Banks are no more secular growth story, prefer NBFCs: Chris Wood

In an exclusive interview with Business Today TV, Christopher Wood, Head of Equity Strategy at Jefferies, sees non-banking financial companies (NBFCs) doing better than banks in India, arguing that the banking sector is unlikely to replicate the secular growth it delivered over the past two decades.

Wood said banks had been a major secular growth story for around 20 years, but that dynamic has changed. While he stopped short of calling banks a “disaster”, he said the sector is unlikely to deliver the same pace of growth seen in the past. He also pointed to consumer finance as an area that has performed well.

Wood's comments come as he remains marginally overweight on India, although he sees near-term risks for equities from geopolitical developments and rising equity issuance.

Energy emerges as key growth theme
Looking across market capitalisations, Wood identified the energy sector as one of the strongest themes in Indian equities, spanning large-, mid- and small-cap stocks.

He pointed to rising private-sector investment in energy and the boom in renewable power, particularly solar. Wood said India is likely to pursue a transition similar to China's, although it may not have access to all Chinese technology.

“Basically, in China today, solar's cheaper than coal,” Wood said, adding that the continued decline in solar costs could make the sector a major growth area.

Small and midcaps remain interesting
Wood also highlighted India's vibrant small- and mid-cap segment, saying it offers investors a large number of interesting companies and themes. However, he cautioned that the segment could face near-term pressure following developments in the Middle East.

He said the recent improvement in Indian equities following an easing of Middle East tensions has also encouraged companies to raise capital. The resulting increase in equity issuance, or “supply of paper”, can cap gains in the broader market index, according to Wood.

Despite these factors, he described India's active small- and mid-cap market as healthy, particularly compared with many global markets where investors tend to focus primarily on large-cap stocks.

AI trade remains a key global factor
Wood said India could outperform more significantly if the AI investment story were to weaken. At present, he believes much of the value generated by the AI trade has accrued to semiconductor companies.

He noted that the semiconductor industry has also benefited from strong earnings growth, with companies such as Nvidia and Samsung Electronics booking profits from the AI investment cycle.

According to Wood, large caps in India have lacked similarly compelling themes over the past three years, while the small- and mid-cap segment has offered more interesting opportunities.

Overall, Wood remains marginally overweight on India but expects investors to track the pace of equity issuance, geopolitical developments and the relative performance of different market segments.