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“You can’t imagine how many shrewd, experienced business men forget in Wall Street what it took them years to learn.” – Edwin Lefevre
End of party or opportunity to get in? That’s the question most market players are asking after the bruising sell-off in midcap and smallcap stocks seen on Monday.
There are two schools of thought here. The bull camp says that volumes were not heavy. This could indicate that the stocks collapsed because of lack of buying more than distress selling. When there is not enough buying in the market, small amount of selling can have a multiplier effect.
The bear camp’s argument is that the price decline was steady and the market closed near its low for the day. This suggests that many investors—most like HNIs—are steadily paring their positions, and that this trend could persist in the short term. The popular view is that even if there are earnings surprises, smart money may use the opportunity to temporarily shift to largecaps which appear cheaper when compared to smallcap and midcap firms.
HUL
The knives appear to be out for the FMCG sector, and being the face of the industry, HUL is in the line of fire. While downgrading the stock to a ‘hold’,
HSBC has highlighted the point that HUL has been a laggard for five years. Investors who have stayed in the stock for five years have not made any money. But what about investors who stayed put for 10 years? Well, they saw their wealth grow five-fold. The thing with stocks like HUL and most other FMCG stocks is that because of their expensive valuations, they work better for investors with a long-term view, may be in decades.
That’s because when markets go through a bullish phase, FMCG stocks typically tend to get overlooked as investors chase stocks that offer much higher rates of growth. And, while they are supposed to be steady performers, like commodity stocks, there are extended periods of underperformance for multiple reasons.
And, sometimes the lean patch could last for more than 10 years. For instance, ITC shareholders have seen mediocre returns for the last 10 years despite the stock doubling in the last 18 months. At the same time, those holding it for 15 years have seen their wealth grow nearly 10-fold.
SBI Cards
The stock was down 1.4 percent on Monday. The festive season is a boom time for credit card companies. The September growth rate for SBI Cards, though has not been inspiring, according to Morgan Stanley. Spends were up 7 percent on-year, but down 9 percent over the previous month, despite a robust growth in card issuances. October spends, however, look solid, says Morgan Stanley. But the stock price has gone nowhere over the last one year.
According to Digant Haria, the problem with SBI Cards lies elsewhere. “For a credit card business to be profitable, it should be able to make more money of customer spending (thus earning a cut from the merchant) and not from lending to customers (through EMIs or revolving credit). That is the model of successful global card companies like Amex,” he told Short Call.
“Dependence on lending for profits, however high the rates, means you will do very well in a good cycle and very badly in a downcycle (because of defaults). We have seen that in the past with SBI Cards. It has a lot of customers, but the share of premium customers who spend heavily is low,” Haria said on the reason for the market grudging SBI Cards a higher multiple.
Bond rally
Billionaire investor Bill Ackman wrote in a social media post on Monday that he has covered his short positions in the US government bonds amid rising global risks. Another famed bond investor Bill Gross, co-founder of Pacific Investment Management Co, wrote that he’s buying short-dated interest-rate futures in anticipation of a recession by year-end. (In a recession, interest rates fall and bond prices rise). This sparked a rally in US treasury bonds.
Is the worst over for the US bonds? There is a saying in equity markets that share prices never bottom out till the last bears have given up hope. If that holds true for bonds as well, then the rout may be far from over.
Weak demand
General Motors is leaving its guidance to build 400,000 electric vehicles by mid-2024, the latest sign that automakers are concerned about the viability of the market for battery-powered cars, reports WSJ. It comes as rivals, including Tesla and Ford Motor, have also raised red flags about consumer’s willingness to pay a premium for them over traditional models.
Super charging
Toyota’s new electric vehicle battery will offer a 745-mile range and only take 10 minutes to charge in what could be a breakthrough in electric vehicle adoption, reports Oilprice.com. The batteries could reach the market by 2027 or 2028, helping to catapult electric vehicles into mainstream use.
Low on charge
Japan’s charging infrastructure for electric vehicles is lagging that in other countries by a mile, reports Bloomberg. The 30,000 charging connectors in Japan translate to one per 4,000 users, according to data by Tokyo-based Enechange Ltd. That compares with one for every 500 people in Europe, 600 in the US and 1,800 in China, data compiled by Bloomberg NEF shows.
China stimulus
China on Tuesday eased financing conditions for local governments such as allowing them to borrow funds ahead of schedule. So far, the country’s measures to boost its economy have been way much slower what global investors were hoping for. One reason analysts say is that China does not want to repeat the past mistakes of overspending, especially in sectors like real estate.
Last Rites?
Last summer, Barron’s flagged seven companies with weak cash balances and high short-term debt that could be staring at a liquidity squeeze. Drugstore chain Rite Aid recently became the third name on that list after Party City and Bed Bath & Beyond to file for bankruptcy protection this year. Amid high interest rates, businesses are squeezed by inflation and falling consumer demand on the one hand, and higher financing costs on the other.
Rare earths
Australia will double the amount of money to support critical minerals projects to A$4 billion ($2.6 billion), reports Mining.com. The goal is to attract American miners and processing companies to establish operations there. Australia’s lithium shipments along were worth A$20 billion ($12 billion) in the 12 months through June.
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