PSUs to rally? We are mindful of
the value trap in the shares of public sector (PSU)
companies. The primary reason is the nature of their
businesses; the second is their high level of government
control. However, right now, three things favor PSU
stocks. The first is the likely shift in investment style from
growth to value – PSU shares dominate value screens.
Indeed, as a group, they are trading at multi-year lows
versus the narrow index (Exhibit 1). Most PSU
companies operate in cyclical businesses, and we
believe that cyclicals will outperform defensives in the
coming months, given the likely recovery in growth.
The third reason, and the likely trigger for some rerating
of these shares, is the government’s proposal to create
a PSU ETF. The government has invited bids from asset
managers, and we believe the process will completed
before the close of this financial year (i.e., end-March).
An ETF would provide a low-cost, diversified and,
hence, lower-risk investment option, especially to retail
investors, allowing them to gain exposure to a number of
stocks by paying a small amount. This would improve
liquidity, trading and possibly the valuations of PSU
stocks.
A close examination of the relative performance of PSUs
to the market in 2003-04 and in 2009 is that these stocks
led the recovery in the market (Exhibit 2). The
commonality with these two periods is a shift in
investment style from growth to value and the
resumption of a growth cycle. Both conditions seem to
be satisfied at this point. This could set the stage for an
improvement in performance of PSUs, in our view.
PSU List: Below we have compiled a list of PSUs with
market capitalization greater than US$1 bn, excluding
banks, across the consensus coverage and using the
framework laid down in The Quintessential Quest for
“Quantamental" Alpha” dated December 14, 2012,
No comments:
Post a Comment