As markets globally continued to navigate currents surrounding inflation, monetary policies and Omicron, the beacon of pessimism was passed on to the domestic bourses as well. FIIs have been withdrawing funds every single day this month. Except for September’21, FIIs have been net sellers since April’21. A major casualty of this selling spree has been Bank Nifty with majority of the top 10 constituents of the index experiencing a sequential drop in FII holdings for the September quarter.
In fact, Bank Nifty has been a relative underperformer not only since the pandemic’s onset but even on YTD and 6 month period basis. History provides evidence that there is correlation between the sell-off by FIIs and Bank Nifty’s underperformance. Since 2017, if we look at those twelve months where FII outflows have been the highest, Bank Nifty has underperformed the benchmark index two-thirds of the time.
However fundamentally, the sector’s current positioning signals an optimistic long term outlook. In the quarter gone by, most of the bigger private banks either met or outperformed market expectations. Not only did banks witness improvement in asset quality owing to improved collections and contained restructurings, but they also managed to equip their balance sheet with adequate provisioning. On the lending front, loan growth has been resilient and is expected to pickup even further due to continued rise in housing demand, recovery in certain sectors like automobiles and a favorable economic environment.
While bottomed out interest rates have augured well, even a rise in policy rates can expand NIM and therefore lead to higher earnings. What’s interesting is that the sector still trades at a reasonable valuation with more than 50% of Bank Nifty constituents trading below their 3 year average P/B multiple. This coupled with multiple tailwinds, leaves decent headroom and value for the banking stocks to capture. Therefore, investors can accumulate stocks of fundamentally sound banks to capitalize on this long term opportunity.
Event of the week
The Fed, in an effort to ratchet up its measures against almost a 4 decadal high inflation, signaled that its run of easy policy is coming to an end. The acceleration of tapering by $30 billion per month as announcedwill conclude the pandemic driven bond purchasing in March 2022, opening the door for policymakers to hike the fed funds rate. Fed officials project three rate rises in 2022, two the following year and two more in 2024. The well telegraphed interest rate hike trajectory along with the lesser than expected hawkish policy provided much needed respite and helped US markets rally. Back home as no future guidance was received from our central bank, Nifty also ended its 4-day losing stint and ended in green temporarily riding on Fed’s announcement.
Technical Outlook
Bank Nifty index closed the week on a negative note, facing resistance around 37,300 levels post a brief bounce. While there is no evidence of bullish momentum, Bank Nifty is trading at a crucial support which coincides with its rising trend line. The previous resistance of 35,600 is now acting as a strong demand zone, thereby offering a good risk-reward opportunity on the long side. Even the benchmark index Nifty is consolidating around crucial price levels. Support and resistance for Bank Nifty are now placed at 35,500 and 37,500 respectively while those for
Nifty are placed at 16,900 and 17,600 respectively. Traders can maintain a neutral outlook and trade with tight stop losses below immediate supports for long positions.
Expectations for the week
With no key domestic events expected, Mr.Market will seek cues from global indices and international macroeconomic data such as the US GDP growth rate to determine its movement. The primary market has been buzzing and the bourses will see a slew of listing debuts this week. On the other hand, in the absence of any positive events, secondary markets are projected to stay under pressure. As global macros continue to dominate, investors should monitor FII activities to gauge trendsand follow a stock centric investment approach amid rangebound movement of the indices. The Nifty50 closed the week at 16,985.20, down by 3.00%.