Nifty Bank vs Nifty IT: Which index should you invest in for long term?
With the March quarter earnings and elections as the next major trend, let's analyse between Nifty Bank and Nifty IT, which sector has better long-term investment opportunities.
The Indian market has gained almost a percent in April so far, hitting multiple new highs and extending this positive trend for the third straight month on improving macros, hopes of a rate cut, the strong possibility of the current PM Narendra Modi winning his third term and overall improving market outlook.
With the March quarter earnings and elections as the next major trend, let's analyse between Nifty Bank and Nifty IT, which sector has better long-term investment opportunities.
Both Nifty Bank and Nifty IT have been in the red and underperformed the benchmark Nifty in 2024 YTD. While Nifty Bank has shed half a percent this year so far, Nifty IT has lost 0.25 percent as against a 3.6 percent rise in the Nifty in this period.
Both indices have also witnessed a similar trend in the last one year as well, underperforming the benchmark. The Nifty Bank index gained 18 percent in the last 1 year while the Nifty IT rose almost 24 percent. In comparison, the benchmark Nifty jumped over 29 percent in this time.
In 2024 YTD, both Nifty Bank and Nifty IT gave positive returns in 3 of the 4 months so far.
Nifty Bank added 2 percent in April so far, extending gains for the 3rd straight month. It also rose 2.2 percent in March and 0.3 percent in February, however, fell 4.75 percent in January.
On the other hand, Nifty IT gained 1.5 percent in April so far after a 7.5 percent decline in March. Meanwhile, it also advanced 2.95 percent in February and 3.1 percent in January this year.
While the market has been on a record-high spree, Nifty Bank has not participated in the recent rally and had hit its peak in late December, whereas Nifty IT hit its 52-week high in February this year.
Currently, Nifty Bank is just a little over 1 percent away from its record high of 48,636.45, hit on December 28, 2023. Meanwhile, it is still 18 percent higher than its 52-week low of 40,727.25, hit on April 10, 2023.
On the other hand, Nifty IT is over 8 percent away from its 52-week high of 38,559.85, hit on February 19, 2024. It had hit its peak of 39,446.70 on January 4, 2022. Meanwhile, it is still over 35 percent higher than its 52-week low of 26,184.45, hit on April 17, 2023.
Read here: SBI vs Bank of Baroda: Which PSU bank stock should you pick for long term?
Meanwhile, in the long term, Nifty Bank has given better returns between the two. The bank index has rallied over 42 percent in the last 3 years while Nifty IT is up 36 percent and Nifty has gained over 48 percent.
Constituents
In 2024 YTD, 66 percent (8/12) of the constituents of the Nifty Bank index have been in the red and only 4 in the green.
AU Small Finance Bank has lost the most, over 19 percent, followed by Bandhan Bank, down 19 percent. Meanwhile, IDFC First Bank and HDFC Bank lost 11 percent each. Furthermore, Kotak Mahindra Bank, IndusInd Bank, and Axis Bank also shed between 2.5 and 9 percent each in this time. Federal Bank was flat but also in the red.
Among gainers, Punjab National Bank surged the most, up 42 percent, followed by SBI, up 20 percent, Bank of Baroda, up 19.2 percent and ICICI Bank, up 8.3 percent.
On the other hand, in the Nifty IT index, 5/10 constituents were in the red while the other half were in the green.
LTIMindtree was the worst performer in the Nifty IT space, tanking over 22 percent in 2024 so far. It was followed by Mphasis, which lost 8.5 percent, Coforge, down 7.9 percent, Infosys, down 3.6 percent and Tech Mahindra, down 1.3 percent.
Read here: Nifty FMCG vs Nifty Finance: Which sector is better for long-term investment?
Which index has a better long-term investment opportunity?
Pramod Amthe, Head Of Institutional Equity Research, InCred Capital, prefers Nifty Bank over Nifty IT.
