You once said that banks are never a safe bet and that you do not like banks which have given underperformance. Are you willing to change your mind on banks?
Banks are such a big part of the index. We have had negligible weightage through 2020 and 2021 which of course proved to be a very good bet because in 2020, banks were the only sector in the negative and in 2021, it went up less than half of what the market went up. Since then, we have increased our weightage.
It would still be somewhat underweight and as there are some positive to banks when interest rates go up in the sense that your loans get re-priced immediately whereas the deposits get re-priced only on renewals, for sometime at least, on the lending sidem the margins go up though on the bond side there is negative impact.
For Indian banks, the bond side is also significant but if there is pain in the economy, whether that would pressure the credit side remains to be seen.
« Back to recommendation stories
So banks are better than where they were but they are definitely not something that we love and want to be greatly overweight in. The other thing with banks is that the number of negative surprises is higher than the number of positive surprises and as an outsider, it is very difficult to see it coming. So, that also remains an overhang for me on the banking sector.
I am never that comfortable buying banks because the certainty is far lower and that for a very highly leveraged sector so 5% NPA for instance is a very large percentage of the shareholder capital of banks unlike and that is never something that cannot happen so I am always wary of banks but being such a large part of the market you cannot steer clear of them entirely.
When you have increased your weightage with banks, how have you done it? Which were the stocks that you selected? We have been doing this banks versus IT comparison. You have been overweight on IT. Are you still?
Yes, it would still be somewhat overweight, but not hugely. In any case, we do not take very skewed sector bets. We are always quite well diversified in terms of sectors and companies. I do not think in fundamental terms you can really compare banks and IT companies. The reason why in the first place we liked IT companies since 2020 is that they have made us a lot of money, not this year but they have. At that time, FMCG was the flavour of the day and our bet was that just as FMCG earnings are reasonably predictable, it is the same in IT as well. Returns wise, IT is not as high as FMCG but still pretty good and the valuation gap was huge.
Some of that valuation gap got filled in 2020 and 2021 and plus it is a dollar hedge which is important at this point and that is very different from banks. In banks, the predictability level is rather low and negative surprises come with periodicity. So it is very different from IT. So I do not know how to compare these two very different industries with a few parallels that I can think of.
The setup is perhaps very easy in terms of what central bankers want to do with inflation. If inflation comes down, which it will, then it will start having an impact on commodity prices. Crude has already started declining. Should one buy commodities at all whether it is soft or hard?
Metals have already given up all their gains for the year. Other than energy, most or at least hard commodities have given up their gains. Energy, we think, will take a pause but is it going to come down dramatically on a sustained basis? It might come down a bit but I think it will still remain on a fairly high plateau given the supply demand dynamics. So that is not something that you can say is over now and commodities will come back down.
In the case of agri commodities, there is a physical supply constraint, especially after the war and I do not see it cooling off immediately. So that part will not go up further but will still remain at a high plateau. In metals, a lot of it is dependent on China demand, how the lockdown opens up and all of that. So a lot of news flow is driving that and it needs to be monitored more closely.
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)