June 2024 – How sectors fared on returns, risk, and valuations

7 Jul 2024 , 07:18 PM

MACRO INDEX STORY FOR JUNE 2024

The NSE has just released the index-wise performance for key sectoral, generic, and strategy indices for the month of June 2024. This is an interesting analysis presented by Nifty each month. Apart from returns analysis for different rolling periods, the risk factors (volatility, Beta, covariance and R²) and valuation parameters (P/E, P/BV, and dividend yields) are also covered. This gives a 360-degree view of sectors and themes; updated as of the end of June 2024. For the month of June, IT may have been the big positive surprise, but only defence theme has delivered a stunning 170% in the last one year. Before we delve into sectors updated for June 2024, here is a quick dekko at how generic indices did in this month.

6. For the month of June 2024, the one-month returns were dominated by the Nifty Small Cap and Nifty Micro cap indices; both delivering over 11% returns. Small was once again beautiful. You really cannot complain in the month of June when the Nifty itself gave 6.77% returns, while mid-caps bettered the Nifty, but only slightly.
7. Let us quickly turn to how the thematic ideas performed in June 2024. The newly launched Nifty EV and New Age Automotive index delivered the best thematic returns of 11.26% in June 2024, while the NSE Emerge and the NSE Digital also delivered double digit returns. Defence theme delivered just under 10% this month, but over the last one year, it is still the star performer at 170% returns. In terms of business groups, the Mahindra group and the Aditya Birla group companies outperformed, while the Tata group companies lagged behind in the month of June 2024.
8. Let us turn to how the various strategy indices performed in the month of June 2024? Small cap quality was the only theme to generate double digit returns in the month. It is rather surprising, but themes like quality and low volatility have been among the top performers in June. It looks like these themes have worked, especially in the aftermath of nearly 2 months of persistent volatility surrounding the political scenario in India.
9. Finally, what about the performance of the various sectors in the month of June 2024? The month was dominated by IT sector, which delivered 11.72% returns as IT emerged as the best bet for investors looking to play the dollar strength. The other top performers among sectors in the month of June 2024 were consumer durables, realty and auto. On a 1-year basis, realty is the only theme that has delivered above 100% returns, with auto, oil & gas and PSU banks delivering above 60% returns in the year.

What we have looked at above is a very short term view to understand momentum and the swing factor in the month of June 2024. However, some of the aspects of the stock markets like returns, risk and valuations are not too relevant in the short term; and the perspective is sharper if we consider a longer time frame. We break it into returns, risk, and valuations.

• HOW SECTORAL INDICES FARED ON RETURNS IN LAST 1 YEAR?

The table captures the key sectors and returns generated across different time frames. The table is ranked on 1-year returns up to June 30, 2024.

Sectoral Index	1-Year Returns	3-Year Returns	5-Year Returns
Nifty Realty	113.22	48.03	31.69
Nifty PSU Bank	80.51	44.84	19.07
Nifty Auto	67.93	34.82	27.54
Nifty Oil & Gas	63.46	23.54	21.63
Nifty Metal	58.68	25.31	28.97
Nifty Pharma	44.44	12.16	20.56
Nifty Consumer Durables	42.18	19.20	18.96
Nifty Healthcare Index	41.68	13.46	22.79
Nifty Non-Banks	29.66	15.07	14.07
Nifty IT	24.93	9.65	20.25
Nifty Bank	18.01	15.53	11.61
Nifty Financial Services	17.89	13.52	12.37
Nifty Media	14.69	4.19	0.35
Nifty Private Bank	14.66	13.31	9.21
Nifty FMCG	10.69	18.34	15.93

Data Source: NSE Indices

The table may look like a melee of numbers, but there are some interesting takeaways. To begin with, the good news is that 1-year returns for all sectors continues to be positive.

• On a 1-year basis, the Realty Sector continues to lead at 113.22% returns. Most of the housing companies have been showing overflowing order book positions and a surge in cash flows in the last one year. At the same time, the growth of ecommerce and AI is creating demand for warehouses, competency centres, and data centres. Interestingly, realty sector is not just the top performer in terms of 1-year returns, but also in terms of 3-year returns and 5-year returns. Clearly, realty as a narrative, has come of age.
• Let us now turn to the other big gainers on one-year returns? PSU Banks are an obvious second with 80.51% returns. For PSU banks, the balance sheets have turned stronger, they are well capitalized and GNPAs are also down to decadal lows. The other big gainers were auto at 67.93%, oil & gas at 63.46%, and metals at 58.68%. In the case of autos, it is a mix of surge in demand and rural rebound while oil & gas has been gaining from robust refining margins and stable oil prices. For metals, the bet is on a revival in Chinese demand.
• What about the bottom of the heap? We will ignore media as it is dominated by just one company. FMCG and private banks are under pressure; and this is largely driven by a number of genuine concerns. While HDFC Bank and Kotak Bank had an impact on the private banking space, there are also concerns on valuations, a slowdown in NII growth and narrowing of net interest margins (NIMs). For FMCG, the concerns are over monsoons, rural demand, and the likely impact of a spike in oil prices and food inflation.
• There are some dichotomies visible in the data. FMCG has lagged in the last one year, but has done well over a 5-year period. IT, despite a weak 3-5 years, has done very well in the last one year. Most of the leading sectors have seen bulk of the returns only happening in the last 1 year.

What stands about the return picture is that there is no sector giving negative returns over the last one year, with even the laggard giving 10% returns in the year.

• HOW SECTORAL INDICES FARED ON RISK IN LAST 1 YEAR?

If returns are one side of the coin, the other is risk. Here we look at 4 parameters of risk. This is the ranking of sectors based on 1-year volatility.

