The current market volatility due to the global pandemic has been very unnerving for investors across the world. Given the prevalent conditions, we would like to share our views & outlook on the markets.
The Nifty Bank index has fallen by 34.3% in March 2020 (the sharpest fall since the inception of the index). The impact on the markets has been severe as the market has not experienced this combination of a healthcare and economic crisis. It is therefore not easy to merely project history this time and estimate the period for economic recovery.
However, in an environment such as this, a few select leading businesses are well-poised to gain market shares in both deposits and advances. These businesses will also be able to cut costs in a weaker operating environment and thus, to some extent, will not let their cost-income ratios get much impacted. Most of these leading stocks have also corrected around 30-40 percent and should bounce back the quickest over the next year.
Amongst the lenders, we are positive on a few private sector banks that have comfortable solvency, capital adequacy buffers, granular deposit franchise, high provision coverage and strong digital operating platforms. Also, we are positive on a few non-lending financials such as in general insurance, life insurance and asset management.
The chart below depicts many such “drawdown events” since September 2003 when the Nifty Bank index fell by over 10% in a month and subsequent 1-year & 3-year returns from the end of the impacted month. As can be observed, the subsequent period returns have been extremely attractive in almost all such cases. We are confident that a carefully chosen portfolio of financial sector businesses described above would very likely generate smart returns over a 3-year period.
The market has been indiscriminate in selling all financial sector stocks and we believe that as always, certain stronger businesses will not just survive but will thrive in the challenging conditions. We quote from The Economist, “Downturns are capitalism's sorting mechanism, revealing weak business models and stretched balance sheets. In the past three recessions, the share prices of American firms in the top quartile rose by 6% while in the bottom quartile fell by 44%.”
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