Nifty Financial Services stocks: Time to be contrarian and buy?

It has been more than three years that some of the biggest wealth creators in the private sector banking space have not been able to deliver much to their shareholders. Each one of them had its own set of issues to deal with. One where a big merger was getting planned and executed, others have seen a change at the helm and had to go through a process of shareholding adjustment to meet the regulatory requirements. Is this phase of going through adjustments over and will they get their mojo back.

Post 2015 and then again in 2018, RBI did a strong rejig in various banking policies, right from capital adequacy to the operational matrix were tightened. The first set of banks which street took note of were larger private sector banks than PSU banks. There is another set of banks, which dont have the distribution reach which large private banks have, but when it comes to ownership they are not the same as the PSU banks. They have very different hybrid kinds of ownership, a sort of quasi private sector banks. These are private sector banks of mid-sized banks which operate in particular regions. Over a period of time they have also been forced to clean up their act. Will they see a strong re-rating?

Among many industries which have seen a strong transformation in the last nine years due to policy initiatives has been the sugar industry. This is despite the fact that sugar is a state subject where central policies can only play a limited role. If one looks at the balance sheet of a large number of them, they are far better placed than they were six years ago and to some extent in the last two years even the institutional investors have started to take exposure in this sector which they have avoided for more than three decades.

In the correction that markets saw in the last four trading sessions, the financial sector stocks, right from banks to other players also declined. But if one looks at the magnitude and the internal breadth of the sector it was much better as compared to a month back when the market correction was started by HDFC bank. There was a bit of profit booking in the PSU bank space, but once again after a small corrective move, things were back with a strong intraday recovery. The way things are panning out in the industry with regulatory tightening taking place, there is very likely that we might see a divergence in performance of different segments of this sector which has the highest correlation with the GDP growth. Better balance sheets and strong franchise are likely to be the differentiating factors. The factor which is largely technical in nature is the shareholding patterns that will also impact the performance of the stocks from this sector.

After a long phase of almost two decades, during Covid there was a sudden phase of expansion in price earning multiples which IT stocks were getting. Now as nothing is permanent on markets, a phase of mean reversion or readjustment of valuations started after October 21. It has been more than two years that largecap IT stocks have been going through this and after a gap of a long time, they are showing some early indications at worst might be over. But because there has been a major technological shift in the last two years, it is a trade that only investors with patience should look at taking. Stock Reports Plus, powered by Refinitiv, is a comprehensive research report that evaluates five key components of 4,000+ listed stocks - earnings, fundamentals, relative valuation, risk, and price momentum to generate standardized scores.

At a time when everything on the street appears good and green, there is a case of being selective. The reason, if it is in a raging bull market, the street never stays in this all good and green mode forever.when the street starts to become selective, it is stocks where there are some improvement in the business operating matrix tend to weather the storm better. So as an investor, one needs to look at every sector and company and their operating and valuation matrix separately. These selected stocks depict a strong upward trajectory in their overall average score which is based on five key pillars i.e. earnings, fundamentals, relative valuation, risk and price momentum. This implies that there has been a significant improvement in their market outlook in the given time frame.

After a long period of time, bears are seeming confident. How long they will be able to roam on the street is the question for which answers are being sought. For that it would be better to focus on why the correction is taking place. Whether there is just a profit booking after a long phase of out performance or there are any headwinds which the economy is either facing or is likely to face. The answer is very clear that this phase of profit booking and there are no headwinds, in fact there are more tailwinds of clear policy making. This is not to say that this corrective phase will not continue further, if there is any increase in oil prices, there might be some short term pressure, but the long term story stays intact. ET screener powered by Refinitiv’s Stock Report Plus lists down quality stocks with high upside potential over the next 12 months, having an average recommendation rating of “buy” or strong buy . The screener applies different algorithms for all BSE and NSE stocks.

In the last two months, there have been phases where the nifty has witnessed a short correction which lasted for anywhere between two to four days. The only difference is that unlike the past when such correction took place, this time when corrections are taking place mid-cap segment also participated. This is indicative of profit booking happening at the broader market level. At this point of time, one cannot rule out volatility which can bring more damage to stock prices in the mid-cap segment. In such times, if one is taking fresh exposure to equity, ensure that there is some level of quality as far as the business and fundamentals are concerned. These selected stocks depict a strong upward trajectory in their overall average score which is based on five key pillars i.e. earnings, fundamentals, relative valuation, risk and price momentum. This implies that there has been a significant improvement in their market outlook in the given time frame.

In the last four years of bull run, among the PSU space, defence was the first sector to see a re-rating, infact it was the sector which led back the resurgence of the PSU space which was then followed by railways and then NBFCs which are lending to particular sectors. Now the fact that the defence stocks have run up sharply and sitting with gains, questions are bound to come on whether they have priced all the positives or not. A part of the answers lies in looking at how the stock behaved in recent times and whether the macro operating picture of the sector has changed or not. On the price front, in the corrective move of March, after initial correction due to profit booking, some of the defence stocks have once again moved upward and are quoting close to all time high, indicating demand for the paper from this sector. On the fundamental front, the operating matrix is better and probably it is one of the sectors where the continuation in policy making will have the biggest positive impact.