Banks and IT stocks share inverse relationship, shows 14-year history

Financials and IT – two of the most widely-owned sectors on Dalal Street have shared an inverse relationship over 70% of the time in the last 14 years.

An analysis of the performance of Nifty IT and Nifty Bank by global brokerage firm Jefferies shows that since 2010, the two indices tend to generally perform in opposite directions. “As compared to the Nifty, on a trailing 3m or 6m basis, the relative performance of IT index and bank index has been in the opposite direction 76% & 70% of the time, respectively,” says Jefferies’ India equity analyst Mahesh Nandurkar.

Even if one considers longer periods of 1-2 years, the opposite performance sustains for over 60% of the time. The fundamental reason is that banks tend to outperform during times of favourable macros like stable and strong INR, falling yields, strong growth, etc, while IT tends to outperform during weaker macro, rising yields/inflation and weakening rupee, the report said.

Put together, financials and IT account for about 40% of MSCI India and 50% of Nifty. For FIIs, financials comprise around 33% of their investment in India while another 10% is directed towards IT.

Nandurkar and his team said there’s still a lot of room in the overweight banks and underweight IT call, given the fundamental trends and relative valuation. “Also, empirically, this type of trend usually lasts for three quarters. We are just half-way into it currently. We would be sellers into the recent IT rally,” the foreign brokerage firm said, adding that despite new highs, valuations are still reasonable for banks.

Jefferies’ model portfolio is overweight lending financials by 2 ppt (percentage points) while IT is the largest underweight by 4 ppt.

On the IT sector, it said the outlook is weak as well with mid-single-digit growth guidance and no increase in employee headcounts planned in FY24. “Despite a weak outlook, IT companies’ valuations are still above the historical averages. March quarter was the first quarter with some disappointments for IT majors. We believe that more disappointments are likely, especially in the mid-caps. For large caps our EPS estimates are 1-6% lower than consensus,” Jefferies said.In the last one year, Nifty Bank is up around 26% while the IT index has lost 4.6% of its value.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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