The market value of mutual fund investments in public sector undertakings (PSUs) has significantly decreased as a result of the recent, severe correction in Indian markets brought on by the unexpected election outcomes. Mutual funds’ market value in state-run companies has dropped by an astounding Rs 90,000 crore over the past two sessions. The specifics of these losses and their possible effects on different stakeholders are examined in this article.
Election Results Trigger Market Volatility
Market volatility has increased significantly as a result of Prime Minister Narendra Modi’s inability to win a majority for the ruling Bharatiya Janata Party. Due to increased operational freedom and anticipation of progressive divestiture, PSU equities had previously thrived under the BJP’s majority government. However, this political instability has scared investors, causing a severe sell-off in PSU stocks.
Decline in Mutual Fund Holdings
Mutual funds owned stakes in 84 state-run companies valued at more over Rs 5.71 lakh crore as of June 3. By June 4, nevertheless, its value had drastically dropped to Rs 4.83 lakh crore, representing a substantial loss of Rs 88,000 crore. Mutual funds owned the highest holding in State Bank of India (SBI), with NTPC Ltd and Bharat Electronics Ltd following closely after. The following are the specific losses:
State Bank of India (SBI):
- Value on June 3: Rs 90,440 crore
- Value on June 4: Rs 77,400 crore
- Loss: Rs 13,040 crore
NTPC Ltd:
- Value on June 3: Rs 68,780 crore
- Value on June 4: Rs 58,157 crore
- Loss: Rs 10,625 crore
Broader Impact on PSU Stocks
Other significant holdings also saw substantial declines:
- Power Grid Corp: Loss of Rs 8,275 crore
- Coal India: Loss of Rs 4,400 crore
- Power Finance Corp: Loss of Rs 4,665 crore
- REC: Loss of Rs 4,500 crore
- ONGC: Loss of Rs 5,490 crore
The overall market capitalization of Indian listed PSU firms dropped by nearly Rs 10 lakh crore in the last two sessions, bringing their total market capitalization to Rs 55 lakh crore. This sharp correction has brought PSU stocks’ share in the total market cap to a six-month low of 13.1%, down from a seven-year high of over 16% in May.
Expert Opinions and Future Outlook
Head of HDFC Securities’ retail research, Deepak Jasani, emphasized that PSUs have profited from BJP’s majority control because of the government’s assistance and greater operational independence. But with the present political unrest, there is now uncertainty about whether the government will continue to support these stocks, which has caused a market reassessment. He pointed out that PSU banks still seem viable and that, depending on upcoming government initiatives, other industries might draw rotational interest.
Kotak Institutional Equities and Emkay Global Financial Services have provided further insights. Kotak phased out capital goods stocks and PSU banks recently, citing a poor reward-risk balance following a sharp rally over the past 12-15 months. Emkay anticipates a short-term market derating due to the increased political risk, advising investors to stay away from PSUs and capital goods, which are currently seen as the most vulnerable sectors.
Potential Long-Term Impacts
The recent fall in PSU stocks can be attributed to their overvaluation and subsequent revision to the mean. This correction, though steep, might not be entirely negative in the long run. Analysts suggest that the next budget will be crucial in determining the future of government spending in key sectors such as railways, ports, and capital goods. Clarity from the government will be vital for shaping investment decisions in PSU stocks.
Sectoral Shifts and Investment Strategies
While the near-term outlook for PSUs appears uncertain, some sectors are expected to benefit from this market correction. Emkay is optimistic about a recovery in consumption, particularly in fast-moving consumer goods (FMCG) and value retailers. Additionally, the healthcare sector is also expected to perform well. Investors might consider shifting their portfolios towards these more resilient sectors.
Conclusion
Political unpredictability and reevaluation of stock valuations have caused a major impact on mutual funds’ holdings in PSUs during the recent market slump. Despite the substantial losses, this correction may result in greater investing opportunities in other sectors and a more accurate valuation of PSU equities. Investors will have a clearer route ahead as the political climate settles and the incoming administration makes its economic ideas more apparent. As of right now, the wise course of action appears to be smart portfolio diversification and cautious optimism.
