Macro Call

There are very few times when a value investor is able to make a macro call. But I am daring to do it at this stage. The call is on financial sector in India. If you look at Index composition of Nifty and Sensex, there is hardly any diversification left. Financial sector represents 23.74% of Sensex (ICICI Bank, HDFC, HDFC Bank and SBI) and 25.37% of Nifty (AXIS BANK, HDFC BANK, HDFC, ICICI BANK, IDFC, KOTAK BANK, PNB, RELIANCE CAPITAL, SBI). As all of you must be knowing, a value investor generally does not invest in financial firms since they are difficult to evaluate. This leaves just 76.24% of Sensex for investment for a value investor like me.

It has already been observed many a times in the past that when a particular sector garners most of the weightage of a financial index, it underperfoms the index. The evidence can be seen in IT sector after 2000 and FMCG and Pharma in India after 2003. So I am taking a call on Indian Financial sector today, that the sector would be an underperformer in the next five years.

Abnormally good or abnormally bad conditions do not last forever. - Benjamin Graham