By Mukul Pal
With 29 of the 39 Indian banking stocks posting an average loss of 20 per cent for the rolling 12 months, one wonders where Indian banking is headed. Banking is a top sector in India and the fact that despite bleeding sector components, NSEBANK has held ground, makes it more critical for review. A bottoming banking sector could make the difference between a positive or negative 2012.
What keeps the banking index a 'believer', while 60 per cent of its house is on fire? Investors might take a while to understand divergence but markets are not finicky; they understand and express divergence. It knows a part will outperform and another section will underperform.
Before we analyse the sector, let's look at how performance-based ranking (Jiseki cycles) delivered. As many as 29 banking components were negative on both price momentum and performance metrics (falling performance ranking among the BSE 500).
So where's Indian banking headed? First; despite its lacklustre performance, NSEBANK is secularly outperforming the Nifty blue-chip 30 since 2009. There are no signs of a reversal in this relative outperformance. Second, a section of the sector has already collapsed, like Canara Bank down more than 60 per cent of its 2009-2010 recovery. Canara is accompanied by seven others falling more than 25 per cent for the running year (Dhanlaxmi, Central Bank, United Bank of India, Union Bank, Punjab National, Indian Overseas, Allahabad Bank). When the sector index holds firm ground, does not fall below 38.2 per cent retracement levels of 2009-2010 recovery, while a section of the sector underperforms, it indicates the sector is getting rid of the negative drag from lagging sector components. More, there is a limitation to where even the weakest sector component falls (provided it remains solvent).
This shedding of underperformance adds resilience to the sector and makes it relatively more attractive. Till the time the Indian economy shows a growth premium compared to the rest of the world, Indian banking would reflect that premium versus peer sectors (we are still in a credit-led growth economic time). This is counter-intuitive thinking but when 80 per cent of the sector is negative, it's too late in the day to keep selling banking stocks. For us at Orpheus, banking remains a bottoming story and the first sector off the block, as soon as we emerge out of the September-November negative seasonality.
September to November is a seasonally negative period, which generally sees a top in September and a low in October or November. November is also a key month for the Yale Hirsch Cycle, which suggests buying in November till April. The respective time seasonality is not a rule but has worked on many occasions. If the correction is to come, it should do so now. Emerging markets and MSCI Asia, ex-Japan, look more negative and prone to a fall during this period. But then, India could still lead the block, having underperformed MSCI Asia, ex-Japan, on a secular basis since June 2010.