We prefer Nifty Bank over IT. In coming quarters liquidity infusion by RBI, easing deposit rates, and rate cuts by RBI can be triggers for the banking sector. The IT sector will have short-term challenges from US election uncertainty on global firms' IT budget allocations.
Varun Saboo, Head - Equities, Anand Rathi Shares and Stock Brokers, likes both.
We are constructive on both Nifty IT and Nifty Bank. Nifty IT has been consolidating, led by the outlook on interest rates globally. Once rates begin to fall, Nifty IT will do very well and we believe this event is not far away anymore.
Banks haven’t performed for a long time, and valuations have turned attractive in this space. We believe banks would correct the downturn of the last 2-3 years. This is more of a tactical call.
Read here: Nifty Auto vs Nifty Realty: Which sector is a better bet for long term?
Neeraj Chadawar, Head - Fundamental and Quantitative Research, Axis Securities, also believes one should have exposure to both sectors for the long term.
Although the fundamental drivers for both sectors are completely different, one should have exposure to both sectors for the long term.
Regarding the IT sector, we have seen a strong revenue growth momentum in FY22 and FY23. We believe Indian IT services may face short-term challenges on the demand front as well as on the margins front. This is because of the economic slowdown, macroeconomic uncertainties, and weaker outlook. However, the industry’s long-term outlook remains robust, with the economy showing signs of recovery. We expect this recovery to begin in the second half of CY24 or early CY25. Many companies are becoming increasingly system-oriented and will have to spend on automation to remain relevant in today’s business landscape. This should lead to long-term solid demand.
In the BFSI sector, the Indian economy is in a sweet spot of growth and remains the land of stability against the backdrop of a volatile global economy. We believe in its long-term growth story driven by the country’s favorable structure, thanks to the increasing Capex, which enables banks to improve credit growth. This will ensure the BFSI sector grows in sync with the economic growth.
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However, on the contrary, Sunil Damania, Chief Investment Officer, MojoPMS, likes the IT sector better.
In the dynamic landscape of the Nifty 50 index, the influence of banks and IT companies is paramount. For the index to ascend, one sector must exhibit resilience. Typically, institutional investors pivot between these sectors, recognising their capacity to absorb substantial capital. Presently, the IT sector appears more promising in valuation and growth, particularly fuelled by the burgeoning potential of AI within Indian IT software firms. Conversely, the banking sector faces diminished Net Interest Margins (NIM) and stringent regulatory controls, constraining alpha generation. Hence, our preference tilts towards the IT sector.
Technical View
Rupak De, Senior Technical Analyst, LKP Securities, is more bullish on the banking space.
Both the Nifty IT and Bank Nifty indices have exhibited sluggishness in the first few months of the current year. Over the last 5 years, Nifty IT has seen a growth of 2.45 times its value at the end of 2018, while during the same period, Bank Nifty has grown to 1.78 times. Therefore we don’t find a significant difference in returns over the past five years. Now, let's analyse the charts to determine which sector is likely to perform better.
The long-term chart of Bank Nifty presents a positive outlook. On the monthly chart, it appears promising following a consolidation breakout. Additionally, the formation of higher tops and higher bottoms suggests a continuation of the uptrend in the long term. In the near future, the index might move towards 50,000, indicating a potential upside over the medium term. A decisive move above 50,000 could lead to significant long-term gains.
Read here: Less chance of market repeating FY24 returns this year, says Krishnan VR of Marcellus
Conversely, the Nifty IT index has formed a bearish engulfing pattern on the monthly chart, indicating a waning bullish sentiment within the sector. Support is visible around 33,500, and if breached, it could lead to further weakness.
Therefore, remaining invested in the banking sector might help capitalise on potential outperformance.
Considering these viewpoints, the consensus leans slightly towards the banking sector, with some analysts seeing it as a tactical opportunity due to attractive valuations and potential triggers like RBI interventions. However, it's essential to consider your own investment goals, risk tolerance, and research before making any investment decisions.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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