Navigating Volatility: Banks, IT Divergence & Hidden Gems

The frontline equity indices, after touching lifetime high, have become volatile now – something that was prewarned in my last editorial. This uncertainty poses an unprecedented challenge for investors in generating alpha on their investments. As a leading research-driven publication, our commitment extends to dissecting various contributing factors, including macroeconomic conditions, central bank actions, geopolitical influences, technological disruptions, sector dynamics, and meticulous stock selection. 

Against this landscape, two pivotal domestic sectors, namely, banks and IT, have emerged as the primary drivers. They collectively account for over 40 per cent of weightage in the frontline indices and have served as significant sources of alpha creation over the past decade and more. Over the last 11 calendar years (CY12 to CY23), Nifty Bank and Nifty IT have consistently outperformed Nifty 50; yet, their performances have unfolded with notable volatility and divergence. The annual divergence between the returns of both ranged between 10 per cent and 60 per cent, underscoring the critical role of accurate sector calls at the onset of each calendar year. 

In CY23, while IT managed to outshine the banking sector by 13 per cent, the preceding year (CY22) witnessed a 47 per cent outperformance of banks over IT. This is post CY21 when Nifty IT outperformed Nifty Bank by an impressive 43 per cent. As we usher in 2024, the initial days have already seen a considerable divergence, with a nearly 10 per cent variance in the returns of Nifty Bank and Nifty IT indices within the first 20 days of CY24. This distinction is attributed to the latest financial results of key players in these sectors. 

Infosys and Wipro experienced significant surges in their share prices post their third-quarter results, while HDFC Bank witnessed a sharp decline, breaching crucial support levels. Although it is premature to draw definitive conclusions based on these results, the prevailing direction appears to be taking shape and investors should take a right call to generate superior returns on their investment. 

Amidst all these dynamics, there’s a sector with relatively modest weightage on frontline indices that is awakening and delivering unprecedented market returns. Over the past year, over 25 companies from this sector have transformed into multibaggers, creating substantial wealth for investors. The remarkable surge in their stock prices prompts a critical question for investors – whether to secure profits or maintain their investment positions. 

Equally pivotal are the considerations for potential investors on the fringes who are contemplating whether to enter the market now. Our cover story delves into these inquiries, offering insights and guidance. Zooming out to capture the broader perspective on Quarterly Results, we have published a comprehensive special report. In this analysis, we have scrutinised the quarterly results of companies that have unveiled their performance metrics thus far, accounting for less than 10 per cent of the total listed companies. 

Nevertheless, many influential players constituting the heavyweight segment of the Sensex have already disclosed their results. Preliminary insights from our analysis indicate positive developments, showcasing growth in both top-line and bottom-line figures. 

In another compelling narrative, our analysts have endeavoured to unravel the concept of a stock’s ‘beta’ and its significance. While investing, akin to the critical examination of diverse fundamental parameters, gaining an understanding of a stock’s beta holds its own importance. The proverb about not everything that shines being gold resonates, underscoring that elevated risk doesn’t necessarily guarantee substantial profits, particularly when viewed through the lens of a long-term perspective. 

Moving forward, we anticipate continued market volatility in the upcoming week due to the convergence of two significant events in the next fortnight. The first event is the interim budget, and the second is the US Federal Reserve meeting, both scheduled for the same day.

We trust that the stories featured in this edition will assist you in making more informed investment decisions. Your feedback is highly valued and welcomed.

RAJESH V PADODE
Managing Director & Editor