There has been buzz around privatisation on the PSB front. Do you see this interest continuing?
The beaten down stocks or themes is the most interesting place and the public sector undertakings form a part of that. We are 2.5 months into 2021. The Nifty is up around 7.5%, the PSU Bank Index is up 30%. Metals are up 18% and the PSU basket or index itself is up 18%.
Globally, the beaten down spaces or sectors that have been the worst hit in the Covid fall are actually the biggest gainers. The PSUs form a subset of that basket. It is not just in India. In the two and a half months, Nifty is up 7.5% and the small cap index is up 20%. The midcap index is up 16%. So, the outperformance happening in the beaten down spaces. Thematically, beaten down spaces have been the biggest gainers in the last few months.
PSU banks are playing catch-up. How long do you think this Rip Van Winkle impact of SBI will continue in other PSU banks like Canara Bank, IDBI Bank and in Union Bank?
It can continue for a longer time. I do not remember when PSU banks have outperformed the market in the last decade. Post 2008, PSU banks have been under owned, underloved and had all the characteristics of something to be dumped. Now we are seeing a pullback rally. The PSU bank index is up 30% when the Nifty is up 7.5%. It really shows a lot of froth. But if you take 2018 data point, that was a top for a lot of midcap stocks. The PSU bank index is still a fair distance from even the 2018 highs. So they have a lot of catch up to do. I do not know whether they will be leaders but this is nothing but oversold rallies. I am saying a decadal oversold, a decadal under owned, decadal underloved, under researched forgotten sector. Whenever these things happen, you will always find that the move tends to be sharp and they can have a lot more upside.
In a bigger timeframe, what has happened is a small blip and with the markets the way they are, the rising tide has lifted all boats and that is happening at a fundamental level. Cyclically things are changing. Will they turn around, will they not? Will they be sustainable? The next few quarters will tell us. But a lot of money is entering this space and that little trickle also creates some effect. PSU banks and the PSUs have an upside simply because they were forgotten and under owned and in case things turn around, everyone wants to have a foot in the door. That is something that you are seeing in the market right now.
Do you think that there is a strong potential within the real estate space? Do you like anything here?
It is part of the whole beaten down space. They include PSU banks and real estate. All three are decadal underperformers. The initial stage always tends to be euphoric or sharp because they are under owned. However, whenever a cyclical change happens – whether it is the changing industrials or the fundamentals or a decadal change that is happening, these sectors attract that money because very few of us have that in our portfolio.
So as and when the fundamentals of that sector improves, whenever there are companies that are reporting good numbers, improvement of commentary or whatever there is, you will find flows. But in the real estate sector, people have been burnt very badly in the past when they got into companies with questionable management. So I feel that the move in real estate is going to be more concentrated. It is going to be linked to the few names which have proven themselves credibly through the downturn and where people feel that there is a certain amount of corporate governance.
So while following the theme of beaten down spaces, stick to good quality managements and names because the ground reality is this sector has its hits and misses and issues of corporate governance, execution, etc. Some of these stocks can definitely be very big movers. Another way of playing this sector is to go through housing finance companies because they also would be big beneficiaries if the whole sector turns around. So one can extend this theme and play hybrids between NBFC and housing finance which would be good proxies for the real estate sector.
