Daily Voice: OmniScience’s Ashwini Shami explains why the rally in PSU banks could be sharper

Central banks around the world have continued to add gold to their strategic reserves to counter geopolitical tensions. The trade war has heightened economic uncertainties, driving up the price of this safe-haven asset. Currently priced between $3,300-3,400 per troy ounce, gold is up more than 45% over the last year. However, this rally seems a bit overdone, and it is unlikely that gold will surpass the $4,000 level—an additional rise of 17%. Fresh investments in gold at this point would remain purely speculative.

Considering the superb rally over the last couple of weeks, do you believe there is still some steam left in the banking segment? What are the key factors that could support a further rally, if one is on the horizon?

The banking sector remains one of the most significantly mispriced segments of the market. Several large brokerages have upgraded some of the major banks, indicating that the sector might be ripe for a re-rating. If this re-rating continues, there is substantial room for prices to rise, as both public and private sector banks are currently trading at significant discounts. The Nifty PSU Bank Index has a P/E of 6.9 and a P/B of 1.3, while the Nifty Private Bank Index trades at a P/E of 16.3 and a P/B of 2.4. Both segments have a potentially strong double-digit growth outlook for the next few years.

Do you expect the RBI to pause its rate-cutting cycle in the upcoming June policy meeting, or is there room for another rate cut?

There could be another rate cut in the June policy meeting, given the stable inflation outlook. Additionally, while the Trump tariffs may create inflationary pressure in the US economy, they could result in a deflationary environment in other economies. Countries unable to export to the US due to tariff barriers may dump finished goods in other regions in the near term, creating deflationary pressure. Furthermore, due to ongoing economic uncertainties, commodity prices—including crude—are expected to remain low.

With tariffs significantly lower compared to other countries, do you believe India stands out as a strong winner relative to its global peers?

While the full extent of the economic impact of the tariffs is yet to be seen, India’s relatively low tariffs are a distinct advantage. This situation is almost a reset of the competitive advantage that the exporting nations had, and it gives India a favourable playing field as it ramps up its export ambitions. With significant investments in logistics and support for various industries through PLI schemes, this might be an opportune time to foster a stronger position in international trade.

Given the recent significant downtrend in the IT segment, would you consider investing in it now based on current valuations?

More than just a recent downtrend, the IT segment has corrected significantly since the end of last year. Year-to-date, the Nifty IT Index is down more than 20%. The key issues have been fuller valuations and conservative guidance from IT companies. While the index has now corrected to a more reasonable P/E of around 25, the near-term growth outlook remains uncertain.

The tariff situation has created additional uncertainty in the US economy, which may result in reduced IT spending—implying a weak outlook for IT firms in the near term. While we remain positive on the long-term growth potential of IT, especially through digital transformation and AI-driven initiatives, the near-term outlook remains concerning.

Are you seeing early signs of recovery in the consumption space? If so, are you a buyer of these stocks at current levels?

We continue to remain cautious on FMCG and consumer durables due to their high valuations. Select consumer finance and housing finance companies offer better exposure to the consumption theme, with strong growth potential and more attractive valuations.

Do you expect a sharper rally in private financials compared to public sector units (PSUs)?

Given that public sector financials—including banks and housing finance companies—are trading at a significant discount to their intrinsic value, and at much steeper discounts compared to their private sector peers, we believe the rally is likely to be sharper in public sector units.

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