FMCG, healthcare sectors beat market return over 10yr period: Ambit Capital

One year horizon has 7.4 times the risk involved in a 10-year investment horizon

Ten years is a long time in investing, especially in equities. But disciplined investing does have its own merits. According to a recent report titled “Sectoral investing in India”, co-authored by Ritika Mankar Mukjerjee and Aditi Singh of Ambit Capital, suggests that fast moving consumer goods (FMCG) and healthcare stocks deliver higher risk-adjusted returns than the market across all time horizons. Consumer durables, too, delivers higher risk-adjusted returns than the market across all time horizons, except the one-year and three-year horizons, the report suggests. 

“FMCG and healthcare stand out as the two sectors offering the highest probability of beating the risk-free rate across most horizons. Over the 10-year horizon, the probability of beating the risk-free rate of 8% is 100% for these sectors,” the Ambit report says.

The analysts say: “At the other end of the spectrum, metals, oil & gas offer the worst probability of beating the risk-free rate across most time horizons. The best companies from the metals and oil & gas sectors gave pedestrian returns on a cross-cycle basis.”

Having analysed the equity return distribution of BSE100, Ambit Capital has analysed the return distribution characteristics of nine sectoral indices. It left out the BSE Realty and BSE Power indices, as they were launched only in July 2007 and November 2007, respectively.

The analysis of the BSE100, according to Ambit, suggests that the one-year horizon entails disproportionately high risk – 4.4 times the risk involved over a 10-year horizon. The three and five-year horizons have the lowest probabilities of beating the risk-free return of 8% with the probability at 51% and 54%, respectively. That apart, the median returns in this time frame are the lowest (at 9% for both) as compared with the 10-year and seven – year horizons that deliver returns of 14% and 11%, respectively.

“The 10-year and the seven-year investment horizons offer not just the highest median returns (14% and 11%, respectively) but also the highest risk adjusted return (with a Sharpe ratio of 0.69 and 0.37, respectively) along with the most elevated probabilities of beating the risk-free return of 8% (76% and 66%, respectively),” the report says.

However, if the benchmark is changed from BSE100 to BSE500, the results are even more startling. Here, the 10-year and the seven – year investment horizons offer not just the highest median returns (16.3% and 15.6%, respectively) but also the highest risk-adjusted returns with a Sharpe ratio of 2.0 and 1.1, respectively along with the most elevated probabilities of beating the risk-free return of 8% (95% and 79% respectively).

The one-year horizon, on the other hand, has the highest risk – 7.4 times the risk involved in a 10-year investment horizon. 

“The three and five-year horizons have a 67% and 73% probability of beating the 8% risk free return. Moreover, the median returns in this time frame are the lowest for the five-year horizon at 12.3%, as compared to the 10-year and seven-year horizons that deliver returns of 16.3% and 15.6%, respectively,” the report says.

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