Anticipation of rate cuts pulls fund managers to bank shares

Equity fund managers pumped in an additional Rs 7,700 crore in banking stocks during the quarter ended March. A strong anticipation of a reversal in the interest rate increase cycle made fund managers increase their exposure to the banking sector by 200 basis points (bps) during this period.

During the previous calendar year, bank shares were among the top losers and were at their respective 52-week lows in December. Subsequently, it led the fund industry to cut exposure to the sector. But, as soon as the new year began, amid an overall market rally, fund managers picked more stocks in the sector.

“The banking sector is a direct beneficiary of rate cuts. And, during the January-March quarter, an overall consensus was building up that rate cuts were going to be imminent. This made asset managers take positions on the banking counter,” says Sadanand Shetty, vice president & senior equity fund manager at Taurus Mutual Fund.

Data from the Securities and Exchange Board of India (Sebi) show the fund industry had in December put Rs 26,334 crore in banking stocks, 15.5 per cent of all equity assets. This rose to 17.6 per cent at the end of March or Rs 34,000 crore.

Kaushik Dani, head of equities at Peerless MF, says, “Several factors were indicating a reversal in the rate cycle trend. More, a little moderation in inflation was being perceived as a precursor to rate cuts.”

With fund managers going for more exposure in bank stocks, it seems the investment decision has proved a good bet. Compared with other indices, the bank index emerged as a top performer during the quarter. At a time when benchmark indices could gain only 13 per cent, the index moved up 28 per cent.

Shares of the country’s largest lender, State Bank of India, had plummeted to below Rs 1,600 last year, only to rise to close to Rs 2,400 during the March quarter. Similarly, stocks of Punjab National Bank tanked to Rs 751 before rising above Rs 1,000 in the following months.

According to market participants, since shares of banks were the biggest losers, there was a clear probability for a strong bounce-back. They believe rates would go down sooner or later, again benefiting bank shares.

Besides, the automobile industry was another sector where fund managers increased their stake by 72 bps, which resulted in pumping Rs 3,000 crore of additional capital in the sector. Interestingly, cement (one of the most neglected sectors) also emerged as one where fund managers took their exposure to beyond three per cent, - one of the highest in the sector in recent years.