Most sectoral indices fall back despite broader market rally in past 2 yrs

Large part of gains in two years accrued to top companies in metals, IT, pharma and realty

The Indian equity market has witnessed one of the strongest rallies in the past two years. The benchmark index NSE Nifty50 is up 46.2 per cent since October 2019 which translates into annualised returns of 21 per cent for equity investors during the period. The broader market appears to have done even better: The combined market capitalisation of nearly 4,000 BSE-listed companies is up 66 per cent, from Rs 1.54 trillion at the end of October 2019 to around Rs 2.56 trillion as of last Thursday.
 
A break-up of the sectoral performance, however, suggests that the rally has not been as broad-based as the headline numbers suggest.
 
Only four sectoral indices — metals, IT, pharma, and realty — have outperformed the benchmark indices over the past two years and a majority of sectoral indices, including banks, NBFCs, FMCG, auto and oil & gas, have underperformed the broader market by a large margin. Numbers also suggest a big gap between the winners and the laggards.
 
Metal and mining companies have been the biggest winners and the Nifty Metal index that tracks the market capitalisation of the top 15 such companies is up 130.5 per cent over the past two years. The metal index is followed by the Nifty IT, which is up 124 per cent since the end of October 2019. So, the top two performing sectors have delivered 3x the returns of the benchmark index during the period.
 
Others that have done well during the period include the Nifty Pharma (up 82 per cent) and the Nifty Realty (up 55.2 per cent). The Nifty Commodities index that includes metal & mining, cement, power, and oil & gas companies has also outperformed and is up 65 per cent over the past two years but largely due to a rally in metals and cement stocks.

At the other end of the spectrum are the Nifty PSU Bank index – down 6.2 per cent during the period – and the BSE Oil & Gas (the data available for the Nifty Oil & Gas is only for 18 months), up just 10.8 per cent during the period despite a strong showing by the index’s biggest component – Reliance Industries.
 
RIL share price is up 67.2 per cent over the past two years, while its market capitalisation is up 74 per cent during the period.
 
Other big laggards during the period include the Nifty Media, which is down 5 per cent, the Nifty Private Bank — up just 14.6 per cent, the Nifty Auto up 19.7 per cent, and the Nifty Bank up 22 per cent.
 
Analysts attribute this sectoral contrast in performance to stock rotation typical of a rally. “Except for IT stocks that have consistently outperformed through this period and banks that have been laggards all through, most sectors have done well in 4-6 months," says Shailendra Kumar CIO Narnolia Securities.
 
What this means is that it’s a matter of time before laggards catch up with winners and start doing well, as long the rally in the broader market remains intact.
 
Others, however, say the rally over the past two years, especially after March 2020 has been stock-specific, rather than driven by sectoral trends, perhaps with the exception of metal & mining companies.
 
“There have been many leading stocks that have done exceedingly well in the last two years, even if the sector as a whole has been a laggard,” says G Chokkalingam, founder & MD Equinomics Research & Advisory Services.
 
For example, Tata Consumer has been one of the top-performing stocks despite a poor showing by the FMCG index. The stock is up 176 per cent over the past two years against a 25.6 per cent rise in the Nifty FMCG index during the period. Similarly, Bajaj Finserv is up 106 per cent against a 34.4 per cent rise in the Nifty Financial index. Tata Motors is up 68 per cent over the last two years, compared to just a 19.7 per cent rise in the Nifty Auto index.
 
Stock rotation may correct part of the skew in the sectoral performance in the coming weeks but the new winners will pick the slack if big outperformers in metals, IT, and cement start disappointing.