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Financial stocks’ Nifty contribution touches 18-month high in November

About a third of the Nifty 50 index weightage now belongs to the banking and non-banking financial companies stocks. The weightage of the financial sector stocks in the Nifty is on the rise again, touching an 18-month high of 30.5%, just shy of its May 2013 high of 30.6%

Participants said that the contribution of banking stocks is set to climb higher as investors continue to shore up on these stocks backed by the Reserve Bank of India’s indication of a rate-cut early next year and continued optimism on India’s upward growth trajectory.

Historically, financial sector stocks have always commanded anywhere between 25-27% of the total weightage in the Nifty, analysts said.

Since May last year, the weightage of these stocks was on a downtrend as economic outlook turned dangerously sour leading to sharp stock price declines.

Ten of the Nifty 50 stocks belong to banks and non-banking financial companies. At 7% ICICI Bank has the highest weightage among these stocks followed by HDFC at 6.28% and HDFC Bank at 6.17%. State-owned bank SBI has seen its weightage climbing to 3.4% from 1.9% at the beginning of the year.

Analysts believe that the contribution of the banking sector is expected to move higher based on the change in earnings outlook for these stocks.

“Going forward, the spreads in the business for the banks is going to be better in the coming quarters. Earnings estimates at this point have not yet factored in the new inflation figure, the new petrol prices or even the rate-cut. This means there could be an earnings upgrade for these stocks in the future further pushing up stock prices,” said Sudhakar Ramasubramanian, managing director, Aditya Birla Money.

Some believe that the weightage of these stocks in the benchmark could plateau at around 35%.

The rally in the banking stocks began early this year as market raced ahead in hopes of a Narendra Modi-led government at the centre. After the elections, optimism in the market returned giving a push to the banking stocks which are considered to be the first beneficiaries of a turnaround in economic outlook.

The Bank Nifty has climbed about 64% this year compared to the Nifty’s 35%. Experts said that investor-interest has slowly started moving in the direction of the state-owned bank which have till now trailed their private sectors, in terms of returns.

Analysts believe that a cut in interest rates by the RBI early next year is expected to boost earnings of public sector banks and reduce concerns about poor credit quality. Private sector banks generally are known to have a much more efficient capital allocation than their public sector peers, analysts said.

“In a falling interest-rate scenario, credit growth would pick up and the capex cycle would also see a move up fuelling economic recovery. All of this would lead to higher earnings growth for the PSU banks,” said Nikhil Golani, head of institutional equity, Tata Securities.

Participants believe that in the near-term valuations may look a little expensive but these stocks have sufficient upside left.

“Liquidity is not an issue for these stocks even though many of them are close to exhausting their foreign investor stake limits. There is enough appetite among the retail and domestic institutions for these stocks who are looking to enter at these levels,” said Ramasubramanian.

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