Moneycontrol Pro Weekender: The Gremlin Boogie hangover

Dear Reader, 

For the markets, 2024 started with a hangover, which is hardly a surprise, given the wild partying that had begun even before Powell gave the green light for the festivities. Powell’s dovish cooing led to a celebration, the likes of which hadn’t been seen in a long time—the Bank of America survey of fund managers for December 2023 said investors were the highest stock overweight since February 2022, the highest bond overweight in 15 years, the lowest cash overweight since April 2021 and the highest commodity underweight since June 2017. In that context, the morning after’s hangover has been rather mild.

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The real questions are: is the Goldilocks 2024 scenario of a soft landing with low inflation still intact? And how much of that has been baked into stock prices? It is the uncertainty around these questions that the markets are grappling with. As Moneycontrol Pro’s independent research team put it, ‘investors today are a happy but a nervous lot, not savouring the fruits of their investment for fears of an imminent correction’. After analysing the markets in depth, they concluded that ‘while bears might fight to make a comeback, by the end of the year, the bulls are likely to have the last laugh.’

Second thoughts about the rally were triggered by the minutes of the last Fed meeting, which, as this FT story (free to read for Moneycontrol Pro subscribers) points out, added to doubts that the US central bank is poised to begin cutting interest rates as early as March, dashing market expectations. Our columnist Ananya Roy points to inflated valuations and advises caution for investors even as they ride the rally. What that translates into, at a practical level, is that 2024 could be the year of alpha stock pickers rather than macro chasers, as S Krishnakumar, the founder of Lion Capital, told us in this interview. You’ll find some of these alpha stock picks from my research colleagues below.

Some incoming data in the new year have been upsetting. Germany’s retail inflation, for instance, moved up to an annualised 3.7 percent in December, up from 3.2 percent in the previous month. Retail inflation in France too was higher. Inflation according to the Eurozone consumer price index too came in higher for December, albeit a bit lower than forecast.

Geopolitics has sent an early signal that it continues to be a problem, with attacks on ships in the Red Sea leading to a surge in shipping costs.

As for growth, the US Composite Purchasing Managers Index (PMI), a snapshot of private sector activity in both manufacturing and services, picked up a bit in December. Despite the improvement, Chris Williamson, Chief Business Economist at S&P Global Intelligence, said, "The more challenging demand environment has dampened firms’ pricing power, squeezing service sector selling price inflation to the lowest for over three years on average during the fourth quarter. With sticky service sector inflation being a key area of concern among Fed policymakers, the slower rate of price increase in December is welcome news." The PMI numbers so far bear out the US soft landing hopes. The Composite PMI also edged up in December for Japan and the UK, while the reading continued to be in contractionary territory (below 50) in the Eurozone.

India is in a different league altogether. In India, the Composite PMI accelerated to 58.5 in December 2023 from an already high 57.4 in November. The strength of India’s PMI is seen when compared to the US Composite PMI of 50.9, of the UK at 52.1, the Eurozone at 47.6, of Brazil and Japan at 50 and China at 52.6.

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It is this strength in the economy and the acceleration in momentum that has led India’s National Statistical Office to forecast real GDP growth of 7.3 percent in 2023-24 in its first advance estimate, which is higher than the RBI’s estimate of 7 percent.

The only concern is that the strong demand could lead to price pressures. The PMI survey said, ‘The rate of increase in prices charged for the provision of services in India was solid, above its long-run average and faster than that seen for input costs. The upturn was reportedly induced by rising instances of firms passing on cost burdens to their customers.’ Furthermore, since nominal GDP growth is estimated to be 8.9 percent in 2023-24, while the assumption in the Union Budget was for 10.5 percent growth, that would mean the government may have to curb spending in the next few months to keep the fiscal deficit at the targeted 5.9 percent of GDP. However, the first advance estimate is only a rough extrapolation and it’s certain to get revised and re-revised over time.

The immediate trigger for the markets, though, is the US non-farm payrolls for December, which came in far better than expected. The unemployment rate came in lower than expected, while average hourly earnings rose more than consensus. That led to a drop in the probability of a Fed rate cut at its March meeting, although the market is still pricing it around 50 percent. On the other hand, non-farm payrolls were revised lower for previous months, so it’s best to take the numbers with a pinch of salt.

For the markets, while the strong jobs report points to decent growth, it raises the prospect of inflation remaining high and dampens expectations of a rate cut. The question the Fed has avoided so far is whether the loosening of financial conditions, as seen in the sharp drop in bond yields, has contributed to growth and the continued strength of the labour market.

