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Is the Indian stock market turning a new page? For the first time in many years, the Bank Nifty is moving in the opposite direction to its benchmark.
The National Stock Exchange's Bank Nifty index is down 5.5 per cent during July so far, against a 3.2 per cent rise in the benchmark Nifty index (the former is the largest component in the latter) during the period. In comparison, the other key sectoral indices - information technology (IT), fast moving consumer goods (FMCG), pharma, energy and infrastructure - have outperformed the broader market.
Historically, the two indices has often moved in step, with the banking & financial sector stocks providing a strong support to the broader market when other sectors such as capital goods, power, infrastructure, metals and oil & gas were pulling the latter down. This is clearly visible in the high correlation between the two. In the past five years, the correlation coefficient between the two indices has been 85 per cent on average, with it being above 90 per cent during a majority of the months since January 2008.
This relationship seems to be breaking. The correlation between the two indices declined to 11 per cent in July, the lowest in six months. Only on one other occasion in five years, in January 2013, has the ratio been smaller.
The poor show by the banking index is mostly due to the recent correction in the stock prices of private sector banks and non-banking financial institutions. These account for nearly 85 per cent of the sector's total weightage in the index. Experts believe this trend could continue for some time due to factors like the Reserve Bank's liquidity tightening, balance sheet stress in some private sector banks and the rupee's depreciation which hast weakened the case for an interest rate cut by the central bank.
"The rupee depreciation and slowdown in consumption demand has vitiated the growth matrix for private sector banks, which were thriving on the back of strong growth in retail loans and easy availability of capital to fund that growth," says Dhananjay Sinha, co-head institutional equity, Emkay Global Financial services.
Coupled with RBI's recent monetary moves such as liquidity tightening, this is inducing many fund managers to reduce their exposure to the banking sector, including private sector lenders. "All our diversified funds have reduced weightages to banks and finances since early this year, when the rupee began to depreciate against the dollar," says Swati Kulkarni, vice-president & fund manager-equity at UTI Mutual Fund. Government-owned banks and private banks are unlikely to outperform the broader market, given the moderation in retail credit growth and liquidity tightening by the central bank at it tries to protect the rupee, she says.
The other risk is a rise in non-performing assets (NPAs), in line with falling corporate profitability, a poor job market and erosion in consumer purchasing power due to inflation.
Others have shifted attention to export-intensive sectors such as pharmaceuticals and IT and consumer staples, in line with the current market trend. These sectors are driving the market now, with the CNX FMCG and CNX IT delivering double-digit return during the month, followed by the CNX Pharma up seven per cent. "We are bullish on select IT, pharma and FMCG stocks, given their earning resilience and likely gains from rupee depreciation," says Devang Mehta, senior vice- president and head of equity sales, Anand Rathi Financial Services.
Following the correction in banking stocks, the weightage of financial stocks in the Nifty has reduced from nearly a third in May to 27 per cent at present. Meanwhile, the weights of sectors such as consumer goods, healthcare and technology is on the rise, the data shows.
Experts believe the financials could lose their dominance in the benchmark indices to other sectors. Historically, it has been seen that sector weights peak out at 25-30 per cent levels. Between 1998 and 2001, the consumer goods sector had the largest weightage, of between 24 and 32 per cent. In 2006-09, the oil and gas sector dominated the benchmark indices, with 22 per cent weightage.
