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Last Updated : Jun 03, 2020 07:42 PM IST | Source: Moneycontrol.com

Banks, financials pushing the market higher; should you trust the rally?

There is not much hope for the banking and financial stocks or for the market, for that matter, unless the COVID-19 comes under control and the economy opens completely.

Equity benchmarks Sensex and Nifty closed with healthy gains on June 3, with the Sensex surging 284 points and Nifty settling above 10,000.

The rise in benchmarks was led by banking and financial heavyweights such as HDFC twins, ICICI Bank and Kotak Mahindra Bank.

Nifty Bank index jumped 2 percent, extending its winning streak into the seventh consecutive session.

Close

The rally of the last week was also propelled by the banking and financial stocks and experts point out that whenever the banking conglomerates start participating in any rally, it is a robust one.

Why are banking stocks surging?

Experts point out that the banking stocks are rising as the perception about them has changed after the resumption of economic activities.

"Indian banking sector was the worst hit due to fall in outlook with a fear that asset quality will downgrade heavily given stringent lockdown. This view is changing due to the expectation of a re-opened economy, fall in the cost of funds, stable liquidity and big equity deals announced by banks with easy placement to foreign and domestic investors at fair valuations," said Vinod Nair, Head of Research, Geojit Financial Services.

Sameer Kalra, Founder, Target Investing, said: "There was an easy trade in the last couple of months to short these stocks that reversed due to massive short-covering in the last few days, trapping a lot of traders. Secondly, as the economy reopens there is a global flow change of selling defensive and buying cyclical.

Rusmik Oza, Executive Vice President & Head of Fundamental Research at Kotak Securities has a similar view.

"Since March, the price correction in BFSI stocks had been very steep and most of them were in a heavily oversold zone. Most retail banks were worst hit under the lockdown but now as the economy opens up in a phased manner they are regaining strength," Oza said.

"Last week we saw the Banking Index gain 10 percent in just last two last days of the monthly expiry indicating heavy short-covering. Indian markets are following the trends of developed markets and moving in tandem with them. Since BFSI is the largest sector by weight in Nfity50 and valuations on price/book Value have gone to abysmally low levels we are seeing some fresh buying in them," said Oza.

Moreover, banking and financial stocks are pinning hopes on RBI for the restructuring of loans, while their valuation had made them attractive for investors.

"Rally in banking and NBFC stocks are primarily led by valuation; few large banks and NBFC were almost trading at 1time FY22 adjusted book value. The ability to raise sufficient liquidity at low cost would be the key criteria for banks to navigate the current situation, as asset side inflow would be limited," said Jaikishan Parmar, Senior Equity Research Analyst, Angel Broking.

"The rally is led by large private banks that have a very strong liability franchise. These large banks have adequate provision coverage for a bad asset. Additionally, there is hope that RBI may allow a one-time restructuring of the corporate loan," Parmar said.

What lies ahead?

There is not much hope for the banking and financial stocks or for the market, for that matter, unless the COVID-19 comes under control and the economy opens completely.

Today is the seventy-first day of India’s nationwide lockdown, meant to curb the novel coronavirus pandemic. Confirmed COVID-19 cases in India stand at 2,07,615. The death toll from the outbreak in India is at 5,815. Maharashtra, Tamil Nadu, Delhi and Gujarat have reported the highest number of cases.

The Centre has extended the lockdown, called 'Unlock 1', till June 30. A number of activities will be allowed to resume in a phased manner over this month.

The rally in the market is propelled by hope. The market is expecting that things will come to normal gradually and has factored in weakness in the economy and earnings. However, this could be illusionary and there could be a wave of selling in the market if fresh negative reports regarding the coronavirus pandemic and the economy emerge.

"The market has been rallying on the optimism of easing lockdown. But we do not expect a V-shape recovery for the market. Banks are a proxy to overall economic consumption and we do not see a V-shape recovery in banks either. We should focus on banks with better value because fund-raising would be needed somewhere down the line given the overall anticipated economic space," said Pankaj Pandey, Head of Research, ICICI Securities.

"We expect a consolidation in the market going ahead. The market will be in the range of 10,500-9,000 in the next 3-4 months," said Pandey.

Oza of Kotak Securities feels that the frontline banks and NBFCs could face resistance after the recent sharp run-up as the sector is still prone to heavy earnings downgrades in the coming quarters.

Sameer Kalra of Target Investing believes banking and financial stocks are witnessing technical bounce and not a fundamental reversal as the real impact of COVID-19 will be seen in Q1FY21 results.

There is a diverging trend in India's economy and the stock market.

While the lockdown has been eased significantly and the market seems to be cheering it, there is a possibility of reintroducing restrictive measures or one-third to one-fourth of the population staying at home and not participating in the economic activities.

"Certain sectors and segments like cinemas, airlines, consumer durables, etc would continue to be impacted till successful vaccines are found and a majority of people are vaccinated. Therefore, in our view, significant contraction in the Indian economy in FY2021 is inevitable," said G Chokkalingam, Founder and CIO, Equinomics Research & Advisory.

Experts warn that the market cannot ignore deteriorating macroeconomic indicators for a long time and ultimately it has to behave in sync with earnings expectations and trajectory of economic growth of the country.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Jun 3, 2020 02:14 pm
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