Thinkpad: Tremors – Global, Local And Hyperlocal

Happy Sunday.

U.S. markets—the brightest spark in otherwise dismal surroundings—have seen some tremors lately. The Nasdaq, which hit an all-time high on Sept. 2, seemed to turn direction thereafter, falling 10% by the middle of this week. It stabilised thereafter but the volatility was enough to shake-up a debate on whether this was the beginning of a downtrend.

The consensus seemed to be that factors underpinning the rise in stocks, led by technology companies, were intact. The U.S. Federal Reserve and global central banks remain committed to ultra-easy monetary policy for the foreseeable future, so there is no reason for the broad liquidity fueled rally to fizzle out just yet. That said, will there be a rotation away from technology stocks with lofty valuations to those that may now offer value if economies start to recover?

This compilation of views offers some insights. Bloomberg reports that hedge funds bought the dips. So the smart money (for those who believe hedge funds are smart money) is signalling that the sell-off is not the beginning of a protracted slide.

Back home, the tremors will perhaps be felt starting next week, thanks to a circular from the capital market regulator.

SEBI has changed the minimum allocations in multi-cap funds. Multi-cap plans will have to invest at least 25% of the assets each in equity and equity-related instruments of large-, mid- and small-cap stocks.

BQ’s markets editor Niraj Shah explains that if the rule is implemented in its current form, the average volatility in multi-cap funds will increase because of a larger quantum of small-cap stocks in the portfolio. Of course, these funds would then be more representative of their classification. The other major implication is the inflows into small-cap stocks. A back-of-the-envelop calculation by brokerages and the BQ team suggests inflows into small caps could be close to Rs 24,000 crore.

But will it lead to selling on large caps in turn? Also will Sebi’s new rule force more allocations to companies where funds and investors have otherwise not been comfortable investing? Think about that till next week, when the issue will be hotly debated.

Here’s another tremor. This one hitting the already bruised and battered banking sector.

To our utter surprise, the matter of whether interest-on-interest (as it’s being called) should be waived for loans that went under moratorium continues to play out in the Supreme Court. Now, the government even has a committee to weigh in on the matter.

A few points. First, maybe we should stop calling it ‘interest-on-interest’, which makes it sound like banks are doing something immoral. It’s compound interest. It’s a basic banking concept. Second, if the government is even thinking of waiving a part of this, it will have to shell out the subsidy. You can’t expect the banks to do it. Third, who will get this subsidy? Those who took the moratorium for the entire six months? Or those who took it even for a month or two? Why penalise those who didn’t take it? This is a road we should really avoid.

Apologies if that last bit sounded like a rant. It kinda was.

Leaving you with a few good reads/conversations if you can make time.

JPMorgan’s Sajjid Chinoy does a deep dive into the ‘quadrilemma’ facing the Indian central bank in this article.

Expenditure secretary TV Somanathan explains the government’s viewpoint on the GST tussle in this conversation.

And The Guardian published an opinion piece written entirely by a robot. The robots are coming. Oh wait, they’re here. And they have an opinion. Just like all of us.

Till next week.