By Prabhakar KudwaCorporate and large PSU banks provide excellent risk-reward at this juncture for investors.
Their earnings have remained supressed over past few years due to several challenges due to asset quality issues and a rate tightening cycle.With bulof bad assets already recognised and respective watch lists shrinking, there is a case for a sharp jump in profits for these companies.
NCLT resolutions should drive healthy writebacks and will help compensate for provisioning requirements going ahead.The recent drop in bond yields should only provide a fillip to said tailwinds.One can take a basket approach and own large corporate and large PSU banks.
Its important to note that this is mean reversion at play, and by no means should one consider these as long-term buys and hold core positions.
Structurally, fundamentals of PSU banks will always remain in turmoil, as they are used as political tools from time to time.One key risk will be implementation of a widespread farm loan waiver (or some populist action) at a large scale as one goes into general elections.Asset Allocation for 2019Given current backdrop one should definitely increase allocation towards NiftyNext and midcap funds.
Nifty50 has become a consensus trade with top ten stocks driving most of gains.
This is likely to moderate in New Year.Having said that, one should keep some cash at hand as we go into an election year.
This cash should be deployed as we get closer to election and post election result based on opportunities that market provides.One should also keep an eye on global markets, which seem to be in their own turmoil and this cash should come in handy in case of any correction due to global factors.Overall, one should do well with a mix of aggressive (look beyond nifty 50) and defensive (hold cash) positions going into next year.
The middle path of owning only large names may not be optimal from a risk-reward perspective; more so because it seems to be consensus right now.The exact percentage allocations will differ from investor to investor based on their risk-appetite, liquidity profiles and conviction levels.Watch Out! Opportunities Galore in 2019