Do PSU equity funds offer an investment opportunity after their recent fall?

The slide

Over the last three months, mutual fund schemes focused on investing in stocks of PSUs have fallen 3-10 percent. Over the same period, the benchmark index Nifty has remained flat.

There are four schemes that are predominantly focused on PSU stocks. The largest such scheme is Bharat 22 ETF, which had Rs 5,932 crore of assets under management as on April 30. (For details refer table)

Returns (%) As on May 23, 2018 AUM as on April 30, 2018

After a rewarding calendar year 2016, investors made relatively less money in 2018 from these schemes, when compared with their returns from other large cap equity funds.

For example, in 2016, CPSE ETF delivered returned 17.43 percent, much higher than the 4 percent returned by large cap funds over the same period. However, the difference in returns narrowed in 2017 and in 2018, investors were exposed to a world of volatility. Mid-sized companies were hit quite hard and fell 10-30. PSUs were not particularly spared.

"The public sector undertaking (PSU) space has two large components – energy and PSU bank stocks. We believe the perceived fear of subsidy sharing due to rising crude oil prices has negatively impacted the energy stocks. PSU banks are undergoing transition due to the NPA recognition cycle. This has led to recent underperformance in energy and PSU bank stocks," explained Haria.

Oil marketing companies such as Bharat Petroleum Corp, Hindustan Petroleum Corp and Indian Oil Corp are currently trading around their 52 week lows. If one chooses to ignore gains made last week, most PSU bank stocks too, are near their yearly lows.

"The volatility in commodity prices is severely impacting PSU companies causing them to underperform," said Renu Pothen, Head of Research, FundSupermart, an online mutual fund distribution entity.

Although prices of stocks such as SAIL and Nalco are higher than they were a year ago, they are 12 percent and 16 percent lower, respectively, than they were a month ago. The quick sell off over the last one month has been a cause of concern.

Think long term

The recent bout of volatility in the market has been putting investors off for some time now. But experts reckon that there is an increased possibility of an improvement in macroeconomic indicators now and that the valuations of PSU are at attractive at the moment.

"We believe the worst in terms of non-performing assets of PSU banks could be behind us. Policy measures in terms of NCLT and IBC can infuse positive sentiment in PSU banks leading to re-rating of these banks," said Haria.

After all crude oil prices may not sustain at their currently elevated level level for long period of time and any correction in oil prices will change market sentiment for the better.

"The stocks in this theme form building blocks of the economy and they are expected to deliver in the long term. Investors should not be rattled by the short term volatility affecting these stocks," said Renu Pothen.

Given the structural reforms brought about by the government, such as the implementation of GST, introduction of RERA and stabilisation of the Insolvency and Bankruptcy Code, India's economy is now set to grow at a faster rate. As capital expenditure becomes more broad based, the fortunes of most of these stocks will likely change.

What should investors do?

Although experts expect better times in FY19-20, the prevalent volatility may upset investors in the intermittent period.

"Elections in 2019 will have an overhang on the decisions pertaining to PSUs. This will ensure that there won’t be big rallies in PSU space, leading to ample time on hand of investors to invest in this space," said Rupesh Bhansali, Head of Mutual Funds, GEPL Capital.

The situation is not likely to improve overnight and there will certainly be a few bouts of heavy selling. Till such time that investors get more clarity on geopolitical tensions and earnings growth, the stock market is expected to move sideways and remain volatile.

"If you can’t digest volatility, do not jump the gun to sell off your existing investments. Hold on to your investments with at least a couple of years view," said Bhansali.

For those who have the stomach for such volatility, the ongoing situation can throw up many opportunities. It would make sense to gradually accumulate units of the PSU-stock-focused funds. If you are eyeing an ETF, you need to keep buying a desired number of units at regular intervals, in case your stock broker does not offer an equity-SIP facility for these ETFs.

In the case of open-ended schemes, you may want to enroll for a weekly or monthly SIP. Bhansali recommends investing in Invesco PSU Equity Fund through a systematic investment plan.