Financial Stocks Surge As RBI Unleashes More Firepower

By November 23, 2020 Trading 2 Comments

Welcome to the 12th edition of our weekly musings!

As Covid-19 cases making a comeback in India’s top cities, India’s retailers, who were the beneficiaries of the pent-up demand caused by the festive season, remain cautious about the post-festive retail goods demand.

With localized lockdowns being introduced by India’s states post-Diwali, the strong demand witnessed in the month of October and November could subside in the first quarter of the calendar year 2021.

An important barometer for measuring demand would be the intent of consumers to spend in the months post-Diwali as the festival saw an uptick in sales of discretionary items such as automobiles, home appliances, etc.

All eyes will be on the RBI meet next week as the central bank is all set to announce the economic growth numbers for the Q2 of FY21. Markets estimates suggest a 9% contraction in the real economy in the quarter gone by. With this, India’s stint of remaining recession-proof could come to an end as for the first time after four decades, India would post a sequential contraction in the economy. Apart from the GDP growth numbers, RBI’s commentary on the year ahead prognosis will be crucial, along with the government’s intent to provide more firepower to India’s distressed states.

Although the economy contracted in the 1st quarter of FY2021, India witnessed a stronger than anticipated recovery from October as the nation’s high-frequency indicators such as power consumption, GST revenue collection, manufacturing, and services sector growth, exports, petrol and diesel consumption, air-traffic, etc. showed a sharp rebound.

The equity indices could turn volatile as with a spike in covid-19 cases globally. The consistency in the improving economic indicators will largely depend upon the vaccine approval and its distribution to developing and underdeveloped nations.

Booster Dose to India’s Shadow Lenders as India’s central bank leads from the front

As the RBI pumped-in more cash in the credit market, India’s financial service sector, showed an improvement in their borrowing and lending activities, mitigating the concerns about the recovery. The spreads on AAA-rated 5-year bonds fell the most in the last 4 months up to October.

With RBI facilitating easier borrowing to NBFCs, it bodes well for the MSMEs as well as the large conglomerates as these shadow banks are spread out across the country and have a better reach than many public and private sector banks.

RBI, in October, announced the financing of $13 billion worth of corporate bond purchases with the help of banks in order to maintain the yield under control. Moreover, in the last week, the government announced its version of the 3rd stimulus package and extended the credit guarantee program for the MSMEs.

Before the week ending on 22nd November 2020, the Internal Working Group of the RBI suggested permitting the large and well-run non-banking lenders to convert into banks. The NBFCs operating for more than 10 years and having an asset size of more than Rs 50,000 crore could be permitted for the same, subject to the government amending the banking regulations act.

From the broader perspective, the NBFCs and many market participants have welcomed this move as many big non-bank lenders have the desire to get the universal banking license to expand their business mix.

This was well evident from the recent rally in India’s financial services sector.

Nifty Financial Services Sector

Source: Tavaga Research

Following are the other big recommendations made by the internal working group of RBI:

  • Permitting ownership of banks by corporate and industrial houses
  • Cap on promoter’s stake, in the long run, could be raised from 15% to 26%
  • If payments bank intends to convert into a small finance bank (SFB), a track record of 3 years of experience as a payments bank would be deemed as sufficient to get converted into an SFB
  • Minimum initial capital requirement for small finance banks should be raised from Rs 200 crore to Rs 300 crore and Rs 500 crore to Rs 1000 crore for universal banks

Oil prices rebound as Covid-19 vaccine boost prospects; Rally expected to be short-lived

Brent crude oil stabilized and showed signs of a third consecutive weekly rise on the back of successful Covid-19 vaccine trials by Pfizer and Moderna with efficacies of more than 90%.

The oil markets were in focus as the hopes of a production cut by OPEC and its alliance partners further strengthened the rally in Brent Futures. Additionally, the oil prices fetched some support by the news of the US Senate Majority Leader resuming the discussions on a fresh stimulus as Covid-19 cases continue to surge in the US.

Brent Crude Oil Futures

Source: Tavaga Research

However, the rally doesn’t seem to be stable especially due to the volatile demand for petroleum products across the globe. Renewed lockdowns in Europe, localized curfews in India, and the much anticipated 3-4 weeks lockdown in the US with covid-19 cases making new highs on a daily basis could lead to subdued oil demand.

The distribution of the vaccines developed by Pfizer and Moderna poses logistical challenges for economies. In the past, large-scale vaccinations to specific sections of the society (like children), took many years to thrive.

Moreover, with Joe Biden emerging as the projected winner of the US Presidential Elections 2020, there will be more focus on renewable and clean energy with investors’ growing awareness about energy sustainability. Therefore, oil as a commodity doesn’t bode well for long-term investors, instead, multiple opportunities exist for cyclical trades due to the absence of a secular trend.

Bitcoin marching towards its all-time highs as Gold fails to continue its outperformance

Bitcoin is accentuating the focus and limelight from gold as a protection against fears and risks arising out of rising inflation and dollar depreciation after performing better than gold post the emergence of Covid-19.

The digital currency’s jump of more than 150% in 2020 brings it closer to its all-time high of $19,650 in 2017 and puts the digital coin’s price at the highest levels in more than two years.

The debasement of the US dollar due to the steepening yield curve, release of firepower by the Fed through quantitative easing, or the higher sovereign debt has led to bitcoin seizing the spotlight to be the hedge of choice.

However, the anxiety of investors for missing out on the rally in bitcoin is startling as the unstable nature of this cryptocurrency doesn’t augur well with investors, especially the retail category. The volatility and the fickle nature of Bitcoin, especially after going bust post hitting highs of $19,650 in 2017 makes the argument for bitcoin, a disputable one!

Coming up in the week

1. Minutes of the US Federal OMC – 26th November
2. France Q3 GDP data – 27th November

Happy Investing!

Download the Tavaga Mobile Application And Link Your Trade Smart Trading Account:

Google Play Store - Tavaga

App Store - Tavaga

Trade Smart has tied up with Tavaga Advisory Services, a SEBI Registered Investment Adviser (RIA).
Through the Trade Smart-Tavaga partnership, both companies intend to democratize investment advisory and cater to investors’ goals and needs through more transparent and efficient investing.
Tavaga & Trade Smart has issued this report for information purposes only. This is not an investment document. Please refer to https://tavaga.com/terms.html for disclaimers.

 

2 Comments

Leave a Reply