“In the past few weeks, based on various disclosures, we are seeing improvement in trends across the financial sector — dipping moratorium book, better collection efficiencies, etc,” says Harshad Borawake, head of research, Mirae Investment Managers.
Many borrowers availed of the moratorium because they wanted to conserve liquidity, not because they were short of money. “Many who have availed of the moratorium are making pre-payments. Market participants are beginning to realise that not every borrower who availed of the moratorium is stressed,” says Monalisa Shilov, director and investment specialist, Trivantage Capital, a boutique asset management firm focused on the financial sector, whose flagship portfolio management services scheme is Trivantage Capital Resurgent Financials Equity Strategy. The realisation that the extent of asset quality issues lenders would face may not be as bad as was initially feared is one factor causing the pullback.
Recently, Kotak Bank raised Rs 7,442.5 crore through a qualified institutional placement of shares. “Many global funds invested in this offering. It gave markets the cue that there are takers for high-quality Indian private sector banks,” says Shilov.
The correction has thrown up many opportunities. “Among lenders, go for large, diversified financial companies, which have superior business models, are well capitalised, have the ability to raise capital if required, and have strong execution ability. Many such players are still available at attractive valuations,” says Shilov. These companies are likely to emerge from the crisis with market-share gains.
Opportunities are also available in what the market has dubbed ‘protection stocks’. Today most people are reassessing their life and health insurance
coverage and enhancing them. Investors may also opt for gold finance companies. With the price of gold touching Rs 50,000 recently, they are unlikely to face asset-quality issues.
Select brokerage stocks, too, are expected to do well as many new investors have opened accounts during the lockdown. Avoid stocks of companies with low equity capital and may find it difficult to raise debt capital in the current climate.
A second wave of Covid-19 infections remains a key risk. “That would imply another lockdown, which will hurt the economy,” says Borawake. More curbs on economic activity could augment asset quality pressures on lenders. Other risks, according to Borawake, include the pace of revival of jobs, and the risk of the credit culture getting impacted as the six-month moratorium ends. Avoid lenders with high exposure to real estate at this point.
When looking for a banking and financial services fund, choose one whose portfolio contains a mix of high-quality growth stocks and stocks that offer reasonable margin of safety. It should be run by good management with a proven track record across market cycles. Don’t invest more than 5 per cent of your equity portfolio in a sector fund.