A Key Ratio That Tells a Story
One important chart compares the performance of public sector banks (PSU banks) to private sector banks over the last 15 years. This is done by taking the index of PSU banks and dividing it by the index of private banks.
This simple ratio helps track how the two sectors have evolved over time. From 2005 to 2020, this ratio declined sharply, falling from around 1.3 to just 0.1. This indicates a long-term decrease in the relative strength of PSU banks.
Why the Ratio Dropped
There are two primary reasons for this decline. First, public sector banks have been underperforming for many years. Second, private sector banks have experienced rapid growth during the same period. As a result, the market began to perceive private banks as the only viable option for growth. Particularly after 2010–11, many investors lost confidence in PSU banks and shifted their focus solely to private banking stocks.
A Recovery in the Last Five Years
However, the last five years have shown a clear recovery in PSU banks. While the ratio is still far from earlier levels, it has risen. In fact, if someone had invested in PSU banks over the past five years, they would have seen better returns compared to private banks. This illustrates how market trends can shift over time, highlighting the importance of monitoring which sectors perform well at different times.
The Importance of Catching New Trends
Markets are always changing. The notion that PSU banks do not experience growth is no longer entirely accurate. Just as private banks once enjoyed a period of strong growth, PSU banks are now showcasing signs of strength. Whether this represents a temporary phase or the beginning of a larger trend remains to be seen. Nonetheless, keeping an eye on these changes helps investors avoid significant mistakes and identify new opportunities early on.
What to Watch Going Forward
Currently, the situation is somewhat uncertain. It is unclear whether the recent rise in PSU banks signals a trend reversal or merely a short-term correction. The key takeaway is that old trends eventually fade, making way for new ones. If investors can navigate these changes calmly and wisely, they will be better positioned for long-term success.
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