It’s Show-Time for Lending Leaders!

Bank Nifty has been in the spotlight for not getting enough limelight for the past couple of years. Starting January 2020, Bank Nifty has underperformed Nifty 50. During this period Nifty 50 gained 37% whereas Bank Nifty rose only 18%.

In one of our previous articles, we mentioned about banking sector bottoming out. The banking pack seems to be finally coming out of the woods and is up 11% in the past month compared to 7.5% of Nifty 50.

In this article, we will continue our discussion on the lending space. Now that we know the sector is attractive, we will understand why we must look at the valuations of the lending sector with a different lens than the non-financial segment.

A high Price to book (P/B) ratio would often unnerve investors. But for the lending business, a high P/B might be beneficial. A high P/B multiple allows the lender to raise capital at a higher valuation. Essentially, they receive more capital in return for less equity.

But the question arising in your mind would be won’t this hold true for the non-financial segment as well?

The lending business is capital intensive as money is the core product. Thus, they need to periodically raise funds to meet the demand and opportunities. There have been instances where non-financial companies have raised funds when they were trading at high P/B. The limitation with non-financial companies is that they can only utilize capital as per the demand environment. The excess capital on their balance sheet would hurt their return ratios. On the other hand, the capital itself produces a return in the lending business.

So, we understand a high P/B allows the lenders to raise more capital in return for less equity, which gets re-invested in their business and generates profitability. But then what drives a high P/B?

This is no rocket science; the market gives a premium to those companies that are efficiently managed and generate a high Return on equity (ROE). Thus, essentially a well-managed and profitable lending institution would get a premium valuation. It would utilize this premium valuation to source funds cheaply and deploy the same to generate more profits. More profitability eventually drives the book value and growing book value results in share price appreciation. This exemplary cycle continues for good-quality lenders.

“Money attracts Money” holds true to the tee in the lending segment. This exemplary cycle would continue to widen the gap between great lenders and not-so-good lenders.

Technical Outlook

Nifty50 Update 30 March 2022

Bulls have come back with a bang and ended the month of July on an extremely positive note with gains of more than 8%. This is the strongest closing for July in the last 10 years. July has seasonally been the second best month for markets. Bulls won’t be disappointed at all with such a closing. Now that we have rallied so much it’s time for you take some chips off the table since momentum indicators on the hourly scale are in the overbought territory. The short to medium term trend remains bullish and traders must look for entry opportunities near 16,800-16,600 levels.

Expectations for the week

The following week is likely to be intriguing since a number of significant events are set to take place. The markets globally will be majorly influenced by the unemployment rate of the United States which as of the last published data remained steady at 3.6%. The unemployment rate would provide some hints on whether the US economy is truly in a recession.

Back home, the RBI interest rate decision will be the major headliner. Whether the MPC adopts a more aggressive measure of joining some developed market or stays on the course will be keenly observed.

India’s trade deficit swelled to a record USD 25.6 billion in June. The markets would thus keep a close eye on the balance of trade data points that are set to be published.  Given these events and the current earnings season, the market might witness some volatility. Nifty 50 closed the week at 17,158.25, up by 2.6%.

Better days ahead for IT stocks!

In my earlier articles, I pointed out that markets were presenting an excellent opportunity to invest. Now the question on every investor’s mind is where to invest?

In last week’s article, I mentioned about banking sector bottoming out. IT is another sector where the fall seems to be over.

The sector has been in the limelight for various reasons. An uptrend was witnessed with elevated demand due to the pandemic. The stock prices skyrocketed leading to exorbitant valuations. However, the rally slowed down with increasing attrition rates. The Nifty IT index has declined by 22% since April 1, 2022.

Attrition rates in the industry hit high levels as demand for skilled professionals was soaring. Companies doled out high appraisals and bonuses to retain talent thereby impacting their profit margins. Despite this employees switched and got better job offers. Some even migrated to foreign locations and start-ups.

