Banking stocks have outperformed the broader markets so far this year, the Bank Nifty rising nearly 45 per cent year to date in comparison to a 25 per cent gain in broader market index Nifty. Despite the sharp gains in banking stocks, UBS Securities is betting on them for the next one year.
Gautam Chhaochharia, head of India research at UBS Securities, expects banking and financial stocks to benefit drop in faster-than-expected drop in effective interest rates on the back of a fall in inflation. He expects 10-year yields to touch 6.5 per cent by March 2016, on the back of consumer inflation coming off sharply. The fall in global crude prices could accelerate the fall in bond yields, Mr Chhaochharia said. The 10-year bond yields are currently at 8.35 levels. (Watch Video)
But Mr Chhaochharia sees the Reserve Bank of India acting with a lag both due to its focus on bringing down inflationary expectations. In fact, the 10 year yields have come off 30-40 points over last couple of months, he added. This mirrored the situation early last decade, when the 10-year-yield came down much sharply much ahead of the repo rate reduction, he said.
The overall market is not cheap but banking stocks despite their big gains this year are trading near historical levels, he said.
Among the banking stocks, his top picks are ICICI Bank, HDFC Bank, Federal Bank, IndusInd Bank among the private lenders. Among PSU banks, he prefers SBI and PNB. Among financial services stocks, he backs LIC Housing and Shriram Transport Finance.
Among the broader industrials, he prefers select power stocks though from a slightly longer term perspective. Though the valuations are attractive in the power space, he still prefers defensives like NTPC and Power Grid Corporation among the power sector. “Though a lot of action of has taken in the power space in the year and half, it will take time to resolve the issues pertaining to the sector,” he said.