Perhaps, as this FT story says, ‘’If financial markets are correct in suggesting the desirability of an early rate reduction, they have gone too far in suggesting interest rates will decline almost as quickly as they rose, pricing in 1.5 percentage points of reductions in both the US and eurozone this year.’’

How long will the hangover last? That will depend on the kind of hangover. In his hilarious novel ''The Mating Season', PG Wodehouse wrote, ‘I am told by those who know that there are six varieties of hangover—the Broken Compass, the Sewing Machine, the Comet, the Atomic, the Cement Mixer and the Gremlin Boogie, and his manner suggested that he had got them all.’

The one the markets are suffering from is probably the Gremlin Boogie, which, according to this blog, ‘’ is almost always experienced in groups and its symptoms include an unfounded sense of wellbeing, hysterical laughter, the desire to buy goods which at other times would be deemed unnecessary and a masochistic enjoyment of the other types of hangover. Most commonly, it fuels within the sufferer a rampant desire to continue drinking, the victim becoming so caught up in the joy of the communal hangover that he or she cannot bear for the experience to end. Indeed, it is generally wise to allow the Gremlin Boogie to run its course.’’

Cheers, Manas Chakravarty

Here are some of the other stories and insights we published this week, apart from our technical picks in the equity, commodity and forex markets:

Stocks 

Cera Sanitaryware, Why this NBFC is an ideal bull market stock, Utkarsh Small Finance Bank, NCC Ltd, DCB Bank,  L&T Technology Services, Syngene, Bosch, What can investors expect from FMCG companies in the December ’23 quarter?; Ujjivan SFB, Weekly tactical pick, Avalon Tech and Elin Electronics, Prudent Corporate Advisory Services

Markets 

MC Markets Poll for 2024

SME IPOs: Here are 7 tips to tell the good from the bad

The froth in small and midcap stocks

What drives the PSU stocks rally?

Which price do professional traders watch the most?

Sharp volatility, correction likely ahead of Q3 results

Financial Times 

The Magnificent Seven is not the only concentration America should worry about

Year in a word: Higher for longer

LEX: Iron ore/China--rusty metal shines in markets

Ruchir Sharma: Top ten trends for 2024

Inside Edge 

Indiabulls' believers, Man Friday eyes Themis Biosyn, Market veteran's scion eyes Dishman, collecting is the new diversification

Wockhardt’s new bull, options ‘genius’ of Bhatkudgaon, wealth god’s Zee buying binge

Cement stock catches fancy, Mankind's giant leap, SEAMEC's stranded get a lifeboat, trading landbank for a landline

Companies and industry 

Steel industry faces a new risk on the horizon

Will traction in 2W sales alleviate concerns of K-shaped recovery?

Trouble at the margin for FMCG companies and distributors?

Iron ore’s uptrend signals expectations of buoyant steel output 

Rising demand for windmills improve project pipeline for Suzlon, Inox Wind

Diagnostic companies

Economy and policy 

Can Panagariya rekindle the spirit of co-operative federalism?

Wide state bond yield spread benefits investors but won’t hurt states much

Pro Economic Tracker

Healthcare regulation—what should be the watchdog’s mandate?

Manufacturing PMI shows moderating growth, lower input costs

Time to give Aatmanirbhar India a Chinese makeover?

Designed to help, Aadhaar is a nightmare for the poor

The Green Pivot 

Booming EV sales are good for car companies but not so much for the climate

Carbon reduction alone isn’t enough, India needs to step up on carbon removal too

India’s solar energy capacity is growing but challenges remain

Tech and startups 

Is your AI program racist?

Startup Street: Social justice and the startup ecosystem

More principles, less hollow valuations from startups

Geopolitics 

OPEC is losing its mojo

The Pakistan military will call the shots in forthcoming elections and dictate foreign policy 

Budget 2024 

Budget Snapshot | India's government punches above its weight in garnering revenue

Budget Snapshot | How does India’s fiscal deficit compare with its peers?

Budget Snapshot: How does India compare with East and Southeast Asian nations on government spending?

IMF recommends a new Fiscal Strategy statement for Union Budget

Pre-Budget wishlist: Give greater flexibility to the self-employed to switch between old and new tax regimes

Budget should push round-the-clock electricity generation capacity

Personal Finance 

Tata Mutual Fund launches gold schemes—is it too late?

Cyber frauds: How to avoid losing money to fraudsters 

Inequality will widen until giving becomes a part of personal finances

Stay with your investment strategy amid market euphoria

What to know about the 13 types of mortgage loans you can get to buy a home

Our experts answer readers' home-buying questions and write unbiased product reviews (here's how we assess mortgages). In some cases, we receive a commission from our partners; however, our opinions are our own.

