The US Federal Reserve and the People’s Bank of China appear to be exerting undue influence over the stocks of banks and other financial companies.
Foreign institutional investors, or FIIs, believed that the Fed’s massive rate decrease of 50 basis points was sufficient compensation for the September loss of opportunity. FIIs had sold banks and other financial equities for a total of Rs 67,382 crore in 2024 until August.
According to NSDL data, financial equities accounted for about half of the FII’s total investment last month, which came to Rs 57,723 crore (Rs 27,200 crore). The FII flow contributed to Nifty Bank’s above 3% increase at the end of September.
FIIs, however, made a U-turn as the Chinese began enticing dollars with an unexpected quantitative easing program at the end of September. Bank stocks suffered the most from FII selling, as the Nifty Bank index dropped over 5% in the first four trading days of October compared to a 4% dip in the Nifty during the same period.
The selling occurs even if bank valuations are still very close to long-term averages, making them one of the remaining pockets of value.
What FIIs were bought and sold in September?
Besides financials, FIIs were observed picking up on defensives – healthcare and consumer equities, barring IT. At Rs 6,639 crore, healthcare was the second biggest buying for FIIs in September, followed by Rs 5,375 crore in realty, Rs 4,900 crore in FMCG and Rs 4,002 crore in capital goods.
During the month, FIIs were observed earning profits in consumer services, auto, IT and construction equities.
What should investors do?
The wave of tactical FII outflows from India also corresponds with a slowdown in corporate earnings as a result of commodity pressures and diminishing benefits from improvements in BFSI asset quality.
Motilal Oswal has lowered its FY25 and FY26 Nifty EPS predictions by 4%/3.6% to Rs 1,072 and Rs 1,269, respectively, driven by the decline in metals and oil & gas.
The brokerage is overweight on BFSI, IT, industrials, healthcare, and real estate and underweight on oil & gas, cement, cars, and metals.
“We are raising our stance on private banks to overweight as we believe that the large banks are positioned well to navigate through current uncertainties and deliver healthy growth and profitability. Sector valuations remain undemanding, and with growth visibility improving over the coming quarters, we expect the sector to rerate,” Motilal said.
On the other hand, Kotak Institutional Equities anticipates that banks would record reduced PAT growth driven by sluggish business growth. Because of the re-pricing and composition of deposits, we anticipate banks to report a sequential decrease in NIMs of 10 basis points. Private and public banks are expected to see modest trends in earnings growth,” the report stated.
Aside from earnings, the RBI’s monetary policy announcement on October 9 is a major driver of bank stock prices. The Street anticipates the MPC to keep the repo rate at its current level of 6.5% while softening its stance to neutral and opening the door for a cycle of rate cuts starting in December.
“We do not project any material forecast change, but the risk to RBI’s headline GDP growth and CPI inflation forecasts for FY25 are biased to the downside. Slowing growth and falling inflation offer room for the RBI to cut rates in the coming months. We expect repo rate cuts of 100bp by December 2025, beginning December 2024,” BofA analysts said.
However, Nomura thinks that given how growth and inflation have shocked to the downside since the August MPC meeting, the RBI may surprise with a 25 basis point rate decrease.
