Sectoral rotation playing out in Indian markets. How to benefit


This week did end on a positive note but the broader breadth of the market continues to be indecisive. Retail investors and FIIs turned cautious and focused on better asset class opportunities other than equities in India and across the globe. Since the beginning of November, markets have been more or less range bound. However in the same short span, Nifty Realty and Nifty Auto have climbed almost 5% and 2.5% respectively. 

This is not unprecedented as sector specific outperformance has been a repeated phenomenon in the markets. For instance, when the housing sector was on a flare between 2003 and 2007, Nifty Realty delivered over 71% returns in 2007 as against 53% returned by Nifty 50. Nifty IT also gave stellar returns of over 490% versus Nifty’s 66% in 1999 during the tech boom.

According to Peter Lynch, “If you are in the right sector at the right time, you can make a lot of money very fast”. 

Time and again some sectors tend to perform better due to the influence of economic cycles, and thus can potentially give market beating returns. These episodes are not limited to only longer time frames. In fact, for over a year now, sector rotation has been playing out in our markets. The persistent rally in the benchmark indices has actually been fuelled by polarized participation of different sectors across various time periods. 

The Jan-March’21 leg of the rally was majorly supported by Nifty Metal (22% returns v/s Nifty 50’s 4.80%) which turned out to be a laggard in July to September’21 (7.7% returns v/s Nifty 50’s 12.4%). Similarly Nifty Pharma, which led April-June’21 rally (15.6% returns v/s Nifty 50’s 5.75%), cracked in July to Sept’21 (0.2% returns v/s Nifty 50’s 12.4%). The rally that seemed like a sprint, turned out to be a relay with sectors running up and consolidating consecutively. Therefore, positional investors in their quest to generate alpha, should observe such sectoral performances and position their bets accordingly.

Event of the week

US headline consumer price inflation jumped to 6.2%, the highest since 1990, spreading chills across the globe. As the inflation appears to be biased towards being non-transitory, the market is now recalibrating its expectations of the Fed’s response mechanism. An anticipated higher quantum of tapering by the Fed may lead to emerging markets including India receiving reduced foreign investments. FIIs have already been net sellers this week. Also, since October, investors seem to be tilting their focus towards non-equity asset classes. According to AMFI, equity oriented MFs saw declining net inflows whereas debt MFs witnessed net inflows as compared to an outflow in September, suggesting increasing allocation to non-equities.

Technical Outlook

Nifty50 ended positively this week and formed a strong bullish candle in the last trading session. Throughout the week, the index continued to consolidate between its 20 and 50 DMA, with the 50 DMA emerging as a key support. Bank Nifty, which otherwise was demonstrating weakness, also bounced back from its support at 38,400. As the benchmark is currently hovering around its immediate resistance of 18,120 and as the breadth of the market continues to be indecisive, we suggest traders maintain a mild bullish outlook while keeping a strict stop loss below 17,750. Next crucial resistance is placed at 18,350.

Expectations for the week

Given that most of the quarterly results and festive mood is behind us, indices are expected to move sideways. As markets across the world are trying to decode the implications of rising inflation, any intensive selling by FIIs may take Indian indices lower, unless the domestic players provide support. 

Next week, D-Street will also see a slew of new IPOs listing and the sentiment surrounding listing gains continues to remain bullish. Amidst worsening inflation fears, investors are currently advised to use knee-jerk reactions to, at best, cherry pick quality stocks in resilient sectors and invest in staggered manner. Nifty50 closed the week at 18,102.75, up by 1.04%.

Yesha Shah is head of equity research at Samco Securities


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