Foreign Portfolio Investors (FPIs) have substantially reduced their exposure to the financial services sector below the sector’s 33% weighting in the benchmark National Stock Exchange Nifty50 Index, though it remains in line with the Nifty 500.
Their share of financial sector holdings has reached a low of 28.9%, the lowest since 2018. At its peak in December 2019, nearly 41.2% of FPI assets were allocated to banking, financial services, and insurance stocks, according to reports.
This current allocation falls Traditionally, FPIs have held a significant weight in the banking sector, given its substantial representation in the index. In the last month alone, FPIs have withdrawn a significant Rs 39,000 crore from financial stocks, triggered by HDFC Bank’s weak December 2023 quarter earnings. The recent peak allocation towards financial stocks was recorded at 34.2% in April 2023. Despite the sharp drop in allocation, the increase in FPI assets by 33% to Rs 62 lakh crore indicates a sectoral rotation in play.
Market experts point out that the financial sector’s sharp underperformance, especially after the pandemic, has prompted FPIs to explore alternative investment opportunities.
Diversifying portfolio
However, recent underperformance in the sector, exacerbated by the pandemic, has led FPIs to diversify their portfolios into other sectors such as automotive, capital goods, and power.
The ease of cashing out from the FPI space, coupled with the interest of institutional investors, has contributed to this shift in allocation. Over the past year, HDFC Bank shares have declined by 11%, while Kotak Mahindra Bank has seen a modest 1.3% increase. In comparison, the Nifty50 has recorded a robust 27% gain, and Bank Nifty is up by 17%.
Analysts note that while FPIs may consider buying stakes in the future, there is currently limited interest in some private bank majors. The sentiment towards other finance stocks has also been affected by the selloff in large private banks, with concerns over high credit deposit ratios and margin disappointments playing a pivotal role in investor decisions.
HDFC Bank fall
The Nifty Bank’s underperformance in the past year is primarily attributed to the poor stock performance of heavyweights HDFC Bank and Kotak Mahindra Bank. Despite most banks trading at higher valuations than their historical median, the recent correction in these two banks has brought about a sense of valuation comfort, with expectations of earnings upgrades likely to restore investor sentiment.
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