The Indian banking sector can tackle reform and move onto a strong growth footing, according to Barings' Ajay Argal, who has bulked up his exposure to the country’s financials.
Argal, who is head of Indian equities, said both private and public banks are set to flourish after being off investors’ radars for many years.
Financials currently make up 31% of the Baring India fund, which is a seven percentage point overweight to the MSCI India 10/40 index.
‘In financials, we are looking at both commercial and private banks, as well as starting to own some public banks once again. This is because, following the election, a lot of the asset quality issues are beginning to be addressed.
‘At current projections, the banking sector will grow either one or one-and-a-half times GDP and there are a large number of strong banks out there. The private banks, in particular, are attractive and have grown from zero market share 20 years ago to making up 20% of the market today.’
Argal believes a strong drive in the mortgage market will aid the private sector banks, with many young Indians looking to purchase houses for the first time.
‘Banks in the wholesale or retail side continue to be attractive and we think this will be supported by a big pick-up in mortgages.
‘These have just started to grow as the young population want to own their houses and it is easier for them to take on a mortgage. Default rates are very low in this area as mortgages are one thing they definitely don’t want to default on.’
Investors had voiced criticism over the banking sector, with some questioning whether new prime minister Narendra Modi would be able to enact necessary reforms; however, managers now appear to be turning more bullish on the sector.
Mind on mid-caps
Elsewhere, Argal reiterated the potential being seeing in the Indian mid-cap market, which he has added to in the wake of Modi’s victory.
The price-to-book discount between the CNX Midcap index compared to the wider Nifty 50 index is currently below historical averages, Argal said.
‘Mid-caps are trading at attractive discounts compared to their large-cap peers. Typically, when the market picks up we see mid-cap names get closer to large-caps.
‘We now have 7.5% of the fund in stocks with a market cap of $1 billion or under, as we believe, going forward, these will be the good sources of return and well-positioned amid reforms.’
The Baring India A USD Acc fund has returned 27.6% over the 12 months to the end of May 2014. This compares with a 25.75% return by the average manager in the Equity – India sector over the same period in rupee terms.