Banking and the financial sector is among the sectors which heavily owned by the foreign institutional investors (FIIs) and the equity index ‘Bank Nifty’ is one of the most preferred equity indices in the domestic market for over half a decade. However, in the current coronavirus pandemic, the Bank Nifty lost more than 40 per cent in just a couple of months. The banking and non-banking financial companies have lost sheen in the market amid COVID-19. It is the first time in the financial sector in last 5 years when we witnessed the major declines in the financials and the decline might be correlated with the massive sell-off by foreign investors in the last couple of weeks led to panic selling in the capital markets.
The FIIs were heavily positioned in the Indian financial sector, and the companies received quite an inflows in good times. Mostly from passive or index funds which are now are facing margin triggers leaving them no choice but to cut their positions. The International Monetary Fund has cut India’s GDP growth estimate to 1.9 per cent for FY2020-21. The banking and financial sector whose prospects are connected directly to the economy is bound to be affected by the current slowdown in the economy due to the pandemic. The Indian banking system which was already saddled with bad loans might see a spike in bad loans as the slowdown could lead to job losses.
The downturn in banking and financial sector, however, presents itself as an opportunity for long-term investors who can pick the top quality stocks with strong fundamentals in the banking sector, which by the way are trading at discounted prices but in peaceful times trade at exorbitant valuations. Many opportunities have arisen in the past few years such as life insurance, general insurance, and asset-management companies. Now, many fintech companies are likely to be listed soon. So, the long-term prospects of the banking sector remain bright. Besides, there is a huge untapped potential in the Indian market, which provides ample opportunities for growth in future.
But, it doesn’t mean that investors can expect a quick turn-around in the sector stocks. Amid coronavirus, many investors lost their capitals and many pulled everything out of the market to invest in debt instruments. It would take some time to see the rally in the stock prices. So, investors who have a long-term investment horizon can think of increasing the exposure of equities in the banking sector. Thus, investors should concentrate on top-tier banks with zero-debts, and have high-profit margin stock. Most importantly, the stock must have the capacity to face the bottom and give a big surge.
Investors who are looking to make short-term returns should stay away as it may be too soon to turn averse to banking and non-banking financial companies’ stocks as we don’t know the extent of the impact of coronavirus on the stock market and banking sector. There is a possibility that it is too early to predict the impact of COVID-19 on earnings. But, if it turns out worse than expected, the investors could be in serious problems.
The Reserve Bank of India (RBI) is doing what’s within its capacity to make sure the financial sector remains viable and to reinforce the worsened economy due to coronavirus outbreak and to provide support by providing the liquidity for growth and help the country to emerge out as a winner in the post-COVID-19 world.
In such times, it would be advisable for retail investors to assess the situation before investing in the banking sector and be prepared for the worse.
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