The financial sector is the backbone of an economy signifying the economic strength of a country. Quoting RBI Governor Shaktikanta Das in a recent interview with Economic Times, he relates to the past global financial crisis and how the Indian economy and financial sector this time around was far more resilient in many aspects. He reiterates that India’s financial sector continues to be sound and stable. Considering that the current financial situation is a pandemic led crisis and not a financial one, this crisis can be seen as an opportunity to proactively raise capital and improve the resilience of the Indian Banking and Financial sector.
Broad Market Outlook
The financial sector in India is primarily dependent on the banking sector. 64% of the total assets under management by the financial system are held by commercial banks. From innovative banking models like SMBs and Payment Banks to RBIs new measures in restructuring the domestic banking structures to approving 100 per cent FDI for insurance intermediaries, opening the insurance sector to an approximate 74% FDI; there is a lot that has been happening in the financial sector.
Yes, the current pandemic scenario has brought with it hurdles in terms of economic slowdown, fall in consumption and investments. Private consumption and investments are two factors that propel growth in the Indian economy. Despite the number of cases rising we are witnessing businesses and lives limp back to normalcy across the country. The economic slowdown has affected the revenue of businesses and individuals causing investors to take a conservative stance in future investments. The latest AMFI August 2020 numbers prove the decline in monthly SIP inflows for the 5th month in a row. For investors looking for an opportunity in the equity market, the banking and financial sector could be your safest bet. Here is why:
Why we foresee a surge in the Banking sector?
In past crises over the decades, investing in financial stocks during a crisis has proven to deliver outsized returns over the next 5 years. Every crisis has been followed by a period of recovery and then exponential growth. During a crisis investors flock towards high-quality financial stocks; these high-quality banks and financial institutions sail through the crisis by focussing on capital allocation and underwriting while evading fear and greed in execution during a crisis. Post the crisis these high-quality lenders enjoy a higher market share and accelerated growth in comparison to weaker lenders. The normalization of the market, NPAs and PEs post the crisis leads to their exponential growth in later stages.
Another correlation has been noticed between recession and low government bond yields in the US combined with falling oil prices which has preceded Indian economic recovery in past crises. The falling US bond yields encourage foreign investors to invest in economies beyond the US and go global (namely India & China). With Crude Oil prices as low as $39 a barrel and the possibility of a double dip recession in the US, the stage seems set for a boom in the Indian Banking sector. By 2028 India is estimated to be the 4th largest private wealth market across the globe.
For further in-depth understanding of why investors should invest in the Banking and Financial sector join our webinar where experts, Mr. Pramod Gubbi and Mr. Tej Shah, will comprehensively cover topics mentioned below:
For further in-depth understanding watch our master class on why investors should invest in the Banking and Financial Sector?