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When buying a home, you'll need to decide which type of mortgage is the best fit. 

Your decision may come down to how much you need to borrow and how strong your finances are. If you don't qualify for one type, you may be able to find another one that's a good match.

A conforming mortgage is a type of conventional mortgage, or a mortgage not backed by a government agency such as the FHA. 

These mortgages meet the conforming loan limits set by the Federal Housing Finance Agency (FHFA). The FHFA sets the limit for conforming loans every year, and in 2024, the limit is $766,550 in most parts of the US. In areas with a higher cost of living, the limit goes up to a ceiling of $1,149,825.

Many mortgage lenders require a 620 credit score and a maximum debt-to-income ratio between 36% to 50% to get a conforming loan. You'll need at least a 3% down payment if your mortgage is backed by government-sponsored mortgage companies Fannie Mae and Freddie Mac, though individual lenders may require more.

You'll pay for private mortgage insurance on a conforming mortgage if you have less than 20% for a down payment. PMI typically costs between 0.2% and 2% of your mortgage amount. You can cancel PMI once you have at least 20% equity in your home.

A jumbo mortgage, also known as a nonconforming mortgage, is another type of conventional loan. You'll need a jumbo mortgage to borrow more than the FHFA borrowing limit.

As discussed above, in 2024, the limit is $766,550 in most parts of the US., up to a ceiling of $1,149,825 in areas with a higher cost of living. A jumbo mortgage is for an amount higher than these limits.

Eligibility requirements for jumbo mortgages are a bit stricter than for conforming mortgages, because lenders are taking a greater risk by lending you more money. Each lender has its own requirements for nonconforming mortgage, but you'll likely need a higher credit score, lower debt-to-income ratio, and bigger down payment than you would for a conforming mortgage.

There are three types of government-backed mortgages, or home loans backed by federal agencies: FHA, VA, and USDA. If you default on your mortgage payments, the agency compensates the lender. This makes the loans less risky for your lender, and therefore more accessible for you.

An FHA mortgage is a government-backed mortgage insured by the Federal Housing Administration. You can get an FHA mortgage with a 3.5% down payment if your credit score is 580 or higher, or with 10% down if your score is 500 to 579. Most FHA mortgage lenders require a debt-to-income ratio of 43% or lower.

You don't have to pay for PMI with an FHA mortgage, but you do have to pay for a different type of mortgage insurance. It will cost you 1.75% of your mortgage at closing. Then you'll pay an annual premium of 0.45% to 1.05% of your mortgage.

A VA mortgage is a government-backed mortgage guaranteed by the US Department of Veterans Affairs, and it's for military families only. VA mortgages typically come with lower interest rates than conforming mortgages, and you don't need a down payment.

You will need at least a 660 credit score and 41% debt-to-income ratio to qualify for a VA mortgage.

You won't have to pay for mortgage insurance, but you will pay a funding fee.  The fee is 2.3% of the amount borrowed if this is your first VA loan, or 3.6% if you've used a VA loan before. The fee will be lower if you have money for a down payment, though.

A USDA mortgage is a government mortgage backed by the US Department of Agriculture. It's for low-to-middle-income families buying a home in a rural or suburban area. The qualifying income limit depends on where you live in the US. The population restrictions are 20,000 for some counties and 35,000 for others.

Like a VA mortgage, a USDA mortgage comes with lower interest rates and doesn't require a down payment. Most lenders require a 640 credit score and 41% debt-to-income ratio. 

You will have to pay for mortgage insurance, but it should cost less than what you might pay for PMI or for insurance on an FHA mortgage. You'll pay 1% of your principal at closing, then an annual premium of 0.35% of your remaining principal. 

When it comes to locking in an interest rate, you'll choose between two types of mortgages: fixed-rate or adjustable-rate.

Depending on which type of mortgage you get, you may get to pick between the two types or be limited to just one. For example, you can select either a fixed or adjustable rate for a conforming mortgage, but you can only get a fixed rate on a USDA mortgage.

A fixed-rate mortgage locks in your rate for the duration of your loan. Although US mortgage rates will increase or decrease over the years, you'll still pay the same interest rate in 30 years as you did on your very first mortgage payment.

An adjustable-rate mortgage, commonly referred to as an ARM, keeps your rate the same for the first few years, then periodically changes over time — typically once a year. For example, if you have a 5/1 ARM, your introductory rate period is five years, and your rate will go up or down every year.

