Correction May Loom for India Bank Stocks, Hedge Fund Warns

(Bloomberg) -- Shares of India's banks may be set for a pullback, according to Vikas Gattani, chief investment officer at Singapore-based fund manager Progress Asia Capital and Advisors Pte.

“In the absence of any sharp uptick in banking credit and a major redressal in the banks' balance sheets via capital injection or otherwise, we fear that this sector could severely correct if the earnings do not keep pace with expectations,” Gattani wrote in a letter to investors seen by Bloomberg.

The S&P BSE India Bank Index, a gauge of the nation's largest lenders, reached a record high on Aug. 1. Indian stock indexes are among the best-performing equity gauges in major Asian markets this year, boosted by purchases of nearly $17 billion of local equities by foreign investors and domestic funds, according to data compiled by Bloomberg.

“The worrying trend in the current rally has been the narrowing breadth of the market, as the financial services sector (which constitutes 30% of the index) continues to significantly outperform and overshadow the underperformance of other sectors,” Gattani wrote in a letter to investors seen by Bloomberg. “The rate of liquidity is driving this market, and at some point a pullback is warranted,” he said by phone.

The Progress India Opportunities Fund added 2.4 percent in July, bringing gains for 2017 to 23.4 percent, according to a letter to investors seen by Bloomberg. The long-short Indian equity strategy has returned an annualized 15 percent since inception in December 2014.

To contact the reporter on this story: Taylor Hall in Hong Kong at thall88@bloomberg.net.

To contact the editor responsible for this story: Nathaniel E. Baker at nbaker14@bloomberg.net.