FPIs load up on banks, staples for poll trades

ET Intelligence Group: Election season in India means it’s time for foreign portfolio investors (FPIs) to place their poll-related bets. FPIs allocated almost 32 per cent of $8.3 billion of inflows in banking and consumer staples stocks in February and March, according to data from the National Securities Depository Ltd. If financial services companies are included in the mix, the proportion widens to more than 89 per cent.

Market trackers call this ‘election trades.’ The objective: to maximise returns in the run-up to the general election results, due out on May 23.

Consumer staples may turn out to be an obvious bet, given that the ruling Bharatiya Janata Party has promised to supplement the income of marginal farmers and that the Congress has pledged to put more cash in the hands of the country’s poorest people. Of the $422 billion of assets under management of FPIs, almost one-fourth is in banking and staples.


Historically, election trades have yielded impressive gains. The Nifty 50 index has rallied in five of the six Lok Sabha elections since 1996, generating an average return of 13 per cent over the three months to election result day.

In the election trades of 2009 and 2014, financial services outperformed the MSCI India index, a gauge for foreign fund managers to benchmark their returns in dollar terms, by 20 per cent and 13 per cent, respectively.

The consumer staples sector underperformed on both occasions.

However, this time around, the BJP’s scheme of cash payment to farmers and the Nyuntam Aay Yojana (NYAY), or minimum income guarantee scheme, of the Congress have made consumer staples one of the safest bets, irrespective of the outcome, because they are expected to boost rural consumption and sales volumes.

About 60 per cent of the rural households account for over 25 per cent of consumption in the home and personal care segment, which has a total size of about Rs 82,000 crore. Credit Suisse estimated that the BJP’s PM-KISAN cash payment scheme may increase FMCG volume growth by 300-400 basis points.

The growing interest of FPIs in banking and finance stocks this time can be attributed to expectations of a 20 per cent earnings growth in the sector as falling interest rates boost credit offtake and provisions for bad debt shrink.

In addition, after reducing investments in Indian equities in October, FPIs scrambled to raise the weight of Indian stocks in their portfolios in February to match the benchmark MSCI EM index and to take advantage of the election trade rally. This necessitated buying more of banking and finance stocks, given their higher weight in the MSCI index.

In another election-related strategy, domestic investors are shifting away from ‘growth’ stocks to ‘value’ stocks, midcaps and stocks of companies with higher capital expenditure. Consequently, the discount of value stocks to growth stocks has narrowed to 30 per cent from 50 per cent in November.

Besides, domestic fund managers also bought stocks such as Thermax, BHEL and Siemens on expectations of increased capital expenditure on infrastructure once a new regime is in place.