FRONT RUNNING
The mega-recapitalisation of public sector banks drove the market to new highs. PSU banks saw unreal spurts in share prices. Singlesession gains exceeded 25 per cent for the ones listed in the futures and options sector. When it comes to details, however, the story is hard to judge from a valuation perspective.
The government will issue recapitalisation bonds of ~1.35 trillion, which the banks will buy. The government will reinvest that money in PSU bank equity. This is in addition to ~18,000 crore that it had earlier committed as bank equity investments. Plus, the banks will sell another ~58,000 crore worth of equity. All this will happen over the next two years.
The terms of the bonds are unknown. The impact on government finances is, therefore, unknown. It is unknown if the banks will be allowed to sell the bonds on the secondary market. It is also not known if that ~58,000 crore will be raised by issuing fresh equity, or by selling existing government of India stakes. We don’t know how this recapitalisation will be split across banks, some of which are in reasonable shape and some of which are technically bankrupt.
What we do know is that the government’s equity stakes in the banks it already controls will increase. So will the equity base of all recapitalised banks. This year so far, we’ve seen ~30,000 crore or so raised in all IPOs. If ~58,000 crore is committed to PSU bank equity and there are secondary sales of recap bonds, there will be a crowding out of investment for other instruments.
This period coincides with many assembly elections and a general election. There will be more farm loan waivers, free electricity schemes, etc. That can’t be good for PSU banks. For recapitalisation to reach Basel III thresholds will probably require another ~2 trillion or more. That would mean another dose of mega-funding.
There were some statements about reforms in PSU bank processes but no concrete announcements. If PSU banks continue operating normally, this will just kick the bad loan problem down the road. Anyhow, the PSU banks will now find it easier to offer credit and that might give some stimulus, even if a large proportion of new loans eventually goes sour.
Focus on bank recap meant less attention paid to Q2 results. It’s worth noting that expectations were low. It’s also worth noting that expectations for Q3 (October-December 2017) are high because the economy tanked after demonetisation and there will be a positive base effect.
Some banks have declared Q2 results. Axis Bank continues to struggle, as does Canara Bank. IDFC Bank will get a “free pass” since it’s a newcomer. ICICI Bank generated lower profits but also stabilised the NPA (non-performing assets) bleed. HDFC Bank saw a jump in provisioning, mainly due to one account.
Among other sectors, the cement majors, ACC and Ambuja, saw sharply rising revenue and earnings per share. Bajaj Auto and Biocon had poor results with lower profits. Maruti was flat in terms of profit despite strong revenue expansion. Colgate Palmolive had lower profits but Hind Unilever registered double-digit profit growth and ITC didn’t do well. Among IT majors, TCS had lower profits. Infosys cut guidance. HCL Tech took a hammering after the results were released. Mindtree has done well. The market seems to like the prospect of Airtel taking over the two Tata telecom companies. This gives the Bharti group another 40 million subscribers and cheap spectrum since it’s a costfree deal.
Traders were waiting for the European Central Bank decision on its Quantitative Easing programme. The ECB has decided to taper to 30bn/month from January 2018 from the current quantum of 60bn/month. It will keep the QE going till Sep 2018 at least. That’s less hawkish than expectations.
The news from Japan was also supportive of status quo. The Bank of Japan will continue its own QE programme of course—that was a known. But Shinzo Abe comfortably winning re- election gives his Abenomics a renewed lease of life.
In the US, there’s speculation about the likely new chairperson of the Federal Reserve as Dr Yellen’s term looks unlikely to be renewed by the current administration. As of now, the Fed continues to look somewhat hawkish, even though inflation doesn’t seem to have caught up with strong US growth.
Next year could see some tightening of liquidity across hard currency zones. If the Fed raises policy rates and also sells off some bonds, it will reduce USD liquidity and raise US yields. If the ECB tapers and then cuts, that reduces Euro liquidity and raises EU yields. This might make foreign portfolio investments less happy about investing in emerging markets. They were net equity buyers in October, however, with all the money coming in after the recap announcement.
Technically a market that is hitting successive new highs every week is obviously bullish. The optimists are predicting a run till Nifty 10650 in November—up another three-four per cent or so. The pessimists expect some selling with consolidation at above 10,000 levels.