Equity MFs' exposure in banks up 200 bps in Q3

Fund managers cut allocation in IT, FMCG and Pharma

Equity fund managers are banking heavily on the bank counters. Though the space has always been a top favourite among them, what really interesting is the pace with which fund managers increased their exposure to country's top banks during the October-December quarter.

Collectively, 21.15 per cent of mutual funds' equity assets is being pumped into banking shares - a rise of 188 basis points (one basis point is hundredth of a percentage point) against 19.27 per cent in October, according to statistics available from the Securities and Exchange Board of India (Sebi).

While in the other three top sectors - IT, pharmaceuticals and fast moving consumer goods (FMCG), the proportions of equity assets invested have reduced.

According to industry equity heads, with government on the front foot for reforms and positive signals of interest rate cuts in the next 12-24 months have only boosted sentiments in the banking counters. For instance, largest lender State Bank of India (SBI), largest private bank ICICI Bank along with Bank of Baroda (BoB), HDFC Bank and Punjab National Bank (PNB) make up among the top holdings of several equity schemes.

During the quarter the BSE's Bankex gained over 9 per cent to 14,345 which only rose further in January to 14,580. During this month, several large cap bank counters from both, private as well as state-owned, have hit their 52 years high and some even touched their two year high too.

"With expected reform measures and rate cuts, investments in projects would start happening which augurs well for banking sector as a whole. We are positive on the space (though there are issues of non-performing assets) with SBI, ICICI, Axis, BoB and PNB among our top favourites in banking sector," explains chief investment officer of a mid-sized fund house.

India's largest mutual fund equity schemes, including HDFC Top 200, HDFC Equity, Franklin India Bluechip and Reliance Growth among others have large-cap PSU as well as private banks in their top holdings.

But it appears that bank stocks are eating the share of defensive stocks. Fund managers have gradually pruned their holdings in FMCG and pharmaceuticals owing to their stretched valuations. During the quarter, equity assets exposure in Pharma stocks declined 43 basis points while in FMCG the decline was only 6 bps.

Though they do not completely rule out the defensives but add that they would rather be neutral on these counters as moving out from them at a time when times are still not certain may prove fatal for the portfolios.

True. Companies like Dabur, Hindustan Unilever, ITC and Marico are facing volume growth issue, they add. According to them price hikes across the product categories have helped the companies but flat volume growth remains a cause of concern.

"Especially, if we look at some of the PSU entities like PNB, BoB and even relatively smaller banks like Union Bank, they all are still available at an attractive valuation of less than 1x FY14," explains an equity fund manager at one of country's top five fund houses.

As on 31 December, 2012, Rs 2.06 lakh crore of equity assets were deployed in stock markets, out of which sum of Rs 43,659 crore found its way into banks' shares.