Paytm hit 20% lower circuit

27th January 2024 – 3rd February 2024 | Another week in the markets

S&P 500	Nasdaq	VIX	DJIA	Russell 1000	NYSE
4,958.61	14,813.92	13.85	38,654.42	2,716.61	17,101.97
1.38%	2.85%	4.45%	1.43%	1.31%	-0.90%
Nifty 50	Gold	Silver	Brent crude	USD-INR	EUR-INR
21,853.80	$2,057.10	$22.79	$77.67	83.00	89.54
2.35%	1.93%	-0.50%	-6.44%	-0.15%	-0.76%

Source: MarketWatch 

Hello Saturday,

This week, Hotter than anticipated jobs date unravels rate cut hopes, Volvo slams brake on funding for EV affiliate and H&M shows the door to CEO over lukewarm growth and recurring crises.

• Employers added 353,000 new jobs in December as labour markets refused to cool down. The boom in hiring data kicked off a surge in bond prices underscoring investors’ belief that rate cuts slated by the Federal Reserve will have to wait for longer.
• As the tide starts turning against EVs, Volvo, one of the earliest convert to the EV bandwagon, decides to snip funding for Polestar, the electric car manufacturer it established along with Chinese automotive major Geely.
• Hennes & Mauritz rolled out the red carpet for the new incoming CEO Daniel Ervér outgoing CEO Helena Helmersson steps down from her position after a four-year stint. Helmerrson’s stint remained marked by intensifying competition and tanking sales for H&M.
• Paytm triggered a second straight 20% lower circuit after an RBI directive put a stop on all credit transactions of the Paytm Payments Bank. 
• Interim Budget lays out a fiscal consolidation path for the Indian economy

Taking stock | Job jumble puts the Fed in a fix | Volvo verdict | H&M’s hi-jinks | Paytm pains | Fiscal consolidation roadmap | Invest wisely | Another week in the markets

Taking stock

All three major indices registered a fourth straight week of gains powered by the earnings of the Big Tech companies. The S&P500 rose by 1.1% to clock in yet another record all-time high. Ditto with Dow Jones which notched up gains of 135 points closing at a record-breaking ninth time this year alone. The Nasdaq moved up by 1.7%

Job jumble puts the Fed in a fix

The US payrolls report released on Friday put up some more roadblocks for the Federal Reserve to overcome in its bid to tamp down on inflation levels in the US.

Jobs data released by the US Labour Department revealed that employers added 353,000 new jobs in December outstripping economists’ expectation of job growth by a massive two-fold. Distressingly, the job growth in December was the strongest reported surge in the previous year.

Fed Chair Jerome Powell who has been cautioning the markets that he can press ahead with the rate cuts only when the labour markets weaken will now have to wait longer before pushing out the rate cuts.

The stronger-than-anticipated jobs data triggered a bond yield surge, with the US 10-year treasury note hitting the high point of 4.051%. Rising bond yields signal that investors are expecting the Federal Reserve to delay rate cuts further. Markets will also be baking in expectations that the Federal Reserve will maintain the benchmark interest rates steady for the fifth time in a row at its next meeting on March 19-20.

Already, the Fed has been holding the benchmark federal funds rate in the range of 5.25 to 5.5%, a 23-year-high, in hopes of cooling economic activity and weakening job growth. However, the surge in employment numbers dashed the expectations of many analysts that a rise in the interest rates would lead to a rise in the number of unemployed and dent income inflows for a large section of the population.

Previously, Fed officials have indicated that slower growth and muted job data were required to bring down inflation and cool down soaring economic activity.

Volvo verdict

For a few quarters now, the tide has been turning against EVs. Customers who were enthusiastically lining up to get their hands on an EV, are now exploring conventional and hybrid options forcing EV manufacturers to go into a huddle over their sales strategy.

One of the companies in the said huddle is Sweden-based Volvo Cars. The company unveiled its plan last week to alienate itself from Polestar, a standalone EV manufacturer that Volvo set up in collaboration with Geely, a reputed Chinese car manufacturer.

Volvo and Geely listed the company on the Nasdaq in 2022 by deploying the modality of a special-purpose acquisition company merger. However, the listing seems to have left a sour taste for Volvo, considering that Polestar’s shares have tumbled by a whopping 83% since its listing.

Going forward, Volvo said that it is eyeing a possible distribution of its Polestar stake to other shareholders, including Geely. The Swedish company has a 48% stake in Polestar and the re-distribution of shares will make Geely a significant new shareholder. 

