PSB stocks are factoring in most positives: CLSA’s Wood

Christopher Wood, managing director and equity strategist at CLSA, chose not to add public sector bank (PSB) stocks to his portfolio citing the runaway rally in them, even as the government announced a ~2.11lakh-crore recapitalisation package for such lenders.

He, however, said the step was in the right direction and would go a long way in meeting capital requirements of these cash-starved PSBs.

“What ‘GREED & fear’ has long been waiting for has finally happened in India. That is the announcement by India’s finance ministry of a proposed recapitalisation of the banking system over the next two years. The sum allocated is sufficient to meet the PSBs’ recapitalisation requirements,” Wood wrote in his weekly note to investors.

Adding: “Unsurprisingly, the share prices of PSBs have soared on the news as relative-return fund managers have sought to protect themselves against the trade out of ‘growth’ to ‘value’. Still GREED & fear is not going to add PSBs to the Asia exJapan long-only portfolio today, since a lot has already been discounted given such violent share price moves.”

Since the announcement on Tuesday, the Nifty PSU Bank index has rallied nearly 29 per cent, compared with a 1.3 per cent rise in the benchmark Nifty50 index till Thursday, ACE Equity data showed.

The rally in individual stocks has been sharper with Punjab National Bank (up 54 per cent), Union Bank of India (42 per cent), Bank of India (37 per cent), Canara Bank (33 per cent), Bank of Baroda (30 per cent) and the State Bank of India (26 per cent) topping the charts during this period, according to the data.

Wood said that the failure to address banking sector issue more proactively has been the one major piece of unfinished business in the Narendra Modi-administration. The vacuum should now be filled, which means it is now realistic to look forward to a new credit and investment cycle, he said.

As an investment strategy, Wood plans to increase India’s weight in the Asia Pacific ex-Japan relativereturn portfolio by two percentage points, which brings the country back to the structural three times overweight position. This will be paid for by reducing the weight of Korea by two percentage points, a move partly influenced by the downgrade of Hynix last week, given the statistical reality that Korea’s outperformance in the first three quarters of this year has been primarily driven by Samsung Electronics and Hynix.