Elara Capital suggests moving back to financials from IT, gradually – here’s why

While the Nifty IT index has rallied 13 percent, Nifty Bank has advanced around 9 percent in 2023 YTD. In comparison, the benchmark Nifty has gained almost 15 percent.

In the note, the brokerage mentioned that the relative flow momentum in financials versus IT is at multi-year support.

The Bank Nifty to NSE IT index ratio has returned to a strong support level, said Elara, adding that the slow reversal of global liquidity back into financials (as opposed to IT) over the past 6 months may act as a catalyst for a robust reversal in this trend.

Significantly, there has been a slowdown in momentum within the IT sector, and capital flows are gradually shifting towards financials. While this trend is still in its early stages, it marks the first occurrence since May 2023, it further stated.

Overall, emerging market (EM) flows have remained negative for the eighth consecutive week, primarily driven by outflows from Global Emerging Market (GEM) funds, the brokerage informed.

Negative flows have been observed in China for the past 5 weeks, and both Korea and Taiwan are experiencing redemption pressure, especially Korea. India, however, continues to be a major beneficiary, receiving an additional inflow of $342 million into dedicated funds. Nevertheless, due to consistent outflows from GEM funds, India’s net inflows this week amounted to only $123 million. Since October 2023, India-dedicated funds have seen inflows of $2.5 billion, but total India inflows were only $457 million, influenced by redemptions from GEM funds, impacting the overall allocation, further noted the Elara.

It also pointed out that Emerging Market (EM) Midcap and Smallcap funds have started witnessing slower outflows over the past two months.

“India-dedicated funds received $342 million in inflows, primarily driven by a $300 million inflow into Largecap funds. India-dedicated ETFs (Exchange Traded Fund) experienced a significant inflow of $209 million over four months,” informed the brokerage. “Additionally, India-dedicated inflows from US-domiciled funds spiked to a four-month high of $114 million, while flows from Japan remained slow,” it said.

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