Private bank stocks may be headed higher on hopes of buoyant Q2 and Q3

Street is hoping the two quarters will see a pick-up in consumption and better economic activity

The last month has seen speculative market positions taken in sectors like Private Banks, Automobiles, Multiplexes and Real Estate. All of these can be described as trades based on hopes that Q2, and Q3 will see a pick-up in consumption, and better economic activity.

While base effects will moderate in Q3, we do have some positive signals signalling macro-economic growth could accelerate. The PMI for the Service sector jumped in August after dipping into contraction territory in July. Manufacturing was also in expansion territory in August. Inflation also eased off slightly, though there is a high base-effect to consider. The Maharashtra government easing Covid restrictions has also led to some long trades in the multiplex sector.

There is a K-shaped recovery at the moment in big-ticket consumption areas. Passenger car sales are doing much better than two-wheeler sales, though even car sales are well below 2019 levels. In housing, high-end and mid-range properties are doing better. Credit card usage has picked up and there are lower bounce rates, although the bounce rates are still objectively high.

Most investors are hoping the festive season would see a comeback for two wheelers, and better car sales as well. One positive signal that suggests an improvement in market conditions at the lower-income end, is that micro-finance collections have also picked up since July and August. The Kharif harvest is also estimated to have been good, which could boost rural and semi-urban consumption.

Results in the banking sector would be crucial. Credit growth has been very low for several quarters, and it’s hard to tell the actual NPA situation for many banks. Corporate credit demand has been low because most industries are running at below capacity.

Banks have shifted strategy to target retail customers because this segment could see faster growth than corporate, and also because defaults on the retail side tend to be lower. Obviously banks (and investors) will be hoping for a significant rise in credit demand across Q2 and Q3.

The RBI Monetary stance is favourable for the financial sector. The central bank cut rates through last fiscal and it has held rates stable through the last two policy updates despite higher inflation. The RBI has also taken an accommodative stance with other measures to ensure easy liquidity.

As a result, banks in particular are enjoying low cost of financing and good net interest margins. Indeed, the real interest rate at which banks are raising money may be negative at this moment. Of course, low interest rates have also helped many corporates across multiple sectors to restructure debt and deleverage balance sheets.

The logic of betting on a consumption pick up is speculative and forward –looking in nature but that’s typical of stock markets. There are possible downsides if, for example, the anticipated Third Wave of Covid is more severe than expected, or if macro-economic growth rates disappoint. The real estate sector’s troubles in China could also trigger a downgrade in global growth rates and lower prices in global commodity markets, especially in industrial metals.

Private Banks could outperform if these downside risks are not triggered. In the past month, while the Nifty and Bank Nifty have both risen around 7.3 per cent, the Nifty Private Bank Index has returned 8.9 per cent. The Auto sector has also jumped 9.75 per cent, with Ancillaries such as Balkrishna, Exide, Bosch, Amara Raja, outrunning vehicle-makers.