Sector- wise performance of the Indian equity markets

With Indian equity markets scaling new highs, an insight into the sector wise performance 

Mid- way through 2017 and phew... have we come a long way in a year filled with drama, suspense and major, major surprises in the global economic and political arena!! Sum that up with the volatility in the markets and it is more than enough to give goose-bumps to even the most accomplished traders.

Indian equity markets have been roaring for the last 6- months and are up about 20 percent from the December 2016 lows. The best part about this rally is that there have been substantial periods of consolidation after every rise, which is a sign of a healthy bull market.

Although the rally can be partly attributed to a similar run in most global markets, a closer look at the performance of the sectoral indices trading on NSE since the beginning of 2011 will show that not all the sectors are performing well and that some of them are yet to regain their footing, leaving long- term investors with negative returns.

The graph gives a comparison of six sectoral indices besides the broader Nifty 50. Four of the sectors have given positive returns with a couple of them even outperforming the broader index, while the Indices representing Infrastructure and Realty have been in negative territory during the 6- year period. Breaking- up the components that make up these two indices, some interesting facts have emerged for the adverse returns, which are highlighted below


Infrastructure Index-

The index comprises of the telecom and the power sector, both of which have been underperforming the broader markets for quite some time.

The telecom industry in India is ranked among the top three in the world in terms of subscribers and the sector has witnessed massive investments in infrastructure which have also led to the concurrent accumulation of debt by the industry players. The arrival of a new entrant late last year has added to the woes of the industry, with profits and customer base of the established companies sliding dramatically. The industry is currently consolidating and it will take a while before a meaningful recovery.

When it comes to the power sector, India is the sixth largest producer of electricity globally. Power distributors such as the State Electricity boards & discoms are neck- deep in debt due to large transmission and distribution losses of about 30 percent, mostly due to non- technical issues like power thefts, tampering of electricity meters and subsidies. The losses have resulted in deferred payments to the power generating industry and a cut down in the intake of power, leading to a surplus with the power generators with no takers.

The large debt owned by the distributors has substantially affected the earnings of the power generators, thereby forcing them to reduce investments in infrastructure that include widening of the power network to include areas that are electricity deficient. Unless the issue is sorted out by the Central and State Governments, the industry will continue to bleed.


Realty Index-

The index comprises of the top ten real- estate companies based on market capitalization, of which DLF has a weightage of more than 26 percent. Looking at the performance of the companies represented in the index will show that most of them would have offered positive returns on investment although the quantum of returns are pretty low compared to the listed stocks in the other sectors. The exception is however DLF, which has slid almost 40 percent from January 2011, leading the overall index lower.  

The real- estate sector which was barely standing on its feet due to large inventories and lower demand due to uncertainty in the Indian job market, suffered another setback due to demonetization late last year. Since then, the industry is gradually returning to normal.

Investing in equities is usually a long- term strategy and investors should be completely aware of the risks involved. Investments are made for long- term capital growth and the ideal investment strategy should comprise of diversification to elude unsystematic risk associated with an industry in general and a company in particular. Avoid making investment decisions based on the performance of a sector or choosing them as a barometer to invest in stocks. Rather, invest in companies that have shown consistent profits over the years, having a good book and are undervalued in terms of potential growth, irrespective of the outcome of the sectoral indices.