The decision of equity fund managers to increase exposure in the banking sector hasn’t been a paying one till now.
As consensus was building for cuts in key policy rates, fund managers had been raising exposure in bank stocks since January. And, lured by the Reserve Bank’s unexpected 75 basis points (bps) cut in March, ahead of the Union Budget, followed by a 50 bps cut in the repo rate in April, fund managers intensified buying in bank stocks, taking overall exposure to above 18 per cent of the industry’s equity assets.
“We had anticipated that key rate cuts will benefit the banking space. There was nothing wrong with this thought process. But what followed in the markets over the last month failed to have the desired effect on our investments,” says the equity head of a mid-sized fund house.
According to fund managers, when no other sectors were doing well, where would one invest? “Apart from banking, it is hard to find any other reliable sector during such a troubled time. This was also one reason why fund managers increased stake in banks, as we cannot sit on a huge cash position,” says the chief executive officer of another mid-sized fund house.
Agrees the chief investment officer of a foreign fund house: “In March, bank shares corrected after a rally post-December. And, when the policy came, we thought it will improve the economy and the sector. But investments made during the time got butchered. Especially, shares of state-run banks lost value sharply, which proved our calls wrong,” he explains.
Since the beginning of March, the benchmark indices have lost a little over six per cent of value, while the bank index witnessed an erosion of 8.6 per cent. Besides, over the past one-and-a-half months, shares of major banks have declined between four and 21 per cent.
For instance, the stock of Punjab National Bank lost a little over a fifth of its value during this period. Shares of Axis Bank and Canara Bank declined 13-15 per cent, while the country’s largest lender, State Bank of India, saw an erosion of 11 per cent of its share value (see table).
“Normally, fund managers keep an equivalent weightage to banks in their portfolios as in the benchmark indices. It is not that we have gone overboard on banking space. But since the markets corrected sharply, it hit banking counters, too,” says the chief executive officer of a small-sized fund house.
Almost all fund managers Business Standard spoke to blamed the government’s flip-flop regulations and policy actions for the current situation. “The government’s dilly-dallying on policy issues have made foreign investors sellers in the markets. The continuous news flow on the Vodafone case hampered foreign inflows of investment. What was the reason to come up with GAAR (the tax avoidance plugging rule) at this point of time?” asks the CIO cited earlier.
