The overall weight of the financial sector has increased to about 29.2% in December 2019 from 24.7% in March 2018
The gains come at a time when the total market value of the BSE 500 remains almost flat since almost two years
While the market’s polarization is well known given the shift towards quality stocks, the sector that has made the most gains is financials.
An analysis of all BSE 500 stocks by Axis Capital Ltd shows that the financials made about $106 billion in gains for investors since March 2018, while core sectors lost about $117 billion.
The gains come at a time when the total market value of the BSE 500 remains almost flat since almost two years. In December 2019, BSE 500 stocks were valued at $2,081 billion, compared to $2,028 billion in March 2018.
Contrastingly, sectors such as autos, industrials and materials saw investor wealth shrink by about nearly $94 billion during the same period. This suggests that there has been a huge rejig happening in favour of financials and IT companies, where earnings growth is visible.
In fact, the overall weight of the financial sector has increased to about 29.2% in December 2019 from 24.7% in March 2018. Autos, consumer discretionary and metals saw their overall market capitalization shrink. The widening gap between financials and the rest of the market may skew investors’ risk appetite.
The big shift in investor preference comes at a time when the market is hovering close to its all-time high, with some quality names getting a huge lift. According to Axis Capital, the basket of industry leaders of only 33 stocks saw their market cap rise by 40% during this period, whereas 350 stocks together lost 31% of their value.
Of course, the interest in the financial sector is for a good reason. “Nifty earnings are estimated to grow 15% in FY20 and 26% in FY21 led by financial space which forms 40% of the index. Financials are estimated to contribute 72% of growth in FY20 and 54% in FY21. Excluding the financial space, index earnings to grow at 4% in FY20 and 12% in FY21," Axis Capital said in a client note.
But this also comes at a time when the broader market earnings continue to be elusive, while gross domestic product growth remains weak. “Some private banks and large IT companies are getting bigger and gaining more market share which is what the market is recognizing. Most companies at the top managed to make market share gains in their businesses and that’s impressive in these times," said Andrew Holland, chief executive of Avendus Capital Public Markets Alternate Strategies Llp.
To narrow this gap between financials and the other sectors, economic recovery will have to be broad-based. Otherwise, investors may not have much of a choice.