Unraveling the Bearish Grip on PSU Stocks
5th Feb 2025
Widespread Decline in PSU Stocks
A total of 60 out of 63 BSE PSU index constituents have plummeted 20% or more from their 52-week highs, as the benchmark itself has fallen 21.48% from its one-year peak. Stocks like Chennai Petroleum Corporation, Mangalore Refinery, Cochin Shipyard, and Oil India have led the losers, dropping 47-59%. Other major decliners include Garden Reach Shipbuilders, NMDC Steel, The New India Assurance, and Ircon International, all down 43-45%.
Shifting Dynamics in PSU Weightage
The weight of PSU stocks in the NSE500 expanded from 8% to 12% between August 2023 and May 2024, creating a "vicious chasing cycle" as fund managers were forced to realign their portfolios. However, this weight has now started dropping, and the pressure on fund managers to own PSUs has waned. The PSU weight bottomed at 5.6% in October 2020 before gradually recovering, but the vertical rise in 2023 appears to have run its course.
Implications for Government Capex and Policy
Analysts note that during general election years, the government's capital expenditure tends to be back-ended, and FY25 is unfolding in a similar manner. While core capex in areas like transportation, housing, and energy has surged, defense spending has been soft. Looking ahead, the strong fiscal deficit target is seen as increasing the probability of rate cuts, which could benefit PSU banks through treasury gains on their longer-duration investment books.
A total of 60 out of 63 BSE PSU index constituents have plummeted 20% or more from their 52-week highs, as the benchmark itself has fallen 21.48% from its one-year peak. Stocks like Chennai Petroleum Corporation, Mangalore Refinery, Cochin Shipyard, and Oil India have led the losers, dropping 47-59%. Other major decliners include Garden Reach Shipbuilders, NMDC Steel, The New India Assurance, and Ircon International, all down 43-45%.
Shifting Dynamics in PSU Weightage
The weight of PSU stocks in the NSE500 expanded from 8% to 12% between August 2023 and May 2024, creating a "vicious chasing cycle" as fund managers were forced to realign their portfolios. However, this weight has now started dropping, and the pressure on fund managers to own PSUs has waned. The PSU weight bottomed at 5.6% in October 2020 before gradually recovering, but the vertical rise in 2023 appears to have run its course.
Implications for Government Capex and Policy
Analysts note that during general election years, the government's capital expenditure tends to be back-ended, and FY25 is unfolding in a similar manner. While core capex in areas like transportation, housing, and energy has surged, defense spending has been soft. Looking ahead, the strong fiscal deficit target is seen as increasing the probability of rate cuts, which could benefit PSU banks through treasury gains on their longer-duration investment books.