State-run banks emerge best bets in runup to polls
Mar 24 2014 , New Delhi
Bank index beats Nifty with 24% rise; finance & auto other favs
Foreign institutional investors invested net of $495 million in Indian banks this month as of March 15, while they sold pharmaceutical and biotechnology shares net of $791 million, according to Sebi data.
Since August 2013, the CNX PSU bank index has gained 26.09 per cent, against 24.57 per cent rise in the Nifty. The CNX IT index has gained only 14.55 per cent. This indicates that IT stocks have been broadly underperforming over the past seven months.
PSU banks have been among the top performers this month, when Nifty has hit successive peaks. The CNX PSU bank index is up about 15 per cent so far this month, outperforming the nearly 5 per cent gain in the Nifty.
The other notable indices that have outperformed the Nifty in the past seven months are the CNX finance index (34.70 per cent) and the CNX auto index (30.78 per cent). (See accompanying chart)
On the flip side, the CNX MNC index gained barely 14 per cent and the CNX pharma index 15.78 per cent forcing them into the category of underperforming indices along with CNX IT.
The turnaround in the performance of these specific indices could be a significant indicator of future trends that these indices may chart, going forward.
Market trendspotters often look at performance of specific sectoral indices in comparison with the Nifty at the time the equity market undergoes a major trendline shift, that might be triggered by, say, the turning of the macroeconomic cycle lasting two-three years.
If a few sectoral indices do better than the Nifty for a quarter or a bit more during such cyclical change, they can be expected to outperform the Nifty in the next two-three years.
Pure price comparison is a good indicator for retail investors to select sectors in which to invest or trade in during a particular economic cycle. More importantly, such comparisons are simple and do not require deep mathematical skills.
Analysts attribute the strong interest in domestic-oriented stocks, such as banks, on expectations the Bharatiya Janata Party (BJP) winning the general election and the return of macroeconomic stability leading to domestic industrial growth.
In the past couple of weeks, certain large foreign brokerages have indicated that the Indian economy may turn around for the better. The reports are emanating at a time when certain sectoral indices have started outperforming the Nifty. The best exposure in the event of an economic recovery would be the PSU banks.
Changes made in the NPA recognition policies in the past three years have forced these banks to make provisions for most of their troubled assets. This would mean any recovery of these assets would add to their bottomlines, raising the earnings per share sharply after a gap of 12 quarters.
Other indices, such as the auto index, have outperformed in the hope that an economic recovery would have a positive impact on car sales within a very short span of time.
On the other hand, with excessive investment flowing into IT and pharma stocks till the middle of 2013, their valuations have reached extreme highs, tempting investors to book profit rather than sink in fresh cash in these stocks.
Is this divergence an indication of which way the wind will blow after the general election? Only time will tell.
Yet, historical trends in market behaviour reveal their own story. On November 8, 2010, the Nifty changed its trend significantly, with the CNX Nifty falling 15.31 per cent between November 8, 2010 and February 8, 2011. In the corresponding quarter, CNX realty index representing the real estate sector fell 42 per cent, CNX PSU bank index 24.38 per cent and the CNX media index 30 per cent.
On the other hand, the CNX IT index gained 1.84 per cent during the quarter, while CNX pharma and CNX MNC indices fell less rapidly than the Nifty.
This just shows that when an economic cycle turns corner, some sectors do well while others cope with the loss in investor confidence. As a result, investment flow into the sectors expected to perform better rise during such periods of transition, which gets reflected in the price performance of the broader sectoral indices.
Between November 2010 and February 2011, investment shifted from realty and PSU bank stocks to IT and pharma stocks, resulting in their sectoral indices outperforming the Nifty. In the next few quarters, most real estate companies underperformed the broader market indices, with some quoting at barely 20 per cent of their respective value since February 2011.
PSU banks, the poster boys of the bull run between March 2009 and November 2010, have underperformed in the past four years with some of them coming close to the levels they had touched during the global meltdown of 2008. Now, a turnaround in their fortunes seems to be on the cards.
On the other hand, the export-led IT stocks performed extremely well since February 2011, as did most pharmaceutical stocks, which posted smart gains in the past four years. But now they too seem to be heading south, as faith in the domestic market begins to rise.