Financials drag index performance

Both Sensex and Nifty reflect the large weight they carry of this sector and many wonder if this shouldn't change

The dominant influence of financial sector stocks, laggards so far in 2013, on the nation’s benchmark stock indices, the Nifty and the Sensex, is impacting the performance of these gauges.

Shares of lenders, which have a 28 per cent weightage on the Nifty, the highest among sectors, have contributed to nearly 40 per cent of the decline in the market from its 2013 peak. The 50-share Nifty has come off nearly seven per cent or 415 points from the 6,075 level touched at end-January. The nine banking and financial components in the index are responsible for 164 points of the total fall.

The fall apart, “high polarisation toward banking stocks is making the market a lot more volatile,” said Nikhil Vora, managing director, IDFC Securities.

Though the top three companies on the indices in terms of weightage — ITC, Infosys and Reliance Industries — are not from the banking sector, Housing Development Finance Corporation (weightage 6.78 per cent), ICICI Bank (6.58 per cent), HDFC Bank (6.11 per cent) and State Bank of India (five per cent) form the bulk.  

“More components from the banking sector are making the index more volatile, as a lot of news flows like central bank credit policy, inflation data, etc, impact financial stocks,” said a senior official with an index provider, who didn’t wish to be named. “However, volatility, which brings in more traders, benefits the exchanges which derive most of their revenues from trading.”  

A report by IDFC Securities said sectors that lead in terms of growth and profitability relative to other sectors find investor interest. Between 1998 and 2001, the consumer goods sector had the largest weightage — between 24 and 32 per cent. In 2006-09, the oil and gas sector dominated the benchmark indices, with 22 per cent weightage.

Financials’ weight in the Sensex increased from six per cent in 2002 to almost 30 per cent in end-2012, as banks grew at a compounded annual growth of 25 per cent in the past 10 years.

Vora believes, however, the weightage of financial sector stocks in the index might come off from the current levels.  “In 20 years, we have seen sector weights have peaked out at 25-30 per cent,” he said.

Some believe such high weightage of bank stocks in the Nifty is not justified from a fundamental point of view. “Banks are not independent of the real economy, such as manufacturing and service sector companies. In classical terms, they are there to complement businesses that produce goods and services demanded by consumers and businesses. So, it’s ironical that they have more weights than the real sector,” said the person quoted above.

Banks’ weightage on the Nifty is likely to continue. IndusInd Bank is to become the 10th financial stock to join India’s leading equity index. It will replace Wipro, India’s third largest information technology exporter. BANKING TOO MUCH ON BANKS

• Banking stocks have the highest weightage in Nifty at 28.13%
• Of the 50 stocks in Nifty, currently 9 are banks
• Analysts say high weightage of banks makes index violate and gives high beta
• Nifty has come off 7% from its 2013 peak, while Bank Nifty has declined 12%