A reversal in the banking vs IT stocks is playing out, with the IT stocks outperformance vanishing, and banking stocks emerging as the most favoured value buys across the board. Banking stocks revived during the second quarter this year, as the US banking crisis receded and Q4FY23 earnings surpassed expectations. On the other hand, weak earnings by the IT sector erased its gains, which resulted in the divergence between both these indices narrowing to ~2% by end of June ‘23 from the highs of ~14% in February ‘23. This is after the see-saw move between both banking and IT indices, with banks outperforming in 2022, whereas IT rebounding in early 2023, according to a report by Motilal Oswal.
Nifty IT, Bank Nifty performance
From 2013 to 2023, the profits of Nifty Bank companies recorded a 14% CAGR, while Nifty IT companies grew by 11% per year. During the same period, the indices grew by 13% and 17% respectively. From 2020 to 2023, the profits of Nifty Bank companies grew by an average of 39% per year, while Nifty IT companies grew by 10% per year. The overall indices grew by 34% and 37% respectively during this period
Nifty weightage
The combined Bank and IT sectors constitute around 40% of Nifty-50 and about 35% of NSE-500 weights. Over the past five years, the weightage of the Bank sector in Nifty-50 averaged around 27%, declining 300 basis points from its peak in 2019. Conversely, the weightage of the IT sector averaged around 15%, rising 330 basis points from its lowest point in 2017.
Understanding the divergence
Both banking and technology sectors have strong connections to the overall macroeconomic conditions. As banking represents the broader economy, it is influenced by the global and domestic macro environment. On the other hand, the technology sector generates more than two-thirds of its revenue from the US and Europe. “Since the onset of Covid-19, the IT sector has – both in 2020 and 2021 – benefitted from the tailwinds of rising technology spends globally as digitization assumed a mission critical importance in an era of physical and social distancing. Meanwhile, the banking sector bore the brunt of weaker economic growth and concerns around deterioration in asset quality led by persistent lockdowns in 2020 and 2021,” said the report.