India rally could continue next year with banks taking over as RIL peaks

India’s record-breaking equity rally will continue next year, with banks and other stocks taking over as drivers from the nation’s largest company Reliance Industries Ltd., some fund managers say.

Reliance has accounted for nearly a fifth of the 75 per cent surge in the S&P BSE Sensex from its March bottom, according to data compiled by Bloomberg. That’s about double the contribution Apple Inc. has made to gains in the S&P 500 Index over the same period. Some market watchers say Reliance’s gains may have peaked for now, prompting the search for new leaders.

The prospects for global recovery amid progress with Covid-19 vaccines has caused investors to shift focus from defensive growth stocks to cheaper economically sensitive shares. That may be particularly good news for financial stocks that have lagged in the rally that has driven the Sensex to an all-time high and propelled India’s total market value to over $2.3 trillion.

“Banking and financial stocks could have the most scope to take the market leadership,” said Mahesh Patil, co-chief investment officer at Aditya Birla Sun Life AMC Ltd. in Mumbai, which had assets under management of around $31 billion as of end-September. He also said metals stocks should perform well because China’s economy is growing again.

Reliance’s performance has been driven by billions of dollars of investment in its businesses by the likes of Facebook Inc. and Alphabet Inc.’s Google, which should help speed the Indian conglomerate’s transition from energy to digital services. Its shares surged to a record in September, pushing their earnings-based valuation to about double the five-year average, though Reliance has slipped 15 per cent since then.

“It’s hard to get excited by energy prospects at this time, or price digital services significantly ahead of where the implied value already is,” said Piyush Sharma, who manages the Minerva India Underserved portfolio for Right Horizons. “Our sense is market leadership could shift away from the likes of Reliance over the next year.”

That thought is echoed by Sachin Shah, a fund manager at Emkay Investment Managers Ltd. in Mumbai, who expects to see “a much more broad-based rally over the next few quarters.” Shah notes that the pandemic has been a catalyst for companies in various industries to cut costs, which should make their stocks more attractive.

Banks in particular could benefit from the hunt for new investment ideas. Still grappling with the fallout of a crisis in the shadow-banking sector when the pandemic hit, financials were among the biggest losers in the selloff earlier this year, and they have underperformed in the rebound that followed. That may change as the market turns its attention to cheaper shares.

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Right Horizons’ Sharma sees value and earnings as the chief factors for India investors in 2021, with the best opportunities in both lying outside of the larger stock gauges.

The S&P BSE SmallCap Index has climbed about 28 per cent this year, while the S&P BSE MidCap Index has gained 17 per cent, both outpacing the 10 per cent advance for the Sensex, after two years of underperformance. The smaller measures may have greater scope for gains, with both still trading below their early 2018 highs.