Gold Financing Companies Recover From Note Ban, Trump Shocks
Gold financing companies regain their sheen as the yellow metals prices recover.
Shares of gold financing companies, which fell after the Indian government’s decision to ban high-value currency notes, have made a strong comeback.
Stocks of Manappuram Finance Ltd. and Muthoot Finance Ltd. had declined over fears of a slower growth in assets under management, repayment worries and lower cushion from a 10 percent drop in gold prices after Donald Trump’s surprise victory in early November.
The yellow metal’s appeal as a safe haven seems to have returned, driven by uncertainty around Trump’s policies and concerns over Britain's exit from the European Union. Spot gold prices have climbed 7 percent on the Multi Commodity Exchange of India Ltd. since December 26, when Indian equities fell to their lowest level post demonetisation.
For Manappuram Finance and Muthoot Finance, which lend against gold as collateral, rising prices of yellow metal mean a higher collateral value and, hence, a lower default risk and fewer gold auctions.
Manappuram Finance, which was the most beaten-down stock in Nifty 500 post November 8 till December 26 (down 42.8 percent), has since rallied 35.8 percent, jumping back from sub-60 levels to back above Rs 80 now.
Muthoot Finance, which had fallen 25.5 percent from November 8 to December 26, has since run up 15 percent.
Both the stocks outperformed the Nifty 500 index, which climbed 7.7 percent during the period, by a huge margin.
Not surprisingly, according to Bloomberg, consensus ‘buys’ on both the stocks are at 100 percent, with eight analysts covering each of the scrips.
The demonetisation-led correction has made valuations reasonable while capturing near-term risks, say analysts.