Where within banks do you find value? Would it be the erstwhile top private banks — the top five within not just banks but financials including the Bajaj Financial twins — that are your bet or are you looking at more bottom-up stories?
There are so many choices as far as banks are concerned, depending upon the risk appetite. For those with a long-term mindset and who want to hold a stock for three to five years and not worry too much about exceptionally high returns, can have HDFC, Kotak, Axis, ICICI and to an extent IndusInd Bank in their portfolio.
But with a little bit more risk appetite, there are two choices. One, look at the smaller private sector banks like Federal Bank or IDFC First or the entire PSU banks basket starting from SBI to
(BOI), (BOB) and Punjab National Bank (PNB).
So depending on the risk appetite, one can select the banking stocks one wants to invest in. The next least 6 to 12 months will be very positive for PSU banks and most PSU banks will outperform their private sector peer group by a huge margin. Beyond one year, one cannot say but the next 6-12 months look very exciting as their credit costs drop significantly and they benefit from resolutions and write-back of provisions. Pre-provisioning operating profits will remain strong. From June quarter onwards, we could see a fantastic spike in earnings for PSU banks and that will excite a lot of investors and traders and the stock prices would also keep moving up.
How are you looking at the entire PSU basket? Could any of them be good for medium-term?
They are on our watch list but we are not making a move yet. It’s a case of “once bitten twice shy.” Many times in the past, we have seen the privatisation theme trying to play out but has never really succeeded. So, let us just wait and watch for an actual privatisation to take place and see the kind of effect that has on the stock price and then maybe look at some of the other privatisation candidates. There are many because the government thinking at this point of time is that whatever can be privatised without much of a political backlash should be undertaken in true earnest. Whether that happens or not is a separate issue but BPCL, CONCOR and BEML are key situations that one should watch out for and see how that plays out in terms of privatisation.
So investors will gain experience on how to play such stocks. The government will get very valuable insight as to how to handle privatisation and the private sector will understand how to benefit from the entire privatisation process. This is a completely new theme and it will have a major impact on stock markets and on the economy. But let us just wait for the first apple to fall and then explore the entire orchard. At this point of time, that is our view.
How are you looking at the issue of rising US yields as a risk to the equity markets? How is that likely to pan out?
I am not an expert on the global bond markets but from an equity perspective, it is not all blue skies at this point of time. Certainly a few clouds have emerged and there are new risks and new stress to deal with and not just rising bond yields. But inflation — coupled with the second wave of Covid globally and many other challenges that businesses are facing in terms of supply chain management and demand supply mismatches and shortages of semiconductors — has created a certain degree of chaos in the business world at this point of time.
So it is something one needs to look out for and the best way to protect yourself from such risks is to have a well diversified portfolio. Even in the case of rising US yields or bond yields, companies which are in software and pharma typically will weather the storm far better than some of the cyclical businesses or some of the digital businesses which are trading at very expensive valuations.
A well diversified portfolio is the best way to manage rising global yields and associated risk factors and volatility because this is something which is lingering but one can never really get a handle on it and trade or sell off or buy, based on that particular information.