However, the tide is finally turning in favour of IT companies now. US Tech companies have frozen hiring and laying off employees due to recession fears.

Almost 22,000 employees in the IT sector have been laid off in 2022 so far. Nearly 12,000 Indian start-up employees were affected due to layoffs. Ola, Blinkit, BYJU's, and Mobile Premier League (MPL) are amongst the prominent ones to reduce their workforce.

These are all early signs of attrition peaking out. Attrition levels will normalise as appraisals are processed. Profit margins could stabilise with employee costs under control.

Another positive for the sector is the weakening of rupee against US Dollar which is beneficial for exporters.

Nifty IT Index valuations are also at reasonable levels. The price-to-earnings ratio of the Nifty IT index is now trading at 25.44 times. It’s down almost 40% from its recent high of 40x.

The only major concern at this point in time is the recession fears in US. Nonetheless, it seems that markets have already priced that in.

With solid fundamentals and reasonable valuation IT sector is turning favourable. Investors must take a cue and start investing in a staggered form.

Technical Outlook

Nifty 50 index closed on a strong note for the week posting the highest gain in last 75 weeks. Similarly, Bank Nifty index also closed with terrific gains. Both the benchmark indices are trading at crucial zones now. Nifty is trading around the previous resistance zone and Bank Nifty is trading just near the falling channel resistance. Major global indices are also trading around falling resistance lines. So a mild decline cannot be ruled out. However, the short-term trend is still positive, and looking at the other market indicators such as breadth and sentiment, we believe the Nifty is heading for a move up to 17,400. Immediate support and resistance are now placed at 16,350 and 16,830 levels. A break below 16,150 will negate the bullish view.

Nifty50 Update 30 March 2022

Expectations for the week

The upcoming week is set to be jam-packed with events. The FOMC meeting and press conference will be the centre of attention. While the rate hike is expected to be aggressive, market players will try to read between the lines to determine the direction of the economy. Fed would try to control the fast-rising inflation and not hurt the job market. Furthermore, the market mood will be impacted by the release of the United States' QoQ GDP figures too. Back home you can expect some volatility as we are headed for monthly expiry. Nifty 50 closed the week at 16,719, up by 4.18%.

Will Bank Nifty outperform Nifty 50?

Bank Nifty has faced the brunt over the last 3 years as it has underperformed the benchmark Nifty 50 by a wide range. Banking index gained 13% whereas the Nifty 50 rose 38% during this period.

Now the question on everyone’s mind is will Bank Nifty outperform the benchmark going forward?

Being a high beta index, it generally gives better returns than the Nifty 50 when we are in a bull market. In a bear market, it tends to fall more than the benchmark.

We have also observed that whenever the banking index underperforms the benchmark it catches up in the following year. Bank Nifty reverts to the mean and outperforms Nifty after a year of underperformance. It’s the reversion to the mean working at its best.

Nifty50 Update

For instance, both indices delivered negative returns during the calendar year 2011. Nifty 50 was down 16% whereas Bank Nifty fell 32%.

What’s worth noting here is that the banking index made an impressive comeback in 2012. It gained 57% while the Nifty 50 rose only 14%. In 2014 and 2017, Bank Nifty outperformed Nifty 50 by 29% and 18% respectively after a year of underperformance.

Over the last two years, Bank Nifty has underperformed Nifty and it seems that Bank Nifty might catch up soon. Check out the charts below.

Nifty50 Update

Whenever the Price to Book (P/B) ratio of Bank Nifty trades below the average of 2.5x, the index delivers stellar returns in the next one year. Bank Nifty's one-year forward return is 37% in months when its P/B ratio drops below 2.5x.

Nifty50 Update

From where we stand now, the banking sector seems to have taken a backseat since 2020. However, history implies that it has a good chance of beating the benchmark in the coming year.

For the month of July 2022, the P/B ratio has already fallen below its average of 2.5x. On a year-to-date basis Bank Nifty has outperformed Nifty by 4%. Nifty 50 has fallen 9% and the Bank Nifty has only fallen 5%. Thus investors must look out for signs of further outperformance from Bank Nifty.

