Why this fund manager believes that underweight financials may be the next decade's winning strategy

He added that index-heavyweights elsewhere seem to be influenced by top exporting sectors

The weight of financials in the benchmark Nifty is going to go down over the next decade, the head of an asset management firm. Currently, financial services have a 37.92 percent weightage on Nifty.

“In India, we could have a scenario where the lending financials will have to not only make space for their non-lending counterparts but also for other sectors such as manufacturing, IT, etc,” Balaji Vaidyanath, the director and CEO of Nafa Asset Managers, said in a Twitter thread he reposted from a year ago.

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He said that, 15 months on, his views have not changed and added that this will be a view he can defend even 10 years on.

According to him, India’s strength in manufacturing, IT, R&D “will be far better in the next decade compared to the earlier decades”. For this, he believes, financials have to make way for the new winners.

“We don’t know who the new winners could be but maybe we can avoid the losers,” he stated.

For the next decade, will under-weighting financials be the only trade a large-cap fund manager needs to do to beat the Nifty, he questioned.

To elaborate, he cited data from the developed markets. “Unfailingly every developed market index has a low weight in financials. Average being 12%. Directionally, every developed market index has seen the financial weight trending down over the last decade,” Vaidyanath said.

For example, weightage of the sector in the US was 16 percent in December 2010 and that fell to 11 percent in December 2021; in the UK, it fell from 20 percent to 18 percent over the same period; and in Japan from 18 percent to 9 percent.

“China too has seen weight of financials drop from 42% to 21% in the last 10 years,” he tweeted.

In India, the sector’s weightage rose from 27 percent to 36 percent over 2010-21.

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“The reduction in US financials were compensated by (no prizes for guessing) IT. The reduction in Germany’s financials were compensated by both industrials and IT,” he wrote.

He added that index-heavyweights elsewhere seem to be influenced by top exporting sectors, for example, Germany with industrials, Russia with energy; and Taiwan with IT.

“It seems like if one were to make a bullish case for India in manufacturing, exports and technology, it could be at the cost of financials,” Vaidyanath wrote.