Investment Shastra

The latest Stock Market Rally – Sectoral analysis

The last few days have seen quite a run up in our stock market. Nifty has gone up from 4544 on 20th Dec 2011 to 5607 points on 21st Feb 2012, giving a return of more than 23%.  Though a correction has already begun, we have tried to understand the relative performance of key sectors during this rally.

Relative Performance Nifty Realty bank metal Infra IT

The chart above shows the relative performance of five major sectors (IT, Infra, Realty, Banking & Metal) and broader index Nifty since December 2011 (i.e. during the rally period). What we found out was, if not surprising, definitely interesting.

So what were the findings?

NSE Realty index has been the best performing sector in this rally having posted the highest return during this period.  It is followed by Bank Index (Bank nifty) at the second place. NSE metal & Infra indexes together are the third best performers, with Metal performing slightly better than Infra. Broader index Nifty is at fourth place in terms of market returns. What’s surprising here is that, NSE IT index has been the worst relative performance amongst these six indices.

Let’s dig down a bit deeper and understand the reasons for performance or under-performance and what lies ahead for these sectors in near future.

Realty Sector – An outperformer:

As seen above, NSE Realty Index  is the best performing sector in this rally. Index has moved from 183 on 20th Dec 2011 to 294 on 21st Feb 2012, an advance of 111 points or a whopping 60% return during this period! The main reasons for this outstanding performance could be the market anticipation of increase in tax sops for housing loans taken by individuals and RBI’s easing interest rates in coming quarters. A tight monetary policy or rising interest rates have been the biggest enemy for the sector for the past few quarters as this led to erosion in affordability for buyers.  As a result, the real estate sector was amongst the most beaten down sectors in the months before the rally, thus making the sector an attractive bet during the ensuing relief rally in December. However, the fundamentals of the sector haven’t improved materially and in case the market corrects or the expectations from the budget aren’t fulfilled, this sector can be expected to be the one most affected adversely.

CNX Realty index market Performance

Banking Sector – Moving ahead as the interest rates go down

Bank Nifty has been 2nd best performing sector, giving a return of more than 43% in the same time.  The Bank Index has gone up from 7798 on 20th Dec 2011 to 11170 points on 21st Feb 2012. Reason for this sudden rise in banking stocks is the expectations of lowering of interest rates by central bank. This would help banks in containing their NPAs and support the anaemic credit growth which has been the case for the past few quarters. However, one should remain cautious as it takes at least a few quarters for any recovery to reflect the correct financials. Also, if the expectations from the budget are belied or there’s a recurrence of the global financial problems, the sector (especially banks with higher global exposure like SBI, ICICI Bank, BoI etc.) would be adversely impacted.

BankNifty index market Performance

Metal Sector – Rallying ahead as the metal prices rise

Metal Index has also gone up pretty fast (from 2470 on 20th Dec 11 to 3398 on 21st Feb 12) in this rally giving more than 37% return during same time. The main reason for metal index to perform so well is the rising metal prices across the globe. Last year, Aluminum prices fell by 25%, Copper prices by 24%, Iron Ore by 28% and Zinc by 23%. The situation reversed in January and most metals prices have increased at least 2-6% over December 2011 prices. This has been largely due to lesser than expected contraction in European economy. The capital infusion by ECB through LTRO (Long term refinancing option)  has provided additional liquidity in the global market as a result of which we have seen the prices of primary commodities see a rise. Though going forward, price rise may slow down given the inventory is at its peak now. The sector has already started witnessing a steep correction and future gain will be limited in any rally. Further any negative development in Europe; disorderly default by Greece or exacerbation of Italian debt problems and any conflagration in West Asia can significantly hurt the prices of Metals.

While domestically the demand for metals continues to remain buoyant, helped by increased construction activity as a result of expected rate cuts by central bank, the global situation continues to remain weak and companies with substantial global operations (esp. European operations) can witness weak performance in coming quarters.

CNX metal index market performance

Infrastructure Sector – Coming in closely behind metals

Infra index has also given returns similar to metal sector (more than 35% in absolute terms), a rise from 2054 to 2783 on 21st Feb 2012. This rise in infra stocks can be explained on the same logic as that of realty sector. With interest rates having peaked, a loosening of RBI’s monetary policy is expected in the near future. With the expected fall in interest rates infra activities are expected to pick up in the coming quarters. Order inflow for many companies had stalled in mid-2011, but these companies are now able to bag orders from their clients. These activities are expected to result in higher earnings of infra companies going forward. The fundamentals of the companies haven’t changed much, hence this rally could be attributed to the positive expectations from the budget wrt infrastructure spends. However, if this expectation is met is yet to be seen. Also, if the RBI does not reduce interest rates as expected, it could pose a threat to the sector.

CNX infra index market Performance

Information Technology – A surprising under-performer

IT has shown a bizarre performance in this rally by under-performing most of the sectoral indices as well as the broader index Nifty. It has given a return of close to 12%, much lower than the other indices. Though prima facie it appears that IT has underperformed in this rally, it may not be justified to call it a laggard. The reason being, rally in IT sector started much before the rally we witnessed in the other sectors or Nifty for that matter.

NSEIT index market PerformanceNSEIT NSENIFTY relative performance

If we look at the 2nd image, we can see that rally in the IT index started in August 2011 whereas the rally in the overall market (Nifty here) started only around late December 2011.  The reason for early start of the rally in IT sector was the rupee depreciation. This depreciating rupee resulted in higher dollar earnings for Indian IT companies which got reflected in their September quarter results. Anticipation of good results resulted into an early rally in the sector.

Going forward, the outlook is not very bright for IT sector as a whole. With companies like TCS, Wipro and Infosys projecting lower revenue realisation and lower discretionary spending in European and North American market (biggest markets for Indian IT companies) in coming quarters, we can expect stagnation in growth of the sector. Besides Rupee is expected to be peaked around 55 level and any correction from this level will also lower the dollar margins of IT companies. Though select IT companies will continue to grow, IT sector as whole may not perform very well in the coming quarters.

Recently, the market has seen a correction with the Nifty witnessing a substantial fall. If the market corrects further, investors can use this as a buying opportunity, to invest in fundamentally sound stocks.

Disclaimer: This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations or needs of an individual client or a corporate/s or any entity/ies. The person should use his/her own judgment while taking investment decisions.

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Ashish Shivam - Team MoneyWorks4me

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