Mutual funds equity exposure to the banking sector touched an all-time high in December as banking stocks found favour with fund managers in the last quarter of CY12 on rising expectations of a cut in interest rates by the central bank.
Mutual funds' investment in banking stocks as a percentage of equity AUM touched a high of 21.15%, data put up on the website of capital market regulator Sebi for deployment of equity funds show. Data further show that the exposure in the sector steadily increased from 17.23% in January 2012 to 21.15% in December 2012. The assets under management rose by R11,279 crore in the same period. The data is made available since 2009.
“Fund managers increased their allocation to banking stocks on expectations of a cut in interest rates,” said Dhruva Chatterji, senior research analyst, Morningstar India. According to him, allocation to banking and financial stocks has been the highest since 2006. Last week, the RBI finally cut the repo rate by 25 basis points to 7.75% and surprised with a 25 bps cut in CRR.
Banking funds had emerged as sectoral outperformers in CY12, giving average category returns of more than 45% and outperforming defensive sectors such as pharma and FMCG.
The BSE Bankex has given returns of about 57% in 2012 compared with negative returns of 31.6% in CY11. Chatterji pointed out that this outperformance of banking scrips has boosted allocation. “If banking stocks perform well, then the allocation to the sector will automatically rise, even if fund managers don't buy any new shares,” he said.
A combination of good news in the second half of the year helped boost the performance of banking scrips. “Fears of asset quality of banks slowly dissipated as the year progressed, although concerns about non-performing assets of public sector banks still remain. Also, results of several private sectors banks and even NBFCs have been quite positive,” said Chatterji.
And while economic revival — often, one of the keys drivers that boost the performance of banking stocks — has not taken off in earnest, corporate earnings seem to have bottomed out, according to experts.
A spate of reforms on the policy front has boosted sentiments among investors and allayed concerns on the fiscal and current account deficits to some extent. At its policy meet last week, the RBI revised down its GDP growth projection to 5.5% y-o-y in FY13 from 5.8% earlier. The banking sector typically grows at three times the GDP growth rate, said experts.