Short Call | Retail now the smart money, hotel stocks in demand, wired for profit, lure of gold

Indian Hotels shares were among the prominent gainers in Wednesday’s trade, climbing around 3%.

No mathematical formula or yardstick alone can be relied on for identifying growth stocks or for detecting when their earnings reach maturity. - T. Rowe Price

Till a few months back, foreign institutional investors were selling relentlessly, and domestic funds/individual investors were steadfast buyers. The plot has changed now, with FIIs buying aggressively and domestic investors using rallies to book profits. Post-COVID, domestic investors have become the deciding vote for market trend. This is in stark contrast to the previous bull runs when they were usually the ones left holding the bag when the rally ended. So what does it say about the near term trend when local investors—who have been more right than wrong in the last three years—decide to take some money off the table?

One possible reason is that there are alternatives for retail investors today, unlike three years ago when equities was the only game in town, thanks to low interest rates and a listless property market. That is no longer the case as both fixed income instruments and real estate are doing well. Combine this with the popular perception that stock valuations are beginning to get expensive, then it makes sense to encash some of the paper wealth and deploy it in other assets. Stocks may be booming, but having been through the correction between October 2021 and March 2022, many investors may have realised the truth in the adage that trees don’t grow to heaven. (There is a second part to that adage—roots don’t grow to hell, but it is not yet time for that one)

Checking in

After a couple of months of consolidation, the hotel story appears to be finding takers again. Indian Hotels shares were among the prominent gainers in Wednesday’s trade, climbing around 3 percent. The hospitality story is pretty straightforward—rising room rates, strong demand despite the high rates and slower addition of rooms. There is reason to believe that the hotel industry will do well in the foreseeable future, but at the same time investors should remember that hotels are a cyclical business. The stock returns of most hotel chains look good post-COVID, but they don’t have a long term track record of having created wealth.

Hospitality bulls are saying that this time is different, because many hotel chains are following an asset light model and are also in no hurry to add capacity. Cynics counter saying that pricey real estate and rising wage bills due to talent shortage will force hotels to raise tariffs further, to a point where demand will begin to hurt. Not to mention competition from the likes of AirBnB and home stays.

Wired for profit

Shares of wires and cable maker Polycab India are on a roll after reporting strong first quarter earnings. In addition, the management is expecting to hit the revenue target of Rs 20,000 crore much before FY26, which was the date it set earlier. Not long back, investors would shy away from companies selling to the government because there was no saying when the payments would be cleared. But looking at the craze for defence stocks and also companies like Polycab which are an indirect play on the B2G (business to government) segment, the government’s credibility as a paying customer seems to have undergone a dramatic rerating.

Polycab has been one of the big outperformers of the year, gaining over 50 percent. If options positions are anything to go by then the rally may still have some steam left. Call unwinding was seen at below 4,200 strikes along with heavy put writing, which likely sets the stage for another leg of the rally.

Bullish retail

You can’t blame retail investors in India for going ga-ga over stocks. It is the same in the US market too. Risk-on investments are the most popular among retail investors in more than 18 months, reports the WSJ. Meme-stock mania is back, with the MEME ETF—tied to the Solactive Roundhill Meme Stock Index—rising 61 percent this year.

From WSJ:

“Retail traders are all-in. Bullish sentiment—represented as the expectation that stocks will rise in the next six months—this month hit its highest level since 2021, according to surveys by the American Association of Individual Investors. Rather than scoop up options that would protect portfolios’ gains if stocks fell, investors are reaching for bets that would pay out if the rally continued. The put-call ratio—a measure of fear in the options market—has fallen to its lowest levels since January 2022, according to CBOE Global Markets data.”

Lure of gold

Inflows into bullion-backed exchange-traded funds on Monday showed holdings ticking higher for a second day following a 19-day run of declines, reports mining.com. Also, money managers are finding more appeal in gold, having increased net-long positions to a five-week high.

What the FEOC!!

US policymakers looking to promote the development of a domestic electric-car supply chain without help from Chinese battery raw materials seem to have run into a peculiar problem, reports Bloomberg. How do you treat battery materials produced using Chinese capital in other countries? While the department provided some guidance in March, allowing certain vehicles to qualify for a $7,500 tax credit, it has yet to clarify how to categorize "foreign entities of concern" (FEOC), referring to businesses or groups owned or controlled by countries considered geopolitical adversaries like China and Russia. From next year, any EV with battery components manufactured or assembled by an FEOC will be ineligible for the tax credit. By 2025, an EV will lose eligibility if its battery contains critical minerals extracted, processed, or recycled by an FEOC.