Markets have been scaling to new highs but many investors have become worried about valuations as they might soon start looking stretched at broader level. Those pockets of the market which have decent valuations are still attracting investors. Take example of Public sector Undertakings (PSUs). For a number of reasons, PSU stocks were underperforming markets over last couple of years, however; in the recent market rally they have outperformed S&P BSE Sensex.

S&P BSE Sensex vs. S&P BSE PSU

Data as on December 10, 2013
(Source: ACE MF, PersonalFN Research)

As depicted in the graph above, S&P BSE PSU has outperformed S&P BSE Sensex over last 3 months. The recent outperformance of PSUs may not be substantial but it is noteworthy considering their sustained underperformance in the past. Relatively cheap valuations and higher dividend yields might have been the primary reasons for the re-founded investor's interest in PSU stocks. Performance of dedicated PSU funds too has been in line with the performance of PSU index. PSU funds have managed to do better than S&P BSE Sensex over last 3 months.

Why investors focus on PSU opportunities?
Although the PSU companies have some non-commercial objectives to achieve, they are expected to run professionally and generate profits to be able to sustain growth. Many PSUs have niche businesses which are difficult to replicate and have huge asset base that provides comfort to investors. Besides, government ownership gives them some sense of security. Due to aforesaid reasons, investors have been investing PSUs.

Should you follow the momentum?
Investing in PSU stocks or in units of mutual funds focused on PSU opportunities might prove risky. Valuations might appear attractive and dividend yields higher, but, both these indicators could be misleading. PSUs too are affected with the general slowdown in the economy. For instance, performance of PSUs in capital goods sector and in banking has been worse than some of their private sector counterparts. True, dividend payouts have gone substantially up over last 3-4 years but not because companies are making huge profits. Indian government has been finding it difficult to contain fiscal deficit as revenues are not growing at a same pace with the expenditure. To bridge the gap, government has been nagging PSUs for higher dividend payouts. Despite muted growth in earnings dividend payouts have remained unaffected, rather have gone up considerably. This means, companies are retaining lesser profits. Excess funds with stronger PSU companies are often diverted to restructure weaker PSUs and meet fiscal deficits. Going one step forward, this year government asked PSUs to buy its shares in other companies in case they had no big capex plans. Such practices are detrimental to long term growth prospects of companies. Speaking about valuations, cheap valuations do not indicate that they will improve in future; it may also mean that company quotes at discounted valuations because chance of recovery is remote.

PersonalFN is of the view that, taking a call on a sector or a theme needs expertise. Therefore, individual investors who do not have time to meticulously monitor sectorial trends should refrain from following momentum. PersonalFN believes investing in dedicated PSU funds should also be avoided. Any opportunities oriented fund with a proven track record may help you capitalise on various investment opportunities present across marketcapitalisations, sectors and themes.

Add Comments