Mark Mobius, founder of Mobius Capital Partners LLP that primarily invests in emerging market economies, has said India's banking sector is grossly overrated, while smaller companies from a number of sectors are underrated.
Banking sector stocks have the largest weight in India's headline indices. Their performance in recent years has been shaky, as they have underperformed quite a few times, disappointing investors. This, though, has not stopped most analysts from being bullish on them.
“Probably the most overrated are the banks... and the most underrated are the medium-sized companies in a number of sectors,” the emerging market investment guru said at an event on June 1. He was asked which was the most overrated and underrated sector in India?
Despite shaky performance, the Nifty Bank has grown at about 11 percent every year in the last five years, slightly lower than 11.5 percent compounded annual growth rate (CAGR) in Nifty.
Mobius holds four stocks, including Persistent Systems and Apollo Hospitals, in India and plans to hold them for a considerable period or “as long as they continue to grow”.
“The great opportunities are the non-index companies (those that are not part of key indices). That's where the great opportunities are,” Mobius said.
The most incredible thing about Indian markets and what separates it from others is the number of companies that have a return on capital or return on assets of over 20 percent, he said.
“We look at other countries and (they are) very difficult to find. So this is a great thing about India and it reflects the economy of course. The fact that the country is growing so fast.”
Earlier this week, the government said the growth in real GDP during 2022-23 is estimated at 7.2 percent as compared to 9.1 percent in 2021-22. The Reserve Bank of India predicted the real GDP growth rate at 6.8 percent for FY23. The growth rate is the highest among all major economies in the world.
Future picks
Mobius said he is currently looking at technology, particularly hardware.
“We believe India has made incredible accomplishments in software, but going forward hardware is going to be very critical and very important in India,” Mobius said. “So semiconductors and businesses related to semiconductors will become more and more critical in India.”
He also agrees with Chris Wood of Jefferies that the Sensex could grow to 1,00,000 in the next four to five years. Wood, in his recent newsletter, said it was just a matter of time before the 30-pack index crosses the milestone.
The Sensex would have to grow in the 10-13 percent range every year to hit 1,00,000 levels. In the past 23 years, the index has grown at a CAGR of 11.5 percent — from 5,000 to 62,000.
“If a country is growing at 7 percent, you can expect reasonably good companies to be growing at 14 percent – double the growth rate of the country. So, it's very possible that you can get this incredible growth in the size of the market and the actual investments in the market. No question (about that),” said Mobius.
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