Banking shares have been the laggards of the last one year, giving negative returns, while pharma shares have gained a bit and IT stocks have not done too much. At the moment, as things stand, banking stocks are clear favourites as we head into 2016 and here's why.

When the global economy is showing patchy growth, you would not want to be in sectors that are big exporters.

The problem with IT stocks is that the days of solid growth is over. Infosys has just sounded a warning on margins and HCL Tech and TCS have performed way below expectations in the last few quarters.

Worries over the US Visa Cap may continue and if the Bill does come through, it could be bad for the IT industry. As far as pharma is concerned, their fortunes are largely linked to what the US FDA does.

In fact, the US FDA recently issued a warning letter to Dr Reddy's whose share price has crashed 25 per cent since. Wockhardt, Cipla, Cadilla, Sun Pharma, Ranbaxy, Ipca Labs are companies that have been issued warning letters in the past.

With so much dependence on the US markets for exports, these warning letters can be a real problem.

What makes the case strong for banking shares?

The one good thing with banking stocks is that prices have fallen sharply. An ICICI Bank has seen a drop of almost 30 per cent from highs prevailing in March. On the other hand PSU banks have seen values erode even more.

The second reason to be buying banking stocks is that there is a high possibility that economic growth gathers steam. When that happens, you want to have stocks that are a good proxy for a growing economy and the best way would be to play banking stocks.

At this stage one would want to invest in a growing economy and the best would be through banking stocks. Likely improvement in nonperforming assets and a growing economy could be a superb dose for these stocks.

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