Short Call | From ‘ouching’ bears of crude oil to inflation fight; focus on Bajaj Auto, Blue Star; and forex woes

“OPEC conduct is nothing different from what a central bank, or a group of central bankers, is doing.” – Saudi Energy Minister Abdulaziz bin Salman

You could call it the revenge of the old economy. It is not just crude oil bears who are “ouching” (as the Saudi energy minister had warned in June this year) as oil prices race towards $100 a barrel, but also central bank heads and political leaders. A commodity said to be in decline has come back from the dead and now threatens to upset inflation targets as well as political fortunes, should the trend continue.

Energy stocks in the US are a big hit with investors and back home, shares of refiners continue to reward their believers. Also having their day in the sun are power utility companies, which continue to rally despite a section of analysts warning the valuations are getting into the expensive zone.

Bajaj Auto

The company’s boss Rajiv Bajaj says that the entry-level segment consumer is not coming back this festive season, unlike in other segments. One reason could be that they are probably looking at electric vehicle models, Bajaj told CNBC-TV18. He feels the entry-level segment needs some disruption.

Bottom of pyramid

Kumar Rajagopalan of Retailers Association shares a somewhat similar view as Bajaj. Inflation is a concern and that is hurting the bottom of the pyramid consumers the most, he told CNBC-TV18. The problem persists and a recovery is badly needed in that segment, he said.

Blue Star

The company will be raising Rs 1,000 through a qualified institutional placement. Stock has had a decent run in 2023 so far, up 33 percent, but bulk

of the gains came between January and March end. With summer sales of air conditioners disappointing, investors have been cool to the stock of late. Neck to has had a better run than Voltas, but there are signs of investors once again warming up to Voltas as valuations are looking decent after the drubbing between March and August. Till a couple of months back, Blue Star was the clear favourite in the air conditioner space. But there seems to be competition now. Investor preference in the coming months will depend on how are the companies are able to maintain/grow market share without margins getting affected.

Shocker ahead?

Investors are in denial about the impending crash in Gujarat Fluorochemicals earnings, according to broking firm Incred Equities. Analysts at Incred see quarterly profits halving over last year and at declining by 15-17 percent over the June quarter.

“Exports are collapsing, the bread-and-butter business of fluoropolymer exports are falling as well are is at risk of being banned and HFC prices (which led to extraordinary earnings in FY23) is on its way down. The fine on 3M has led to volume decline of fluoropolymers and American policy announcement of cutting HFC consumption is leading to supply chain destocking before cut comes into place from Jan-2024,” says the note.

Interestingly, considering that fluorochemicals was one pocket within the chemicals sector which investors are still bullish on. That also explains why stocks in the fluorochemicals business have not been hammered as much as some of the other chemical companies.

Personal loans

Given its penchant for seeking out dark clouds wherever possible, Short Call managed to come across this paragraph in an otherwise rosy report on the NBFC sector by broking firm IIFL.

“We also highlight runaway growth in personal loans (27 percent four-year CAGR and 36 percent on-year in FY23) as an area of concern. We find rising vintage delinquencies for unsecured loans, rising small-ticket personal delinquencies that are 2x of big-ticket PLs and the falling approval rates by lenders — as signs of stress brewing up in the segment. We expect the fintech players and lenders who rely on them for sourcing (such as Piramal and AB Finance) to be mainly impacted.”

US bond yields

The 10-year Treasury yield hit a 16-year high of 4.366 percent on Tuesday. The 2-year yield climbed to 5.109 percent, its highest since 2006. The lowest number of monthly housing starts since June 2020, coupled with hotter-than-expected inflation in Canada, has reignited fears of a possible rate hike by the Fed later this year, reports WSJ.  High bond yields are one of the main reasons keeping stock prices in check, say analysts.

Iron ore

The recent rally in iron ore has turned out to be short lived. Prices fell for the second successive day Tuesday due to increasing domestic supply in China and ongoing concerns about demand, which have been exacerbated by a prolonged downturn in the property market, reported Mining.com.

Turbulence ahead

Several US airlines expect declining revenues due to unexpectedly high jet fuel prices, despite increasing passenger numbers, reports oilprice.com. That is prompting aviation companies to review their fuel hedging and ticket pricing strategies. Business travel is recovering slower than leisure travel, and with seasonal decreases in domestic travel and inflation, maintaining revenues could be challenging, the report said.

China diary

China’s local government financing vehicles (LGFVs) are staging a comeback in credit markets, with a surge in yuan bond sales as Beijing intensifies efforts to defuse risks from the debt-laden group of borrowers, reported Bloomberg. Domestic bond issuance by LGFVs, which are typically tasked to build infrastructure projects, reached nearly 620 billion yuan ($85 billion) in August, an almost 50 percent jump from July and the third-highest monthly tally on record, the report said.

Rising yuan

While the yuan is struggling in the foreign-exchange market, it continues to grow its market share in China’s cross-border transactions as the No. 1 payment currency, reported Bloomberg. That reflects progress of the yuan’s internationalization in trade, as well as growing influence of foreign capital flows to China’s financial markets

Four day work week

The striking United Auto Workers (UAW) in the US is calling for, among other things, the introduction of a four-day, 32-hour work week, at the same rate of pay, and overtime pay for anything beyond that, reports CNBC.

“Our members are working 60, 70, even 80 hours a week just to make ends meet,” said UAW president Shawn Fain on a Facebook Live event last month. “That’s not a living. That’s barely surviving, and it needs to stop.”