Mumbai: Financial stocks, which have faced sustained selling pressure from foreign portfolio investors (FPIs), could emerge as the next major winners in the Indian stock market if overseas selling starts to ease, according to JPMorgan’s Rajiv Batra. Better valuations and the possibility of stronger credit growth could provide support to the sector.
Batra, JPMorgan’s head of Asia Pacific ex-Japan/China Equity Strategy and India & Southeast Asia Equity Strategy, said the financial sector’s recent underperformance has created a more favourable risk-reward opportunity. He also highlighted the possibility that foreign investors could gradually increase their exposure to Indian financial stocks as their positioning changes.
Financial stocks may lead the next leg of recovery
Financial companies have remained under pressure as FPIs have continued to reduce their exposure to the sector. This selling has weighed on the performance of several banking and financial stocks despite the broader resilience of the Indian market.
According to Batra, however, the sector’s relative weakness could eventually become an advantage.
Financial stocks now offer more attractive valuations after their underperformance, while expectations of stronger credit growth could provide another catalyst for earnings and share prices.
The combination of lower valuations, improving credit demand and a potential change in foreign-investor positioning could therefore make financials an important sector to watch.
Why FPIs have been selling Indian financial stocks
Foreign investors have been reducing exposure to Indian equities for several reasons, including valuation concerns and changes in their global asset allocation.
Batra’s assessment is that part of the selling reflects the composition of what foreign investors already own rather than a complete loss of confidence in India’s long-term growth story.
Foreign investors have historically had significant exposure to sectors such as information technology and consumer companies. As India’s investment cycle and domestic economic growth have gained importance, the relative attractiveness of domestic cyclicals has increased.
This creates a potential transition point for FPIs as they reconsider where they want their India exposure to be concentrated.
FPI selling could ease
One of the key factors behind JPMorgan’s constructive view on financial stocks is the possibility that FPI selling will moderate.
If foreign investors stop aggressively reducing their India positions, sectors that have experienced prolonged selling could see a stronger recovery.
Financial stocks could benefit disproportionately because they have already faced substantial pressure.
A shift from selling to even neutral positioning could reduce an important source of pressure on the sector. Fresh inflows could provide an additional boost.
Better valuations improve risk-reward
The recent weakness in financial stocks has also changed their valuation picture.
Stocks that were previously considered expensive have become more reasonably valued following periods of underperformance. This can make the sector more attractive to investors looking for companies with earnings growth potential at relatively lower valuations.
For long-term investors, the key question is whether the lower valuations accurately reflect the risks facing financial companies or whether they have become excessive.
JPMorgan’s view suggests that at least some of the pessimism may already be reflected in prices.
Credit growth is another potential catalyst
A recovery in credit growth could provide another important trigger for financial stocks.
Banks and other lenders benefit when demand for loans rises because stronger credit growth can support interest income and overall business growth.
If India’s economic expansion continues to support corporate and retail borrowing, financial companies could see improving earnings momentum.
The outlook for credit growth will therefore be an important indicator for investors tracking the sector.
Domestic cyclicals remain important
Batra’s broader market strategy has previously favoured domestic cyclicals, including financials, automobiles and real estate, alongside defensive sectors such as healthcare.
His view reflects the changing composition of India’s economic growth, with domestic investment and infrastructure spending playing a larger role.
Financial companies are particularly important in this environment because banks and other lenders provide the capital required to fund consumption, corporate investment and infrastructure activity.
India’s market recovery could broaden
The potential improvement in financial stocks also points to a broader question: whether India’s market recovery can expand beyond a relatively narrow group of outperforming companies.
A sustained market rally typically becomes more durable when participation widens across sectors.
If financials begin recovering alongside other domestic cyclicals, they could provide another source of market momentum.
This would also help reduce dependence on a small number of large-cap stocks driving index performance.
Foreign investors remain underweight
Despite India’s strong long-term growth prospects, foreign investors have maintained relatively cautious positions.
Batra has argued that part of the issue lies in the limited exposure foreign investors have to the areas of the Indian economy that could benefit most from the country’s investment cycle.
As foreign investors adjust their portfolios and gain greater access to domestic investment opportunities, their India allocations could potentially increase.
That could create a tailwind for sectors such as financials.
What investors should watch
For financial stocks, several indicators will be particularly important in the coming quarters:
- FPI flows: A reduction in foreign selling could improve sentiment.
- Credit growth: Faster loan growth would support the earnings outlook.
- Asset quality: Lower bad-loan risks would strengthen investor confidence.
- Net interest margins: Stability or improvement would support profitability.
- Valuations: Relatively lower valuations could attract investors if earnings expectations remain intact.
- Domestic demand: Continued economic activity would support borrowing and financial services.
Investors should therefore look beyond short-term share-price movements and track these underlying indicators.
Financials face risks too
Despite the positive outlook, financial stocks are not without risks.
A slowdown in economic growth could weaken loan demand, while deterioration in asset quality could increase provisions for lenders.
Interest-rate movements can also affect banks and financial companies through their impact on borrowing costs, margins and credit demand.
Meanwhile, continued FPI selling could delay any expected recovery in the sector.
Therefore, JPMorgan’s view should be seen as a market outlook rather than a guarantee that financial stocks will outperform.
What this means for the Indian market
If financial stocks begin to outperform, the impact could extend beyond the banking sector.
Financial companies have a significant weight in Indian market indices, meaning a sustained recovery in the sector can influence the broader market.
A combination of easing foreign selling, stronger credit growth and attractive valuations could therefore provide an important second leg to the market’s recovery.
At the same time, investors will need to assess whether earnings growth justifies current valuations as the market moves forward.
Conclusion
Financial stocks could be among the next major winners in the Indian market if FPI selling begins to ease, according to JPMorgan’s Rajiv Batra. The sector’s recent underperformance has resulted in more attractive valuations, while expectations of stronger credit growth could provide support.
A change in foreign-investor positioning could be particularly significant because financial stocks have been under pressure from sustained overseas selling. If that selling slows and fresh allocations return, the sector could see a meaningful improvement in sentiment.
However, investors should continue to monitor credit growth, asset quality, margins, interest rates and FPI flows before drawing conclusions about a sustained financial-stock rally.