By Savio Shetty
(Reuters) – The Indian banking sector is a preferred bet on the back of an upcoming favourable interest rate cycle and bottoming of net interest margins (NIMs), a top executive at Avendus Capital said on Thursday.
The banking sector has been a laggard in 2023, as well as so far in 2024. The 12-member bellwether Bank Nifty index has returned 1.9% this year, compared with a 4.6% rally in the broader Nifty 50.
“I think the sector is being overlooked by investors, given the interest-rate cycle going forward,” Andrew Holland, CEO of hedge fund Avendus Capital Alternate Strategies, told the Reuters Trading India forum.
When asked if his fund viewed banks as one of the top overweight sectors, Holland said, “Yes, it would be. JPMorgan’s bond inclusion is being ignored by investors and (its) impact on bond yields. (It is) good for MTM (mark-to-market) on bond holdings.”
A rally in bond prices improves gains from notes held by banks. India’s benchmark bond yield fell from 7.24% mid-April to 6.95% on Monday, before giving back some declines after the lower-than-expected mandate for Prime Minister Narendra Modi.
India’s central bank is widely expected to keep interest rates steady at 6.50% and retain its tighter monetary stance on Friday.
In September, JPMorgan said it would start including India in its emerging market bond index from June 28. The inclusion would extend over 10 months with 1% increments on index weighting.
Holland was also unsure about a pre-budget rally, citing a possible change in capital gains tax as one of the reasons.
“I think we might see some consolidation around here (current market levels) but I am sure capital gains tax will be at the forefront of all discussions,” Holland said.
India currently has a long-term capital gains tax of 10 percent and a short-term capital gains rate of 15 percent on profit made from equities. India’s full budget is slated to be presented in July.
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(Reporting by Savio Shetty; Editing by Sohini Goswami)
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