“Guessing at the future rate of interest is, in my opinion, one of the most puzzling problems in the world.” ~ John Maynard Keynes
Bulls prevailed for the third straight session on Wednesday even as near term outlook on the market remains cautious. Trading volumes are low and institutions too are not showing much interest. One of the popular ‘March’ theories in the market is that mutual funds typically support the prices of their favourite stocks to juice up the net asset value (NAV) for year-end purpose. That is not playing out this time as inflows into equity schemes have slowed down of late. At the same time, many wealthy traders are cutting back on some of their positions to gets their account books in order ahead of the year end. FII net short positions in index futures have now climbed to 85 percent, surprising, as one would have expected some short covering in a rising market.
Bulls in Hindustan Aeronautics are worried if the stock will go the IRCTC way now that the government has announced its plan for an offer for sale. The floor price for the OFS--3.5 percent stake or roughly 1.17 crore shares—has been fixed at Rs 2450 per share. The market’s long standing complaints about PSUs is that the moment the companies start doing well, there is either some policy change that affects earnings (think ONGC, OIL) or an OFS by the government. IRCTC shares tanked shortly after the OFS at Rs 680 per share in December and since then have traded way below that price. There is a difference though. The internet platform story in the case of IRCTC is no longer hot, and besides the company’s earnings from its main line of business—internet ticketing—is not growing at the same pace as before. In comparison, the defence story with bulging order books and earnings visibility for the next few years still seems to have some steam left. And yet, veteran brokers will tell you that irrespective of how attractive the fundamental story, an excess supply of shares is never a good thing in the short run.
The stock seems to be back in favour with the market now that gold prices are rising. The shares have underperformed over the last three years as banks made inroads into the gold loan segment, the mainstay of Manappuram Finance. For long, it was felt that banks would not be keen on expanding their presence in this business, and even if they did, local NBFCs would do a much better job of it. That assumption turned out to be wrong. Banks got into gold loans in a big way, given the juicy margins, and they offered lower interest rates, forcing NBFCs like Manappuram and Muthoot to do the same. In addition, falling gold prices also led to a spike in defaults by customers. The price war on interest rates has now abated, and high gold prices mean that gold loan firms can lend more against the same quantity of gold. Besides, gold loan firms will be less worried about defaults because they can always sell the jewellery and recover the outstanding dues. Some brokerages have again turned bullish on Manappuram. But the bet could be different this time around. Analysts are not hopeful that the gold loan business alone can change Manappuram Finance fortunes, or any gold loan NBFC for that matter. Banks have demonstrated that they can play the gold loan game as good as the established NBFCs. Those with a bullish view on Manappuram will have to bet that the NBFC will be able to make up for the market share loss in gold loans by performing better in its other line of businesses-commercial vehicle loans, mortgages, SME and personal loans.
US markets’ about turn
US markets initially rose as the Federal Reserve hiked rates by 25 basis as expected, but later fell sharply after Fed chair Jerome Powell’s speech. What could have caused the about turn?
“At first, Powell’s reassurances that the “banking system is sound and resilient” continued soothing markets. Then Powell started talking about “tighter credit conditions for households and businesses” which were not reflected in stock indexes since they “don’t necessarily capture lending conditions.” This signaled to markets that the economy could be in a worse place than many had expected.”