Disaggregation of market performance throws up interesting details for 2017

A disaggregation of market performance, sector by sector, throws up some interesting details for 2017. First, the Nifty went up by 28 per cent from January to December 2017. Smaller stocks did better with the Nifty Midcaps 100 free-float up by 46 per cent and Nifty Smallcaps 250 up by 55 per cent. (All percentages are rounded).

Practically every sector has gained. The one poor performance has come from the erstwhile darling, pharmaceuticals. The pharma index is negative at minus seven per cent for the year. Exports to the US have been under a cloud with "raids" by the FDA closing down facilities, and slow API (active pharmaceutical ingredients) approvals.

The Nifty IT Index also returned 12 per cent in the last year, underperforming the broad market. It's become harder to get US visas. This has pushed up costs. The rupee's strength may also have hit competitiveness. Finally, there's the shift into AI (artificial intelligence), cloud, digital services where Indian service firms aren't at the forefront.

The big gains have come in Banks (up 42 per cent), Energy (up 35 per cent), Metals (up 45 per cent) and Realty (up 88 per cent). In banks, the private sector outfits continue to be highly valued, even though their NPAs (non-performing assets) are also rising, as recognition norms become stricter. Public sector banks trailed in valuation, but they got a big boost towards the year-end as the government announced a massive recapitalisation scheme. The NPAs of PSU banks are still growing at an alarming rate and the recap will 1) be hard to pull off and 2) even a Rs 2.2 trillion injection may not be enough. The Reserve Bank of India's projections suggest NPAs will peak in September 2018.

Moves like the new Insolvency and Bankruptcy Code (IBC) have given investors hope. Private sector banks are over-represented in the Bank Nifty in terms of weightage due to the free-float norms. Hence, their high valuations mask the lower valuations of PSU banks. However, even PSU banks scored over 20 per cent returns last year.

In Energy, the paradigm has been simple and it may be changing. Crude and gas prices were low, retail prices were decontrolled and gross refining margins (GRM) for the private exporters was high. There were massive returns for Reliance Industries (RIL) and Hindustan Petroleum (HPCL), which pulled up the sector index because RIL has a huge weight. This year won't be great for the downstream industry going by the fact that crude prices are rising and GRM could fall. There may be question marks about retail pricing freedom if crude import prices rise beyond a certain point. ONGC and OIL may gain however. To be noted: RIL's valuations are also significantly dependent on Jio's performance - close to half of RIL's total investments in the past decade have been pumped into the telecom subsidiary.

Metals generated 46 per cent returns in 2017. First, anti dumping duties shielded the domestic industry and then, a production cut from China gave it a further boost. Non-ferrous metals like copper have also been in secular bull-runs. India was a net exporter of steel in November (it was a net importer in the first half of the fiscal). Balance sheets appear to be improving and global demand stays firm.

The realty performance is odd. Real estate prices have stagnated or fallen across most of India, certainly in large urban areas in the last year. But, realty stocks have nearly doubled in price. Earnings have stayed flat. The optimism is based on future prospects in the assumption that RERA, Benami Act, etc., and other policy changes will push up activity while tax breaks will pump demand. It's hard to see this happening on a scale and timeframe where the positive benefits will be visible anytime soon.