Investor’s Dilemma

We may have seen the beginning of a major market re-rating…

The day after the bank recapitalization package was announced, there was a frenetic rally in PSU banking stocks. This rally not only took the Bank Nifty to a new high but even propelled the Nifty index to an all-time high beyond the 10,300 levels. There are obvious valuation worries at this level. Here are 3 sectors that you should seriously focus on as a long-term investor.

Banks will be the nucleus…

With a 30% share of the index, the banks have to do well for the index to go up further. There are 2 trends that are emerging and these are important from an investor’s perspective. Firstly, investors in private banks are getting a little more discerning. There are banks like HDFC Bank, Kotak Bank and IndusInd Bank that appear to have managed growth, margins and NPAs quite well. These will be the key outperformers going ahead. Then there are banks like ICICI Bank, Axis Bank and Yes Bank where there are clear worries on the NPA front. These banks are likely to be a lot more vulnerable to price shocks as we have already seen in the recent past. But the big question is what to do about the PSU banks. With the recapitalization and the huge infra boost, PSU banks could see a major re-rating. Avoid the highly stressed PSU banks as they are unlikely to benefit from these capital bonds. Your focus should primarily be on banks that have the capacity to expand their loan books!

Consumer stocks will be hot…

One of the themes even at these levels of the market appears to be that the consumer demand is robust. Latest numbers from two-wheeler sales, auto sales, and FMCG sales substantiate that. Most of these sectors are seeing a bottoming out of business metrics as growth in sales, profits and margins are picking up supported by volumes. The results of Bajaj Auto, TVS Motors, and Hindustan Unilever appear to underline this trend. Many of these stocks are still underpriced considering their future potential as the proxies of the Indian consumption story. As an investor, if you are genuinely wondering what to do at market highs, this is another story you should keep an eye on.

Expect alpha from capital goods…

Capital goods stocks have not been the greatest of ideas in the last few years. Credit flow has been tight and the revival of the capital cycle appears to be some time away. But, that could be changing fast. With banks recapitalized, we could see the flow of credit once again to these capital goods companies. Secondly, the $100 billion investment proposed for the Bharatmala project could have a multiplier effect on the demand for capital goods. The sweet spot may have finally arrived. If you are looking ahead, you cannot create a portfolio without these stocks. The turnaround may be underway! ©

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