PSB stocks are factoring in most positives: CLSA's Chris Wood

Wood said that the failure to address banking sector issue more proactively has been the one major piece of unfinished business in the Narendra Modi-administration

Despite the government's Rs 2.11-lakh crore recapitalisation package for public sector banks (PSBs), Christopher Wood, managing director and equity strategist at CLSA chose not to add these stocks to his portfolio citing the runaway rally in these stocks. He, however, says that the step is in the right direction and will go a long way in meeting the capital requirement of these cash-starved PSBs.

"What GREED & fear has long been waiting for has finally happened in India. That is the announcement by India's Ministry of Finance on Tuesday of a proposed recapitalisation of the banking system over the next two years. The sum allocated is sufficient to meet the public sector banks' recapitalisation requirements," Wood wrote in his weekly note to investors.

Adding: "Unsurprisingly, the share prices of the public sector banks have soared on the news as relative-return fund managers have sought to protect themselves against the trade out of 'growth' to 'value'. Still GREED & fear is not going to add public sector banks to the Asia ex-Japan long-only portfolio today, since a lot has already been discounted given such violent share price moves."

Since the announcement on October 24, the Nifty PSU Bank index has rallied nearly 29%, as compared to 1.3% rise in the benchmark Nifty50 index, ACE Equity data show. The rally in individual stocks has been sharper with Punjab National Bank (up 54%), Union Bank of India (42%), Bank of India (37%), Canara Bank (33%), Bank of Baroda (30%) and State Bank of India (26%) topping the charts during this period, ACE Equity data show.

The failure to address the banking sector issue more proactively has been the one major piece of unfinished business in the Modi administration, Wood says. The vacuum should now be filled, which means it is now realistic to look forward to a new credit and investment cycle, he believes.

As an investment strategy, Wood plans to increase India's weightage in the Asia Pacific ex-Japan relative-return portfolio by 2 percentage points (ppt), which brings India back to the structural three times overweight position. This will be paid for by reducing the weighting in Korea by 2ppt, a move party influenced by the downgrade of Hynix last week given the statistical reality that Korea's outperformance in the first three quarters of this year has been primarily driven by Samsung Electronics and Hynix.