PSU Bank index: Is it on course to hit new highs?

Nifty PSU Bank Index

Experts remain cautiously optimistic about the Indian markets, despite concerns about valuations and a deteriorating global outlook. PSU stocks and PSU Banks have been the highlight of the Indian equity market, with the PSU Bank index up by 23.93 percent year-to-date, and 87.22 percent over the past year. This performance makes the PSU Bank index the best-performing index on a year-to-date basis, outperforming the Nifty Oil & Gas index, which is up by 23.83 percent. On a year-to-date basis, the Nifty CPSE index is up by 19.83 percent.

Nifty PSU Bank Index outperforming Nifty Private bank index in one year - weekly chart

The India VIX has seen a slight increase in volatility of 4% in 2024. However, if we compare market volatility since July 2023, we can see a significant jump of over 50% in India VIX. This increase in volatility should remind us to be cautious when it comes to investing in the markets.

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Recently, we have seen a sharp short-term correction in PSU stocks and PSU banks, which has caused stock prices to drop by up to 25% from their all-time highs in just 3 to 4 trading sessions. Although the recovery after the sharp correction has been equally quick, this raises questions about the sustainability of the rally in PSU stocks and banks in general.

A recent report by foreign brokerage firm Jefferies explained how PSU stocks including PSU banks are undervalued and that there is still upside left in the PSU counters. The PSU Banks underperformed due to the writing off of the bad loans and mounting NPAs. Even though the PSU Bank index has outperformed the Private Bank index by 70 percent in the past one year, still the PSU Bank index is trading at relatively lower valuations according to the report. Fund managers highlight the improving ROEs in PSU banks as one of the reasons for better performance on the bourses by PSU Banks.

Improving fundamentals have supported the stock prices of PSU Banks in 2023 and in 2024 so far, what do the technical suggest on the PSU Bank index?

Technical Perspective:

According to Darpan Patil of Rupic Consultancy, “We don’t see a major trend reversal in the PSU Bank index and we believe that the index is headed higher towards new life highs. PSU Bank index has given a strong 13-year breakout. On the daily chart, we see the PSU Bank index chart react perfectly in its demand zone. From the bottom PSU Bank index has given 385 percent returns. We see potential positive returns in the PSU Bank index."

Nifty PSU Bank index

He further adds, "If you see UCO Bank charts, you will find after 10 year downtrend a positive rally has started and we assume here that supply is almost finished. All momentum indicators are giving bullish signals in both the PSU Bank index and UCO Bank.”

UCO Bank

Considering the current bullish momentum of the market, it won't be surprising to witness Nifty PSU Bank index reaching new heights, especially when we acknowledge that the rally in PSU Banks is backed by improving fundamentals. However, it is highly unlikely to expect a rally in 2024 that can match the rally in 2023 when it comes to PSU banks. Therefore, experts are advising cautious optimism in the index that has been the top-performing one in 2024 so far.

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