SBI loss reporting & 2 lakh crore bad loans moving to Bankruptcy court. This brings opportunity for NBFC’s & private banks.
Government announced 2.11 lakh crores of support to the PSB’s, market goes berserk. PSB stocks like SBI, PNB goes up more than 30%, PNB made 46% gains. Private banks took a hit, NBFC’s which were leaders lost big value. Broad indices move up a percent and our portfolio goes down a percent. After having had continuous out performance, which saw big alpha generation against the benchmarks and our portfolio. Now the reverse has began to happen.
NBFC stocks had big run up, which stretched their valuations, now probably the market is selling them to accumulate PSB’s. In my opinion, just infusing capital cannot take a business out of mess, unless the management is responsible. One more thought that I heard from the markets, banks get capital from Government and soon there is election and they will have to waive off farmer’s loans, which will eat up 61K crores.
Ultimately, Government is playing, using the banks as a tool. With the kind of moves that the banks had today, it brings concern on the future rally in the markets. Mutual Funds having exposure to banking stocks will show enormous gains tomorrow, while the same will not stay for long as what goes up has to come down too. And here, there is no real value, so the fall will also be drastic.
Liquidity from retail participation has been driving the markets where the earnings have been subtle, now the current move to breach 33000 on the SENSEX will bring in more investments. People who were waiting on sidelines will take a plunge, just to ensure that, they don’t lose even more opportunity. And this money is coming into the markets after seeing the gains of the past 12 months, expecting that the same will repeat. Even a slight unsteady move from here, the same retail money will become a pressure to the fund managers as they have to sell to meet redemption requests.
Then, they will go out and complain that Mutual funds are not good investments, it is a gamble.
We have been waiting for a correction since 7 months now, the markets have defied expectations and gone far away. Now, if it has to fall in place, the impact will be high too. Looking forward to some challenging times in the coming months.
There was an article in Economic Times on the above topic. 40% discount is a big number, how should we see this one? Is this discount an advantage or worrisome?
Most of the companies that have lost big time in the recent weakness are from the Metals and Banking sector. Metal stocks have been the most hit with some stocks losing more than 75% from their peak prices. Metals or commodities as they are wildly said have been very poor performers worldwide. The reason behind this is China! Does that mean the whole world has been dependent on China for their commodities business and if that is true, China had been buying raw materials from across the globe to feed its mammoth manufacturing facilities? Which also means that, the world has given itself fully to the dragon.
How things will change from here and make this crisis situation an advantage is not very clear for now. Whereas, such high level of dependency on China is not a good one. If it is continued, such turmoil’s will repeat. China’s forex reserves have taken a nosedive as the government has resorted to dollar selling to keep the Yuan safe from sliding down. This will create one more problem, if China has to purchase all the raw materials available in the world, it has to pay in dollars. Will it resort to some other game plan to meet that requirement? It is very early to comment on these ideas.
For the banking sector the woes are much higher. Banks have not only lent to the core sector like metals which are in doldrums, it also has good exposure in the infrastructure segment, which is another big bottle neck.
When Modi government came to power, infrastructure was expected to be of highest attention and priority of the government, where, there seems to be an abrupt neglect. Our country needs infrastructure to grow faster, why we are not taking bolder steps here is not known. As the lending to these two sectors along with all the existing mistakes the consortium of public sector banks have created are building up huge NPA’s, Banking sector is not likely to see a turnaround in a shorter duration.
Housing sector has seen slow down, Automobile purchases are showing down tick and these are the segments were banks have big exposure too. When the industry is not taking loans, retails is becoming tight, Banks cannot perform better.
So, no wonder that both these sectors lead the wealth destroying mela in the markets. Investing in them just because their stocks are quoted at lows will only result into long term dormancy or investment suicide. Yesterday I had one of my clients ask me about investing in SBI, because he sees the stock is cheap. This thought is normal, because for us Indians, SBI is a behemoth at least that is what we think about. Our Grandfathers had accounts with SBI, which means it is trustworthy. Yesterday SBI hit its 52 week low. Any stock that reaches for a new low goes there for a reason; they rest in peace for some time and only then start their journey upwards.
When markets go down, which is a natural process, how much our portfolio has taken the impact is what everyone who has invested in stocks think about. Going by emotions and sentiments if someone has invested into stocks like Tata Steel, SBI, PNB, Jindal Steel, Tata Motors etc., they are doomed for failure. Always, investing in the sectors that are in the limelight for their performance is the good one, when it comes to investing.
In our Bravisa Temple Tree portfolio we don’t have a single stock in both, Metals as well as Banking sector. We were not biased in taking this decision, it happened as a natural process as our research application did not give out such names for investment. Following the very simple principle that we will invest in only those companies that have good sales as well as profit numbers has eliminated these stocks from our list. When in 2014, the markets made a big rally with most of the participation coming from the banking sector; there were thoughts in the back of the mind, “Have we missed something?” It was good that we struck to our rules, now; it is getting proved that our decision was right. The damage that both Metals and Banking sectors have created in the market will take time to ease out, which in the process will also bring down valuations of those companies that are fundamentally good. Once the dust is settled, and the market begins on a renewed rally, the fundamentally strong stocks are the ones that will lead the market rally.
Feels good, that we are placed right.