Sectoral Index	1-Year Volatility	1-Year Beta	1-Year Correlation	1-Year R2
Nifty PSU Bank	30.22	1.61	0.68	0.46
Nifty Media	29.24	1.01	0.44	0.19
Nifty Realty	26.19	1.30	0.63	0.40
Nifty Metal	24.36	1.44	0.75	0.57
Nifty Oil & Gas	23.35	1.44	0.78	0.61
Nifty IT	18.53	0.73	0.50	0.25
Nifty Non-Banks	17.98	1.11	0.78	0.61
Nifty Bank	16.53	1.13	0.87	0.76
Nifty Private Bank	16.32	1.10	0.86	0.73
Nifty Financial Services	15.97	1.12	0.89	0.79
Nifty Auto	15.54	0.84	0.69	0.48
Nifty Consumer Durables	14.24	0.73	0.65	0.42
Nifty Pharma	14.05	0.49	0.44	0.19
Nifty Healthcare Index	14.02	0.48	0.44	0.19
Nifty FMCG	12.47	0.46	0.47	0.22

Data Source: NSE Indices

The above table is ranked on 1-year volatility starting with the most volatile sectors and going down to the least volatile sectors. We have measured volatility by the standard deviation.

• Although media figures in the top on risk, we will discount it from our analysis due to excess dependence on just one stock. In terms of standard deviation of returns, the more aggressive plays during the year like PSU banks, realty, and metals are also high on the volatility scale. However, the higher volatility risk was compensated by higher returns; so, it was a worthwhile risk. On the low volatility side, you have the typical suspects like FMCG, Healthcare, and Consumer Durables. In fact, Pharma and healthcare gave solid returns in the year, despite very low levels of volatility.
• What about Beta; a highly popular measure of systematic risk. Higher the Beta above 1, more aggressive the sector in terms of returns and risk. The high beta sectors in the year were PSU Banks, metals, and oil & gas. Despite a high beta, private banks have not done too well. The low beta sectors were, obviously, Pharma, Healthcare, FMCG, and consumer durables; with Pharma and healthcare giving 44% returns in the year, despite low levels of standard deviation and low beta.
• Finally, let us look at correlation and R². Correlation shows whether the sector offers diversification benefits versus the Nifty. Lower the correlation, more the diversification benefit. From that perspective; Pharma, healthcare, and FMCG offer the best diversification benefits on a Nifty portfolio. The financial services sector continues to have a very high correlation with Nifty, which is not surprising.

The surprise package this year was healthcare and pharma. It was low on risk, low on beta, high on diversification benefits and also beat the Nifty by 18 percentage points.

• SECTORAL INDICES AND THE VALUATION PLAY IN LAST 1 YEAR

Let us finally look at sectoral valuations on P/E, P/BV and on dividend yield to identify the overpriced and underpriced sectors. The table below is ranked on P/E ratios.

Sectoral Index	Price/Earnings (P/E Ratio)	Price / Book (P/BV)	Dividend Yield
Nifty Consumer Durables	88.57	12.41	0.45
Nifty Realty	66.89	6.89	0.29
Nifty FMCG	44.94	11.26	1.74
Nifty Healthcare Index	40.81	6.00	0.55
Nifty Pharma	35.76	5.43	0.61
Nifty Metal	34.65	2.84	1.38
Nifty IT	30.25	7.89	2.20
Nifty Auto	24.45	5.77	0.98
Nifty Non-Banks	23.25	3.48	0.88
Nifty Financial Services	17.49	3.56	0.89
Nifty Private Bank	16.52	2.97	0.67
Nifty Bank	15.97	3.01	0.91
Nifty Oil & Gas	10.13	2.21	2.14
Nifty PSU Bank	9.45	1.54	2.27
Nifty Media	0.00	2.10	0.42

Data Source: NSE Indices

Here are some of the key takeaways from the three valuation parameters. Let us look at how the sectors stacked up on each of these valuation parameters.

• In terms of P/E ratio; consumer durables, realty, FMCG and healthcare are the most expensive, with P/E ratios in the range of 40X to 80X. To an extent, one can say that FMCG and consumer durables justify higher P/E ratio on brand value and moat; while healthcare has the IP moat. In the case of realty; and to a lesser extent metals, the problem is that the earnings growth has not kept pace with the pace at which the stock prices have rallied. That could create a problem for stocks in these sectors if the actual earnings do not live up to the rather aggressive growth projections. On the downside Oil & gas and PSU banks are still available at near-single digit valuations and this is despite the sharp rally in these sectors in the last one year.
• How do sectors stack up on price to book ratio or the P/BV ratio? The P/BV does a good job for financial services companies, where the book value to price ratio is a key parameter. IT also helps in businesses with long gestation. However, the results are almost in sync with the P/E rankings.
• Finally, Dividend yield is the rupee dividend paid out by the company as a ratio of its market cap. At a sectoral level, companies with high dividend yield are considered relatively undervalued. The Nifty has a dividend yield of 1.25%. In terms of sectors, some of the better picks are PSU banks at 2.27% DY, IT and 2.20%, and oil & gas at 2.14%. Dividends have grown sharply in the last couple of years, but have been slowing with reference to the price increase. That is evident in tapering of dividend yields overall.

The big question that investors need to ask is; if these are the themes that have done well, how will they do in the future. If you look at investing themes, they go through typical cycles. For example, private banks were the stars about 3-4 years back, but they lag today. Realty and PSU banks have emerged as key themes, something that was not thinkable about 3 years back. Defence is the best theme in the last 1 year. The list can go on. The trick is to play this shifting momentum. However, that is much easier said than done!