Banking stocks tend to underperform during heavy selling by FPIs: Report

Foreign portfolio investor (FPI) flows have considerable influence on the performance of banking stocks. An analysis by domestic brokerage Motilal Oswal Securities (MOSL) shows the Nifty Bank Index — a gauge for the performance of banking stocks — tends to underperform the benchmark Nifty during months of heavy selling by overseas funds.

In November, the Nifty fell nearly 4 per cent, while the Nifty Bank Index dropped 8.7 per cent amid an $800-million pull-out by FPIs. Motilal Oswal has analysed the 10 biggest months in terms of FPI selling. It was observed that the Nifty Bank Index underperformed the Nifty on seven occasions. This is because FPIs have the highest allocation towards the financial sector. Nearly a third of their assets under custody are in banks and financial stocks.

“Financial is the only sector which can absorb large institutional flows. FPIs particularly prefer investing in banking stocks as there are some large, liquid, and well-managed stocks. The downside is they tend to underperform during events of large FPI selling, with or without any triggers specific to banks. However, domestic investors can use such episodes to accumulate good names with a long-term investment outlook,” said a fund manager.