Monday, October 13, 2008

Relief rally comes as a relief

Governments join hands to save banks. The net result is : The financial services sector is effectively nationalised.

How things change! Just a new months ago, privatization was the way to go. Now, starting from the USA, leading to Uk, Belgium, Iceland, Germany and more, countries are nationalising their banking companies.

I think this is all for the good. Financial Services offer immense opportunities for manipulation & fulfillment of greed. The value addition by these companies is negligible. Compare for example an "Investment bank" (brokers in India who also provide other services) which wheels and deals and Tata Steel which makes steel. Tata Steel adds value for every ton of steel it makes. It provides employment, pays taxes, fulfills its role as a contributor to society. The Investment bank makes money by manipulation & insider trading, it employs very few people who are paid absurd salaries and bonuses. What value addition does it provide ?

Then, the long term impact of the nationalisation will be beneficial. But, this will certainly hurt shareholders of the nationalised entities. As an example, the Royal bank of Scotland (RBS) was nationalised today in the UK. Its share price fell 6.56% today while the FTSE was up by almost 5%. (The RBS has already fallen 80% from its highs!). Most other banks / housing societies also saw similar decline in equity prices.

For this reason, it is wise to invest mainly in PSU Banks.

Here is a suggested Portfolio for investors wishing to invest now.


s.k said...

Dear sir
on .10th,I commented "Panic Rally in the offing?".It has happened.Now can you please put a number to Nifty level

Shashank Jogi said...

Commercial banks in the west are being nationalised out of compulsion and not on ideological reasons; they HAD to be nationalised as private money could not provide them with the much needed fresh balance sheets!

Otherwise, there is no reason to believe that public sector banks are better run than private sector banks. In fact, in India, the reverse is true.

Why would private sector banks in India be nationalised? This is not the 1970s driven by socialistic ideology. Will a government, already strained financially, print more money or raise taxes or be able to generate more income to nationalise Indian private sector banks?

If not done well, the longer term implications of bank nationalisation will not be beneficial. With poor accountability, public sector banks waste resources and misdirect credit under the influence of their political bosses...the very reason that PSU banks command much lower valuations than private sector banks.

A huge amount of money is being thrown in the system by governments and central banks all across the world. Increase in money supply, especially when it gets multiplied through the banking system is inflationary. While the current crisis has the potential to be deflationary, over time, whenever economies get better, reflationary policies are likely to bring about higher inflation.

A regime of high inflation is never good for banks. It is good for hard resources. Many hard non-renewable resources have a potential high demand and lagging supply. The next bull market in stocks might just be led by natural resource stocks...and maybe not by banks.

Manish said...

RBS is nationalize. And since last few days only they are airing advertisement with Sachin Tendulkar saying they are different. May b they r different that they dont go down quickly. But they go down when everybody else is going.

men7014 said...

Mr Sudarshan,
I am a vivid follower of your comments regularly on cnbc, in the model p/f what should one do if the stocks are up/dn by 20% and what is the time frame for investment/or target for exit.
From the psu banks please give your best picks.