write home about.
Defence the new defensive?
Once shunned by the market because of their over reliance on the government, defence stocks now appears to have acquired something of a ‘defensive’ tag, something that should hold ground in an uncertain market. The order books of leading players are robust at this point, and that explains why the market is willing to pay premium multiples for the sector. A section of the market feels that investors are getting too comfortable with the sector and ignoring likely cash flow and execution risks, which is also very much part of the game. A good long term story no doubt, but one cannot rule out near term hiccups. Wealthy investors who have made a killing in defence stocks are said to be holding on to their positions for a little longer. With HDFC’s defence sector fund set to start shopping for stocks shortly, the upswing could sustain for a while.
No longer a hot story
Before the earnings season began, banking stocks were the hot favourites, tipped to deliver strong numbers which could be sustained for the few quarters. But that narrative appears to have soured. The list of underperforming stocks in May has many names from the banking sector. Reason: banks have been hiking deposit rates and the impact of that will be felt in the next few quarters in the form of lower net interest margins. The widely held view is that the RBI may not hike rates in the foreseeable future now that inflation appears to be coming under control. In fact there is a growing view that the RBI may start cutting rates sooner than expected. That spells bad news for banks. When rates are rising, the loan book gets repriced faster than the deposit book, resulting in fat net interest margins. That is because a major chunk of loans are on a floating rate basis. The same rule applies when rates start falling. Borrowers will get the benefit of lower rates, while depositors will enjoy higher rates till maturity. This should not be so much of a problem if loan growth continues to be high. But some analysts have begun voicing concerns about loan growth in the current fiscal, which at best could be the same or slightly lower than last year. For banks which are expanding their branches and investing in technology and man power, there is an additional pressure on margins.
Overheard
Sanitaryware shares are back in demand, now that gas prices have begun to ease. A high networth individual and close ally of the late Big Bull, known for his investment picks as much as for his penchant for shaayari and songs, is said to be accumulating shares of Cera Sanitaryware. This HNI had held a 1 percent stake in the company till end of September 2022, and after that his name did not show up for the next couple of quarters, indicating that he may have possibly exited the stock or trimmed his position to less than 1 percent. He now seems to have had a change of heart resumed his purchases of the stock.
Plan B
Think of it as Y2K for the financial industry. With the US administration embroiled in the debt-ceiling crisis, Wall Street is preparing for the worst. Firms are putting in place a system to ensure investors can keep trading US Treasuries even if the US defaults on interest or principal payments next week. A series of conference calls will be held if the unthinkable happens to calm the chaos. Agenda items have already been prepared by the Securities Industry and Financial Markets Association (SIFMA) – whose members include banks, brokers and asset managers. Participants are hoping that the storm will pass over, like in 2011 and 2013. But with the world’s crazy quotient at lifetime highs, who knows?
Blaming the bears
Saudi has warned oil bears saying they may pay dearly for their short bets on crude. But Saudi may be missing the big picture, writes Bloomberg columnist David Fickling.
“All this scolding rhetoric is another sign that the Middle East’s biggest crude producer is underestimating the way that an accelerating energy transition and short-term economic weakness are squeezing demand for its product. In each instance, Saudi Arabia is failing to listen to what the money is saying.
The growth of electric vehicles is accelerating, air passenger numbers are finally forecast to return to their pre-pandemic levels next year, but will remain about 20% below trend growth of around 4% annually. Consumption of gasoline has peaked and road fuel as a whole will soon go the same way,. Even ships are switching to alternative fuels, leaving petrochemicals the only product set for strong demand growth.”
ClosedAI for Europe?
US Big Tech battling EU regulations is a long-running prime time show. The latest episode features OpenAI, the company behind the headline-grabbing Chat-GPT artificial intelligence tool. OpenAI’s boss Sam Altman has threatened to pull out of Europe if a proposed legislation increases its compliance burden.
The EU’s AI Act was initially designed for specific use cases, like medical imaging or loans sanctioning. However, with AI systems witnessing supersonic advances, the European Parliament earlier this month proposed to widen the ambit of the law. The new rules, which will have to be approved by the member states, make companies partly liable for how their AI tools are deployed, even if they have no control over the myriad applications which use their technologies.
Wonder what ChatGPT has to say about this.
(Abhishek Mukherjee contributed to this article)
