A significant fall in PSU bank stocks following the general elections 2024 results offer an opportunity to re-evaluate the sector, said JM Financial as it expects the PSU Bank index to outperform the benchmark Nifty going ahead.
From its 52-week high level, the PSU Bank index has fallen 15 per cent, with constituents such as UCO Bank (UCO), Bank of India (BOI), Indian Overseas Bank (IOB) and Union Bank of India seeing 25-30 per cent fall. Punjab National Bank (PNB), Central Bank of India, Bank of Baroda (BOB) and Bank of Maharashtra also declined in the range of 18-22 per cent. Indian Bank, Canara Bank and State Bank of India (SBI) tanked 12-15 per cent, JM Financial said.
The PSU Bank index declined from high of 8,053 levels in the previous week to find support around its 200-day EMA levels. In the ongoing week, the index has managed to surpass the previous week highs, suggesting further strength to prevail.
"We believe this significant drop offers an opportunity to re-evaluate the sector, with expectations that the PSU Bank index is more likely to outperform the Nifty in the future, the brokerage said.
The brokerage noted that the PSU Bank index has exhibited a strong positive price movement in the months of October and November. In the last 10 years, the index has closed in the positive territory on seven and eight occasions with an average return of 7 per cent and 6 per cent, respectively.
In the previous phase of correction i.e. December 2022 - March 2023, the PSU Bank index had managed to find support around its 200-day EMA and staged a strong bounce up.
For the index, the immediate resistance is placed at 7,083 levels, above which it will negate the formation of lower top lower bottom, JM Financial said. "Support in the index continues to prevail at 6,500-6,600 levels, coinciding with its 200-day EMA zone. The range further coincides with the support zone observed during the period February 2024, March 2024 and June 2024," it said.
In the F&O space, the sector has not witnessed any significant rise in cumulative futures open interest, suggesting a lack of aggressive sellers in the futures segment at around the current levels, JM Financial said.
"Open interest in PNB and Canara Bank has increased by 15 per cent and 14 per cent respectively. SBI witnessed an increase of 6 per cent while unwinding of open interest is being observed in BOB," it said.
The brokearge said the ratio of the PSU Bank index over the Nifty has declined from a high of 0.3441 levels as observed on June 3 to the current levels of 0.2642, suggesting an underperformance of 23 per cent from the peak.
"The ratio is now trading closer to its trend-line support zone drawn by joining all previous highs in the last 5 years. t has acted as a strong resistance zone and a support zone in the past. In the last 5 years, the ratio has found resistance along the trend-line during the period November 2019 and December 2022-January 2023 while it found support dfring the period October 2023. We expect the ratio to continue to find support along the trend-line," JM Financial said.
On a 1-year data window, the ratio is trading at 1 standard deviation below the mean levels of 0.2902 and is at its 23 percentiles. The 1-year low in the ratio stands at 0.2471 levels, 6 per cent lower, JM Financial said.