The financial services sector is likely to remain the top pick for equity investments for fund managers this year but they may trim exposure to public sector banks (PSBs) following the recent scams and invest in some well managed private lenders and NBFCs, says an analyst.
According to mutual fund tracker Morningstar India, equity funds exposure to the sector in 2017 was highest at nearly 28 per cent and the trend is likely to continue this year as well.
Combined with basic materials and consumer cyclical, rate-sensitive financial services has been a favourite among the Indian managers for a long time as these three account for more than 50 per cent of the portfolios of equity funds.
Like last year, the equity portfolio managers would continue to position their portfolio to benefit from the turnaround in the Indian economy and low interest rate scenario, Morningstar Investment Adviser India Senior Research Analyst Himanshu Srivastava told PTI.
"The focus would continue to be on sectors such as consumer cyclical and financial services which are rate-sensitive in nature and stand to benefit from economic turnaround. We are also seeing some early signs of interest on Technology stocks, but it will continue to be stock specific approach in the sector, he said.
Srivastava believes that while there would not be any significant change in the sector's positioning in the portfolios even after the news of various scams like the ongoing PNB fraud case, managers may trim down their exposure to public sector banks in the wake of recent developments and invest in some well managed private sector banks and NBFCs".
He said: They may adopt a wait and watch approach towards investing in public sector banks until more clarity emerges on the steps that the RBI/government would take to address the NPA issues faced by them.
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Global factors such as the trade wars between US-China, geopolitical tensions and US interest rate movements are playing on manager's minds and could materially impact the inflows from FIIs into Indian markets, he added.
Since late 2016, however, domestic inflows have acted as a fine counterbalance for the volatile FII flows and helped prop the Indian equity markets, he said.
On sectors which are loosing out equity exposure, Srivastava said that despite S&P BSE Realty sector clocking a staggering 106 per cent return in 2017, most of the managers stayed away from investing in core real estate stocks, which is evident from an average exposure of 0.4 per cent in December 2017 to the sector.
At the same time, he observed that managers are quite actively investing in niche sector like Insurance companies (Both life and non-life).
Asset Management companies is another space where we could see some activity as some more line up in 2018 after Reliance Nippon Life Asset Management's listing in late 2017.
This space is exciting from a manager's perspective as there are very few listed names, the industry growth rate is quite exciting, though high valuations could be a dampener, he said.