Lagging behind: Brokerage firm CLSA flags 'odd' Indian financials trend

The underperformance of the financial pack this year has left influential brokerage CLSA surprised.

The Nifty Financial Services index is up 8.1 per cent on a year-to-date basis. In comparison, the Nifty50 index has gained 9.7 per cent. The underperformance was even starker until recently, with financial stocks catching up in the past one week.

“This underperformance of financials in India may be seen as odd, since India has many high-quality, respected names in the sector. Moreover, Indian banks are coming out of a multi-year credit cycle, which should lower credit costs drastically,” said Vikash Kumar Jain, equity strategist at CLSA in a note.

CLSA says the financial stocks have outperformed their country benchmarks in 14 of the top 19 world markets this year “as investors view this sector as a great reflation trade.”

In the Indian context, the performance of the financial pack has a huge bearing on the market as it has the highest weighting on the benchmarks Sensex and Nifty.

The Hong Kong-based brokerage expects financial stocks to do well going ahead.

“A recent peak in the wave should return investor focus to economic normalisation in the coming months, even as banks’ relative valuations are below the historical average and overweight of foreign institutional investors (FIIs) is at multi-year lows. We add Axis Bank to CLSA’s India focus portfolio, replacing HCL Tech, as we reduce weight in defensives after their strong outperformance in the last two months,” Jain said in the note.

CLSA observes that India’s large-cap banks have surplus provisions to offset any balance-sheet risks emanating from the second wave. Also, many banks are trading only marginally above their respective long-term historical average price-to-book valuations, it notes.

Further, the sector’s relative valuation to Nifty is below the historical average discount at which it has traded.

Foreign portfolio investors (FPIs) have been less bullish on banking stocks than they have been in the past.

“Overweight of FPIs in banks fell to a fresh multi-year low of 7.7 percentage points in April, which suggests one of the lightest FII positioning in the sector in many years. Overweight of even domestic mutual funds (MFs) in banks is much lower than in the heydays of 2019,” the CLSA note adds.