Technical Outlook

Nifty 50 closed negative for the week after consolidating around 16200 which coincides with previous support and the falling resistance line. However, we believe the market is still oversold as India VIX is continuously forming lower tops and even breaking below the crucial level of 18. Major global indices are also finding support at current levels. We believe the benchmark index is likely to sustain above 15800 zone and might be heading towards 17000 levels as well. Immediate support and resistance are now placed at 15500 and 16300 levels.

Nifty50 Update 30 March 2022

Expectations for the week

Indian benchmark indices are expected to continue their indecisive phase in the near term as fear of rising inflation and recession looms over the global economy. Amid this backdrop, investors are expected to keep an eye on the currency market as USDINR has hit fresh all-time lows of 80.23. Further, with quarterly earnings in full gear, stock-specific movements are expected to dominate the bourses in the short term. Additionally, the banking herd will be in limelight next week as they report their numbers. Nifty 50 closed the week at 16049.20, down by 1.06%.

Bulls Might Rule the Markets in July!

The Indian markets have entered the month of July with new optimism and renewed energy. The broader market is trading in the green in the first week of July.

Last week we spoke about Nifty’s performance when its PE falls below 20x. The average 1 year forward returns are 15.2% when PE drops below 20x. Currently, we are trading at 19.9x. This is indicating a lucrative level for market participants to pick good quality stocks for generating higher returns going forward.

Today we will look at why the markets are likely to remain optimistic in July despite all the macro headwinds.

In the last three months i.e. from April to June, the Nifty 50 Index has fallen by 9.65%. This fall makes it the tenth time since 2002 that the benchmark has fallen for three consecutive months.

The interesting data point from these falls is that on all the previous nine occurrences the market bounced back and delivered a positive return in the next month.

The average one-month return after the previous nine such falls has been 6.4%. The last three consecutive monthly declines happened during the Covid outbreak. Markets dropped in all three months from January-March 2020. Nifty bounced back with the highest gains of 14.7% in April 2020.

Period Opening Price Closing Price % Fall One month – Forward return
Jul-Aug-Sep 2001 1107.9 913.85 -17.5% 6.35%
Mar-Apr-May 2002 1142.05 1028.8 -9.9% 2.82%
Jan-Feb-Mar 2004 1879.75 1771.9 -5.7% 1.37%
Sep-Oct-Nov 2008 4360 2755.1 -36.8% 7.41%
Jul-Aug-Sep 2011 5647.4 4943.25 -12.47% 7.76%
Mar-Apr-May 2012 5385.2 4924.25 -8.56% 7.2%
Jun-Jul-Aug 2013 5985.9 5471.8 -8.5% 4.82%
Dec-Jan-Feb 2019 10876.7 10792.5 -0.77% 7.7%
Jun-Jul-Aug 2019 11922.8 10792.5 -9.5% 4.09%
Jan-Feb-Mar 2020 12168.4 11023.25 -9.4% 14.68%
Average return 6.42%
Apr-May-Jun 2022 17464.7 15780.2 -9.65% ?

This makes a strong case for an optimistic end to the month of July. Another historical data point that makes the case stronger is that July has been a favorable month for the market. From 2002 to 2021, July has ended on a positive note for 75% of the time second only to December.

Nifty50 Update

Source: Stockcharts

As mentioned previously, the 200 DMA trends and the google search patterns indicates that the market has extreme level of fear. But as history suggests period of fear has always been followed by above average returns.

The fundamental, seasonality, technical and behavioral aspects all indicates a positive end for the month of July. We might just witness shower of joy too this monsoon.