Analysts have been repeatedly spotlighting that Polestar’s business has been an operational mill around Volvo’s neck. The EV manufacturer has been lumbering with increasing losses, and falling sales in an intensely competitive market, effectively dragging down Volvo’s profits. Earlier, Polestar had raised $1 billion from Volvo as it struggled to put a turnaround plan in action. 

In a welcome respite for Polestar, Volvo said last week that it will allow Polestar to pay back the convertible loan by 2028, extending the payment due date by 18 months. Volvo officials also added that, for now, they will be focusing on meeting their own financial needs, and that it was the right time for Polestar to look for alternative funding sources.

Source: Google Finance

H&M’s hi-jinks

Bogged down by cut-throat competition and suffering from recurrent crises, H&M decided last week to bring in a new CEO to help steady its earnings boat. 

Under the helm of its outgoing CEO Helena Helmersson, the clothing retailer lost the crown of the world’s largest fashion retailer to Inditex, the parent company of Zara, while simultaneously facing snowballing competition from ultrafast rivals like Shein and elevated raw material expenses.

Helmersson will be replaced by Daniel Ervér, a 42-year-old company veteran. The news of the replacement of the CEO failed to enthuse the markets and a lower-than-expected fourth-quarter bottom line sent the stock into an 11% freefall.

On Wednesday, the company reported sales number that managed to exceed the pre-pandemic 2019 sales by 1%. However, markets were far from impressed considering that rival Zara-owner Inditex has been dishing out a superior performance. In 2022, Inditex’s annual sales figures were 15% higher than the 2019 numbers. 

Besides tanking sales, H&M has been grappling with several crises under Helmersson’s leadership. The former CEO assumed charge in January 2020, only a few months before the COVID-19 pandemic brought the clothing retailing business to a screeching halt. H&M’s sales also fell by a fifth that year as the lockdown forced several shops to shutter business.

This was followed by a consumer boycott of H&M goods in China in 2021 over the thorny issue of sourcing cotton from Xinjiang. In the latest annual results, H&M, which draws the majority of its sales revenue from China, has been witnessing a gradual growth in sales. However, compared to pre-pandemic numbers of 2019, sales in Asia were still down by 16%.

H&M’s business was further hamstrung by the Russia-Ukraine conflict which forced it put the lockers on 185 stores in Russia, Ukraine and Belarus. Meanwhile, rising raw material costs also prodded the company to launch a cost-cutting program, under which the retailer fired 1,500 employees and closed hundreds of stores.

Today, the company runs 4,369 outlets globally compared to over 5,000 stores it ran in 2019.

Paytm pains

One 97 communications’ shares suffered a meltdown for the second day in a row to end at ₹487.05 as a lower 20% circuit came into play. The shares of fintech Paytm have been taking a beating since the Reserve Bank of India restricted the digital payment arm of the company — Paytm Payments Bank — from taking fresh deposits on account of failure to comply with regulations and supervisory orders.

The company said that it expects its annual EBIDTA, that is, earnings before interest, tax, depreciation and amortization to be impacted in the range of ₹300 to ₹500 crores. The fintech also clarified that it is already working with other banks to move its business to third-party partners.

In a research note, investment banker Jefferies pointed out that RBI’s strongly-worded restriction on Paytm Payments Bank reflects concerns about persistent non-compliance. 

“Direct impact on wallets and payments can be 20-30% of Ebitda and reputational impact on lending partnerships can affect further by 20-25%,” said Jefferies.

Fiscal consolidation roadmap

In the Interim Union Budget of 2024-25, Finance Minister Nirmala Sitharaman laid the roadmap for hauling down India’s fiscal deficit to 4.5% of the GDP by 2025-26. For 2024-25, it is pegged at 5.1%.

The Finance Minister stated that the central government will be raising ₹14.13 lakh crore in the coming year as compared to ₹15.43 lakh crore in the current financial year. Meanwhile, the capex as per the interim budget is slated to be hiked to 3.4% of the GDP from 3.3% in the previous budget. Total capex spending allocated by the government has risen by 11.1% to ₹11.11 lakh crore. 

Sitharaman also pointed out that there will be no changes in direct and indirect tax rates.

Invest wisely 

Stronger than anticipated jobs data has further dampened the hopes of thousands of investors eyeing a rate cut in early 2024. Complicating market earnings is the surprising spurning of EVs and a rejection of established fashion brands by otherwise loyal and dedicated customers. Such twists and turns in the economy and the financial landscape are becoming fairly commonplace. Building wealth in such volatile and tumultuous markets requires clarity, insight and vision. With the right partner guiding you along the way, your wealth-creation journey can be a walk in the park. With the Appreciate app, you can seamlessly invest in the US markets and build prosperity and abundance in the long run.

Warm regards,
Another week
in the markets