Banks regain top spot in BSE Sensex, CNX Nifty

Experts say the share of financials will improve further, as economy improves and insurance firms list

After ceding their overweight position to the technology stocks in February, index heavyweights from the banking sector such as HDFC Bank, State Bank of India, ICICI Bank, Kotak Mahindra Bank, IndusInd Bank, Bank of Baroda, etc have recently regained their pole position.

With the dust of Brexit (Britain voting to exit the European Union) settling down on Indian technology majors such as Tata Consultancy Services (TCS), Infosys and Tech Mahindra, Wipro, and HCL Technologies, they now account for only 16 per cent of the CNX Nifty, against 20 per cent in February (based on full market capitalisation). The weight of banking stocks increased from 16 per cent to 19 per cent in the index during this period, and experts say the trend may sustain in the medium term.

“IT (information technology) sector is undergoing a transition and hence valuations have become cheaper. Fundamentals are not in favour of the sector and IT may continue to underperform in the near to medium term,” says Dipen Shah, head-PCG Research, Kotak Securities. He expects the IT stocks to trade near the current levels for some time. More so, no major new listings are expected.

On the other hand, fundamentals are brightening up for banks. “There is credit growth in the market and, more importantly, the infrastructure sector is continuing to grow”, says Deven Choksey, managing director, KRChoksey Investment Managers. Also, the Street has largely factored in the likely pain ahead of the banking system while assuming a recovery in earnings in the second half of FY17.

After the June quarter results, analysts at Prabhudas Lilladher, in a note, said, “We believe any upgrades and recoveries of large accounts in banks will take at least take two·three quarters until which we will continue to see gradual improvement in earnings.” Although earnings improvement seems two quarters away, the Street has already started pricing in the gains partly. “While banks may remain overweight in the indices, we need to see how much extra outperformance is still left, given the recent rally”, cautions Shah.

In the long term, however, Choksey is of the view that with the secondary market opening up for insurance companies, the share of banks in the Nifty is set to increase to at least 25 per cent in the next five years.

And, if we include other segments like non-bank financial companies (NBFCs), insurance companies, etc, which have been doing well, the share of financials in the Sensex and the Nifty has already started widening (versus IT) since July.

And, there could be more gains. What does all this mean for investors? It is an indication of the shifting preference in favour of financials, and with valuations correcting a bit in recent times, it makes sense for investors to do some cherry-picking.