Expectations of the week

The upcoming week is going to be eventful as a host of important events are slated to release. The markets globally will be majorly influenced by the Inflation numbers of the USA which hasn’t shown any signs of deceleration. Further, the USA’s Producer Price Index (PPI) and Jobless claims is something the global markets will have a keen eye on. Back home, the Indian inflation data will be the major headliner. The Retail inflation eased to 7.04% in May vs. 7.79% in April, whether the declining trend continues or not is something that is keenly awaited. Apart from the Macro data, the quarterly results will drive the market sentiments. D-street will be interested to hear the management commentary about future earnings growth trajectory. Amid a host of important events coming up, investors are advised to remain cautious and be prudent with their investing picks. Nifty 50 closed the week at 16,220.6, up by 2.97%.

Technical Outlook

Nifty50 Update 30 March 2022

Nifty index ended the week on a bullish note near the day’s high. On an immediate term perspective, it could face stiff resistance around 16,200 levels. If it sustains above the same then the next hurdle could be around 16,500 levels. On the downside, 16,000 will act as a solid support.

Is Nifty PE Bidding Adieu To Bears?

Indian markets remained muted this week. It has ended the first quarter of FY23 on a weak note as Nifty 50 declined by almost 10%. Just when it seemed like it couldn’t get any worse we were hit with dark clouds of recession and inflation. The recent correction has left investors with fears of further price plunge. The number one question on investors mind right now is whether we are near a bottom.

Last week had shown from a quantitative perspective that only 14% of the Nifty 50 stocks closed above their 200 DMA as on 20th June, 2022. We had seen the markets bottom out in the past when this number is in the range 10-20%.

Apart from this we had also seen that google searches for the word “bear market” had recorded the second-highest readings after the Covid outbreak. This indicates market participants are fearful. Guess what happens next? Markets bottom out.

Now today we will have a look at one of the most popular fundamental metric –price to earnings ratio. The Nifty 50 PE ratio hit 19.87x on 12th May 2022 for the first time this fiscal. It has hit a low of 18.92x on 17th June, the day streets witnessed a violent blood bath.

Nifty PE Ratio and One Year Forward Returns %

Nifty50 Update 30 March 2022

If we look at the historical Nifty 50 PE trend, it exhibits that every time, this ratio falls below 20x, the 1 year forward returns have been higher. For instance, when PE fell to 15 in Jan 2003, the forward return was ~88%.

During the 2008-09 crash, the PE traded at extremely low level while the 1 year forward return was over 80%. During the Covid crash of 2020, the Nifty PE fell below 20. Nifty’s returns a year later was around 70%.

On the other hand, when a bull rally causes the ratio to surge we have seen a decline in 1 year forward return. In January 2021, when PE surged over 35x, you can see a drop in the 1 year forward return.

Just have a close look at the data in chart below…whenever the PE falls below 15; the benchmark has delivered an average 51.8% return over the next one year. When the PE is between 15 to 20 the average return is 15.2%. Currently, Nifty’s PE is placed at ~19x.

Nifty One Year Forward Returns % at Various PE Levels

Nifty50 Update 30 March 2022

This suggests that this could be a lucrative level for market participants to start nibbling in to good quality stocks from a medium to long term perspective.

Any more fall in PE would make markets even more attractive for investors.

Technical Outlook

Nifty 50 index ended mildly positive for the week after trading in a range of 350 points. The short-term trend is still bearish; However, Nifty has been outperforming its global peers, as most of the global equity indices are trading below their recent support. The resistance zone at 15,930 is a crucial hurdle for an uptrend. Until Nifty breaks above the same we suggest traders to maintain a neutral stance. Until that happens global sentiments are likely to keep market under pressure.

Nifty50 Update 30 March 2022

Expectations of the week

Mr. Market is predicted to stay volatile due to a slew of expected market-moving events. From the macroeconomic front, investors would keep an eye on FOMC minutes that will shed light on where the economy is headed. Further, global markets would also be influenced by the inflation statistics for China which is due next week. Back home, the Q1FY23 earning season will drive the market sentiment and create stock-specific actions. Investors are advised to pay close attention to management commentary and pick sound fundamental companies to focus on the long-term picture. Nifty 50 closed the week at 15,752.05, up by 0.34%.