Bank, finance stocks make for nearly half of FPIs' record investment in Nov

Experts said banking is a play on the economy and the latest buying into this space is underpinned by hopes of a sharper-than-expected recovery in the economy.

Sundar Sethuraman & Samie Modak report.

Foreign portfolio investors (FPIs) invested $8.1 billion in domestic stocks during November — a record for any calendar month.

Nearly half of this went into banking and financial stocks, an analysis by domestic brokerage Edelweiss Securities revealed.

The liquidity gush saw the financial pack outperform the markets by a huge margin: The Bank Nifty index jumped 24 per cent, twice the gain made by the Nifty50 index in November.

The inflows into the financial sector nearly equalled the combined flows into the next nine.

Experts said banking is a play on the economy and the latest buying into this space is underpinned by hopes of a sharper-than-expected recovery in the economy.

“Banking is one of the sectors which will do well when the economy starts recovering.

"After the Global Financial Crisis, the markets made their lows in March 2009.

"The rebound was led by banking, industrials, energy. and consumer discretionary — all of them had something to do with the domestic economy.

"There is no reason to think that pattern won't repeat,” said Andrew Holland, CEO, Avendus Capital Alternate Strategies.

In the latest market rebound, banking stocks were major underperformers.

The gains in recent weeks have helped them play catch-up.

“Attractive valuations and rotation play led to FPI flows into the banking space, driving the overall market up.

"Global liquidity, negative interest rates, and lack of clarity in other asset classes will make equities still attractive for some time. For money to flow into assets other than equities, attractiveness has to return to real estate.

"Also, once the interest rates go back up, bank fixed deposits may again become an avenue for investments,” said Arjun Yash Mahajan, head-institutional business, Reliance Securities.

The buying frenzy shows financial stocks are back on overseas investors’ radar with a bang as the rolling FPI flows into the financial pack for the previous 11 months was in the negative territory.

"Banking stocks saw a lot of FPI outflows after the Covid-19 onslaught.

"There were concerns about the economic impact of the pandemic, and there were concerns about the moratorium for loans, which led uncertainties about asset quality.

"In September and October, the economy kept doing better, a lot of high-frequency economic data was positive, and it sustained.

"The fears started to dissipate, and FPIs began to change their stance.

"The flows to banking stocks will be stable and steady, but will not see a significant uptick.

"Investors will approach the banking sector in a slightly calibrated manner.

"Investors will be watching how the third quarter plays out and whether the economic recovery and demand sustains in the fourth quarter.

"Flows will accelerate if quarterly results and demand recovery turns out to be positive," said Rajiv Mehta, lead analyst-institutional equities, YES Securities.

Abhilash Pagaria, analyst at Edelweiss, said the share of financials in FPI assets has reached pre-Covid levels at nearly 35 per cent.

However, it is still below the peak of 38.4 per cent in December 2019.

He said a portion of the FPI flows into the banking sector was due to technical reasons.

For instance, flows into Kotak were driven by MSCI inclusion, while IndusInd Bank benefited from the RBI panel’s recommendation related to a hike in promoter stake from 15 per cent to 26 per cent.