Why PSU Bank Stocks are Falling? Main Reasons & Future Trends

As Sir Isaac Newton famously said, "What goes up must come down." While he was referring to gravity, this statement somewhat compliments market sessions.  In the past couple of days, the stock market has witnessed a significant downturn, particularly in midcap and PSU (Public Sector Undertaking) stocks. Some PSUs and midcap stocks experienced a staggering decline of up to 10% in just one day.

In today's blog, we'll specifically understand the rally of PSU banks. Why are PSU banks falling? Is the PSU rally coming to an end? What future plans and growth prospects do PSU banks show? We'll cover all these aspects and draw a conclusion at the end. So just stick with us to the end.

 

Detailed Video

 

Why did it happen?

From a technical perspective, PSU bank stocks have been on a one-way rally over the past few months. It all started on August 10, 2023, when Prime Minister Modi encouraged investments in PSU stocks. Alongside PSU banks, we've also witnessed a rally in other PSU stocks.

However, one significant factor that contributed to this rally is the story of free float. Before getting into that, let's recall the Ketan Parekh Scam, where low free float stocks were manipulated to make hefty profits.

Free float essentially refers to the portion of shares available for trading in the market. For instance, if a company has a total worth of 25,000 Cr, but only 2% of its shares are available for trading while the rest are held by the government, effectively only 500 Cr worth of shares are being traded. Many PSU banks show a similar pattern, with the government holding a substantial percentage of shares.

 

Analysing the Numbers

Taking UCO Bank as an example, the government holds around 95.39% of shares, leaving only 4.61% for trading in the open market. When Modi's statement about PSU stocks came out, people began buying, leading to a huge surge in prices due to increased demand. However, the basic principle of supply and demand eventually comes into play.

 

 

Negative Factors

From a technical standpoint, the RSI indicator suggests that whenever PSU bank stocks enter the 75-80 zone, a fall is likely. Moreover, fundamental analysis reveals overvalued ratios for PSU banks like UCO Bank and Central Bank, indicating stretched valuations.

 

The JP Morgan Report

A report by JP Morgan seems to be one of the primary reasons behind this upset. The details of this report were discussed in a recent live video on our youtube channels. It's worth checking out if you want to understand the situation better. Notably JP Morgan is not the only one making predictions. Robert T. Kiyosaki, renowned author of "Rich Dad Poor Dad," has also indicated anticipating a market crash in 2024. With these influential figures sounding the alarm, it becomes challenging to ignore.

 

Future Trends

Although the short-term outlook seems bearish, the government's plans and announcements could also play an important role in the result of PSU stocks. For instance, the recent announcement about raising funds from the debt market has implications for PSU banks. However, it's crucial to note that the timeline for these initiatives hasn't been disclosed yet.

 

 

Conclusion

In conclusion, the current outlook for PSU stocks appears negative. Keep an eye on valuations and government actions for clues about future market movements. However, once valuations stabilize, we might witness another rally. It's essential to remember that this discussion is based on datasets, which can evolve over time.

Disclaimer: This Stock Analysis is only for informational purposes and should not be considered as investment advice. Always do your research and consult with a financial advisor.