CONTRA view on financial stocks

Five reasons why as an investor you should hold on to your financial stocks.

• UNDER PENETRATED

According to a report by Boston Consultancy Group, India has the second largest financially excluded population of about 135 million, which is next only to China. Though the development in terms of technology, regulation and compliance has taken place vary rapidly, the financial services sector in India still remains highly under penetrated. Just imagine how big is the opportunity that needs to be tapped. This should be enough motivation for an investor to remain invested in financial stocks.

• EVOLVING CAPITAL MARKET

As per rough estimates, only about 2% of Indian population of 1.1 billion invest in capital markets. Of this, individuals invest only 5% of their total savings into stock markets — an indication of the kind of potential Indian financial services have. The sharp rise in India’s stock markets since 2003 reflects its improving macroeconomic fundamentals. The next growth opportunities, believe analysts, will come from online trading, internet banking, currency derivatives and commodity derivatives in this space. Thus, analysts believe if you hold stocks of brokerage houses, there’s no reason to panic, as growth prospects are robust and will be highly rewarding in days to come.

• LACK OF LINKAGES

The Indian financial sector has remained relatively sheltered from the ongoing volatility in the global markets. The firms in the financial services space don’t have any substantial linkage to the subprime losses in the US except for some banks, which is too low to have any bearing impact. The lack of linkages means they are comparatively insulated against volatility in global markets.

• ATTRACTIVE VALUATION

For the long-term investor, current valuations are fairly attractive. The financial stocks have already factored in negative sentiments. Analysts advise that one could start accumulating value stocks in the financial services space in one’s portfolio. Almost all public sector banks are trading at book values. They have all reduced their non-performing loan book. With a strong retail franchisee network and expanding horizons through bancassurance channel, they will be the king of good times in future.

In the current scenario, when the index has gone down by almost 40% and financial services have taken a big hit due to the financial turmoil in the US and European markets, the valuation has become really compelling and very attractive for investors who have a two to three years horizon.

• CONTRARIAN THOUGHT

The time to buy is when blood is running on the streets. This is a renowned dictum which was issued by Baron Nathan Rothschild in the early 19th century. If you believe in contrarian approach to investing, then there cannot be a better opportunity than now to buy financial stocks. Offloading the financial stocks in the crisis is comparable to selling your livestock during a drought.

Thus, it’s important that you are fully aware of financial considerations of selling stock in a market bottoming out.