Budget 2020

Why PSU banks & NBFCs may be a better bet over next 1 year


Incremental investments may go into PSUs as well as smaller private sector banks just to get the alpha going, says Dipan Mehta, Director, Elixir Equities.

Barring the post Budget rally when the banks actually led the charge, we have seen stark underperformance from banks. Even the most preferred ones on the street like an ICICI Bank are struggling to stay afloat at Rs 580. What is causing this underperformance?
To an extent, private sector banks are over owned and investors are moving into some of the smaller sized banks within the private sector space like IDFC First,

. That is one trend which is underway. More importantly, the next 12 months look far more exciting for PSU banks, for NBFCs per se rather than the stable, safe banks like HDFC, ICICI, Axis and Kotak.

A more risky trade is playing out in the bank stocks and the Bank Nifty has underperformed because it has got high weightages from the large private sector banks which themselves have been underperforming.

While private sector banks are a great story for the next three to five years or so, the next one year could see some underperformance vis-à-vis their peer groups in the smaller private sector banks and the PSU banks. That has been playing out over here and it may last for six to 12 months or so. But, at the end of the day, the four large banks have a superb track record, have great scope to improve their earnings going forward.

Just the other day we heard that HDFC is targeting SMEs and trying to maintain a 20% type of credit growth rate and that is quite fantastic from their price and their base. So sometimes good quality stocks do give underperformance but just because of three, four quarter underperformance, you do not really liquidate the position. You just ride out this period because when it is outperforming, it is difficult to catch at all points of time. That explains why the underperformance is there and incremental investments may go into PSUs as well as smaller private sector banks just to get the alpha going.

What would you pick from the commodity basket?
I would prefer to wait as far as commodities are concerned. There’s no point in jumping on to the bandwagon at this point of time. A lot of gains have been discounted. The increases in steel prices, aluminium prices and commodity prices per se have been discounted in the stock price and from this point on, the risk return profile is just not favourable. These are very cyclical industries. It is difficult to predict when the downturn will come. But at some point of time, when that does happen, then you can also see a sharp correction. In the last 15-20-30 years or so, they have not been great value creators and it will just be a distraction for investors, especially long-term investors.

The best time to buy commodities is when the cycle is on the low or down and steel prices, aluminium prices are at extremely low levels and the companies are bleeding. But that is not the case just now. I would just like to give a pass at this point of time. There are many other investment themes in these sectors.

What repercussion is this going to have for metals globally because all through 2020, metals have been in a good spot. Such a large infrastructure investment in the US and for eight years only means that metals are going to be in a good stead for a long time to come?
The assessment is right and that is what has got a lot of traders quite excited about metal stocks. But these plans last for a long period of time and the commodity cycles do not last that long. On the negative side, we are seeing that the Chinese economy is getting back into normal and the central bank over there is getting back into normalcy as far as monetary policy is concerned and they are trying to focus less on infrastructure and more on consumption.

So both of these economies and their demand for steel, aluminium will balance each other. It is just that I feel that metals at this point of time, given how notorious they are in terms of practicality and given the fact that it is very easy to set up new steel plants to expand capacity and to match supply with demand, I would just be a bit cautious given the run up in the stock prices.

There are some favourable macro trends and those have largely been discounted. We could see metal shares rally by another 10-15% but they can correct equally fast. It is very difficult from an investor’s perspective to play the commodity stocks and that is why we like to avoid them. But if you have a trading kind of a perspective or edge, then certainly metals can deliver decent returns in the short term.



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