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As financials escort Nifty towards 17k, can you bank on Bank Nifty now?

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Bank Nifty surprised with high participation in the latest session on Dalal Street. Is it spark a sign of stronger participation from the banking index going forward?

As financials escort Nifty towards 17k, can you bank on Bank Nifty now?
As the Indian equity market raced to a record high yet again, a jump in bank stocks rekindled hopes of stronger participation of the heavyweight basket in market rally ahead.
For the 50-strong headline index, Nifty50, Monday brought the best single-day rise in nearly a month. The index surged 225.85 points or 1.35 percent to end at 16,931.05 -- its best day since August 3. Strong buying interest across most sectors -- led by banking, financial services, automobile, metal and pharmaceutical shares -- was behind the sharp gains in the headline index.
But what was special about the rally was the firepower offered by Nifty Bank, which bounced 2.02 percent -- its best day since August 4. Also, the IT pack, which has been the biggest driver for the market in recent months, stepped back on Monday, finishing the day 0.58 percent lower. The Nifty IT index was the only sectoral gauge on NSE that stood in negative territory for the day.
Is the latest spark in Bank Nifty a sign of stronger participation from the space going forward?
For the Indian equity market, IT stocks have taken the wheel from financial services in the post-Covid period compared with the pre-pandemic era -- as many analysts like to view market performance in the past few months.
In 2021 so far, Nifty Bank has gained 16 percent compared to a 21 percent rise in the Nifty. Still, it is better than last year when Nifty Bank declined 3 percent compared to a 15 percent rise in the Nifty.
This is in stark contrast to 2020, for example, when Nifty50 rose 12 percent, Nifty Bank returned 18.41 percent and Nifty IT 8.39 percent.
Financial services shares have the maximum weightage in the 50-scrip index, and next are IT stocks.
Weightage in Nifty50 (July 2021)
Sector Weight (%)
Financial services37.17
IT17.54
Oil & gas11.24
Consumer goods10.85
Auto4.94
Metals4.07
Pharma3.66
Construction2.83
Cement & cement products2.71
Telecom1.94
Power1.68
Services0.73
Fertilisers & perticides0.65
Data on the correlation between Bank Nifty and Nifty50 suggest that the banking index has been reluctant in following Nifty higher since September 2020, according to Anand James, Chief Market Strategist at Geojit Financial Services.
"But correlation tells only half the story. The correlation could also be low if Bank Nifty were to charge ahead at a faster rate than Nifty. That is not the story either now," James told CNBCTV18.com.
"It is quite unusual of Bank Nifty to be stuck in ranges for such long periods," he said. The last time the Bank Nifty index did so was between November 2019 and January 2020, which was the precursor to the Covid meltdown of 2020.
"So, if history is any indication, then we can be rest assured that a major breakout move is awaiting us in September," he predicts.
While IT stocks appear to have come forward, financial services scrips have taken a back seat. Analysts say financial services stocks might surprise the market whenever the space's participation returns to pre-pandemic levels led by quality stocks.
Santosh Meena, Head of Research at Swastika Investmart, said Bank Nifty has missed his expectations in the recent past.
"We didn't see a major contribution by Bank Nifty in this bull run and it missed out expectations, but the situation is looking conducive now... The Indian economy is showing a strong recovery whereas the Federal Reserve is not looking in a hurry to hike interest rates," Meena told CNBCTV18.com.
The market awaits the release of official data on India's GDP due after market hours on August 31.
Monday's surge was backed by gains across global markets, which cheered Federal Reserve Chairman Jerome Powell's more dovish commentary than what many analysts had expected at the Jackson Hole symposium. Investors had been waiting to see whether the Fed Chair would offer clear signs on the timing of the US central bank's tapering of its stimulus or withdrawal of record low-interest rates.
"We can expect a mean reversion from here that may lead to outperformance in Bank Nifty," said Meena.
So which stocks are best to look at for Bank Nifty faithfuls?
"NBFC stocks may also do well eyeing a strong recovery in the economy where housing finance companies HDFC and Can Fin Homes may outperform on the back of growth momentum in the real estate space. Bajaj twins (Bajaj Finance and Bajaj Finserv) may continue to do well despite expensive valuations as there is growth visibility and investors are betting on them as fintech companies," said Meena.
He said Cholamandalam Finance remains his top pick among NBFCs citing the quality of its business.
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