You might need a construction loan if you build a house and need financing to cover permits, supplies, and labor. 

Construction loans are short-term loans (usually for one year) that carry higher interest rates than regular mortgages. You may choose to pay off your loan once construction is completed, or roll it into a regular mortgage.

If you want to buy a home and make significant changes to it, you can apply for a renovation loan. The money you borrow for renovations will be rolled into your mortgage.

With a balloon mortgage, you'll make monthly payments as you would for any other type of mortgage for the first five years or so. At the end of that initial payment period, you'll pay off the total amount you still owe in one lump sum.

Balloon mortgages come with low interest rates, but they're risky. You might like a balloon mortgage if you expect to move out of your home or refinance before the initial payment period ends. This way, you'll benefit from the low rate without paying a ton of money all at once later. 

You also may prefer a balloon mortgage if you expect to receive a lot of money in the time between getting the mortgage and paying off the total amount. But this mindset can be dangerous, especially if the money you were expecting doesn't come through.

Balloon mortgages are risky for both the buyer and lender, so finding a lender that offers one may be difficult.

With an interest-only mortgage, you borrow money as you would with any other type of mortgage, and you make monthly payments. But you only pay off the interest charged by the lender, not the principal (the amount of money you borrow).

Interest-only mortgages have a set period, such as ten years, where you'll make interest-only payments. Once that period is up, you'll start paying both principal and interest.

Some people like this type of mortgage for the low monthly payments. But interest-only mortgages typically have adjustable interest rates, so your rate will fluctuate from year to year. You also won't build equity in your home, because you won't be paying down the principal.

Each lender sets its own eligibility requirements for interest-only mortgages, but you'll likely need a higher credit score, lower debt-to-income ratio, and bigger down payment than you would for a conforming mortgage.

A piggyback loan involves taking out two mortgages, one large and one small. The smaller mortgage "piggybacks" on the larger one. The primary loan is a conventional mortgage. The other is a home equity loan or home equity line of credit. 

There are several types of piggyback loans, but an 80-10-10 loan is probably the most common. The first mortgage is for 80% of the purchase price, the second is for 10%, and you provide 10% cash for the down payment. By combining the second mortgage and the money you already have saved for the down payment, you'll have 20% total to put down. This way, you don't have to pay for private mortgage insurance.

A reverse mortgage is a type of home loan for people age 62 or older. Unlike most of the other mortgages on our list, a reverse mortgage isn't the first mortgage you'll take out on your home. It's for people who have gained equity in their home since originally buying it, and likely have paid off their mortgage already.

A forward mortgage — which you probably think of as a regular mortgage — is a type of loan you'd use to buy a home. You make monthly payments to the lender until the home is paid off, and over time, your debt decreases.

A reverse mortgage, on the other hand, is used after you've already bought the home. The lender pays you, and the money comes out of the equity you've acquired in the house. Over time, your debt increases. 

When you eventually sell the home (whether you're living or dead), the proceeds go to the lender to pay off your debt from the reverse mortgage. Any additional money from the sale will go to you if you're living, or to your estate if you're dead.

If your heirs want to keep the property, then they can pay off the reverse mortgage themselves.

When you refinance your home, you replace your initial mortgage with a new one. There are multiple potential benefits to refinancing: locking in a lower mortgage refinance rate, making lower monthly payments, or canceling private mortgage insurance are just a few.

Because you're just applying for a new mortgage, much of the process will be the same as it was the first time around. The lender will still look at your credit score and debt-to-income ratio. But instead of determining your interest rate by looking at your down payment, the lender will consider how much equity you've accumulated in your home.

By far, conventional mortgages are the most popular mortgage type. In 2022, lenders originated more than 4.1 million conventional loans, according to Home Mortgage Disclosure Act data. By contrast, there were over 1.3 million nonconventional mortgage originations in 2022, including all FHA, VA, and USDA mortgages.

VA mortgages often have the lowest interest rates, though FHA interest rates are also relatively low and occasionally dip below average VA mortgage rates. However, if you have a great credit score, a low debt-to-income ratio, and a large down payment, you may be offered a better rate on a conventional mortgage.

Generally, an FHA mortgage would probably be considered the "easiest" mortgage to get, but you'll still need to meet certain criteria if you want to qualify. FHA mortgages are geared toward those with lower incomes or rocky credit histories, so if you aren't able to qualify for a conventional mortgage, you might want to see about getting approved for an FHA mortgage.

Laura Grace Tarpley, CEPF

Personal Finance Reviews Editor

Molly Grace

Mortgage Reporter