Consumer stocks may test banks' dominance in Sensex

In its last rebalancing of the 2010s, India’s benchmark index dropped the Yes Bank Ltd. Despite enduring a period in which India’s banks faced some of the worst bad loans among major economies, Yes Bank’s fall from favor is an exception among the country’s large private sector banks. The weightings of financial industry stocks on the benchmark S&P BSE Sensex doubled last decade, with investors eyeing growing demand for credit in Asia’s third largest economy. Their high weight is also due to regulations that pushed banks to increase their free-float market cap.

“Financials have had a dominant phase in the last few years on the index, partly because other sectors have struggled,” said Dharmesh Kant, head of retail research at Indianivesh Securities Ltd. “In the next decade we’ll see things changing with more weightage for sectors like metals, infrastructure, consumer durables and FMCG (fast-moving consumer goods).”

While financials will probably maintain the top spot on the index for some time in the 2020s, consumer-oriented firms are likely to grow in heft. In the same rebalance that saw Yes Bank’s departure from the Sensex, jewelry and watch-maker Titan Co. and food manufacturer Nestle India Ltd. were added.

“Retail and FMCG are getting bigger, and as the rising consumption trend continues, you can expect more consumer-oriented companies to enter indices,” said Karthikraj Lakshmanan, a fund manager at BNP Paribas Asset Management in Singapore. “India has many sectors and companies that are emerging and becoming winners. Someone who is able to identify those trends should be able to create alpha.”