Banking, IT stocks winning bets over 10 years, but rarely move in step

An analysis shows the average return divergence between these two sectors during the past decade has been 37%

Banking and IT stocks have proved to be the winning bets over a 10-year period. Both have generated superior annualised returns between 2012 and 2022 vis-à-vis the benchmark Nifty 50 index. However, both played Russian roulette or rarely moved lockstep.

An analysis done by Motilal Oswal shows that the average return divergence between these two sectors for the past decade has been 37 per cent. “Over the past decade (CY12-22), while both Nifty Bank and Nifty IT outperformed Nifty 50, their performances remained highly volatile and divergent.

The quantum of relative performance gap between the two sectors was more than 40 per cent in six out of the 11 years and over 10 per cent in 10 out of 11 years,” the brokerage said. Both sectors have a large bearing on the market performance.

Bank accounts for 26 per cent, 22 per cent and 24 per cent of Nifty’s profits, market cap and index weight, respectively. On the other hand, IT accounts for 16 per cent, 19 per cent and 18 per cent of Nifty’s pool, market cap and weightage. Put together, they account for 41 per cent of Nifty’s weightage and 31 per cent of NSE 500 weightage. Their divergent performance means the benchmark Nifty’s upside is capped. (During years when banks lift the index, IT acts as a drag and vice versa).

Since 2012, the Nifty never outperformed both the Bank Nifty and Nifty IT index during a single calendar. Also, this makes alpha generation that much more challenging for investors for whom it is a challenge to guess which sector will out-do the other and when.