Banking pain a gain for technology stocks

Fund managers remain cautious on FMCG and expect re-rating of IT

Indian banks failed to boost the confidence of equity fund managers through 2013. The sector, which accounted for  a little more than a fifth of equity assets at the start of the year, witnessed a decline of about four percentage points in allocation.

Equity assets’ exposure to banking stocks dipped as low as 15.7 per cent in August against 21.15 per cent at the start of the year. While fund managers kept their fingers crossed on their investment calls on banks, they heavily and steadily kept buying information technology (IT) stocks.

At the start of 2013, allocation to the IT sector was a little below eight per cent of overall equity assets. This was close to 14 per cent in September. After that, it declined a bit to 13.2 per cent recently.

In other words, pain in banks turned out to be a gain for IT, as fund managers shifted investments. No other high -profile sectors, including pharmaceuticals, fast moving consumer goods (FMCG) and automobile, could see such a large diversion of investments.

At a time when the benchmark Sensex has gained 8.25 per cent thus far in the current calendar year, the BSE’s IT Index galloped a whopping 58 per cent. Shares of Infosys, despite having high profile exits, are hitting all-time highs. Those of Tata Consultancy Services (TCS) have gained around 50 per cent since it hit its a 52-week low. More, fund managers feels there is still more upside in the IT sector and probability of re-rating of IT stocks may not be ruled out.

 

BSE’s Bankex is down 10 per cent, while heavyweights in the index, including State Bank of India, Punjab National Bank, Bank of Baroda, ICICI Bank, HDFC Bank and Axis Bank, are much lower than their 52-week high. Concerns of non-performing assets (NPAs) are still persisting and till the investment cycle picks up, fund managers continue to remain cautious. Stock-specific calls remain a dominant tool, irrespective of sectors.

Riding on the back of improving US economy, coupled with steep currency depreciation for major part of the year, ‘Buy’ call on IT paid off well for the fund managers.

FMCG was a clear “no no” for equity fund managers. Uncomfortably higher valuations in the FMCG sector made them avoid taking fresh buying calls. However, at the same time they chose not to cut exposure drastically given the high volatility in the market surrounded by uncertainties. The allocations to consumer non-durables were reduced by a mere half-a-percentage-point thus far this year.

Pharmaceuticals, yet another defensive sector, too could not see as high interest among fund managers as the IT generated. Though, currency depreciation turned out to be good for the sector but continuous regulatory hurdles from USFDA for various India’s pharma giants did not go well with fund managers. As a result of this along with higher valuations, the sector could see only a 50 basis points rise in allocation.