Invest wise with Expert advice

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

6 Jun 2024 , 12:51 PM

MACRO INDEX STORY FOR MAY 2024

NSE has just released the index-wise performance for key sectoral, generic, and strategy indices for the month of May 2024. 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. The big question in the minds of investors how did sectors rank on returns, risk, and valuation parameters in a particular period? Before we delve into sectors updated for May, here is a quick look at how generic indices did in May 2024.

For the month of April 2024, the one-month returns were dominated by the Nifty Next 50 Index at 4.11% and the Nifty Microcap Select at 2.72%. Nifty 50, the generic market benchmark, gave tepid returns of just about 0.03% for May 2024. The mid-caps did face some pressure, but it was the Small cap index that took a sharp hit. For May 2024, the Nifty Smallcap 100 index was down -1.82%.
Let us quickly turn to how the thematic ideas performed in May 2024. Defence was once again the undisputed leader with an astounding return of 23% on top of 16.5% returns in April 2024. It was followed closely by the MNC index at 5.54% and the Nifty CPSE index at 5.34%. The only business group index to give over 8% returns was the Mahindra group. On the downside, the Nifty Digital India index fell -1.82%, while among the business groups, the Tata group took a sharp hit in May 2024.
Let us turn to how the various strategy indices performed in the month of May 2024? There were 3 themes that generated around 5% returns in the month. These included the Nifty Midcap 150 Quality 50, Nifty Alpha 50, and Nifty 200 Momentum 30. These are diverse themes. Ironically, the growth sector theme and the low volatility theme gave negative returns in May, just as it did in April 2024.
Finally, what about the performance of the various sectors in the month of May 2024? The month was dominated by metals giving 5.97% returns as the bets on a revival in China as well as higher domestic demand boosted the fortunes of these stocks. Other sectors like autos and realty also did very well in May 2024 giving returns of over 4%. Pressure, in the form of negative returns in May 2024, was visible in financial services, oil & gas and the healthcare sector.

What we have looked at above is a very short term view to understand the swing factor in the month of May 2024. However, many 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 period. We shall break that up into 3 levels.

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 May 31, 2024.

Sectoral Index	1-Year Returns	3-Year Returns	5-Year Returns
Nifty Realty	113.75	45.22	29.66
Nifty PSU Bank	84.66	46.85	18.79
Nifty Auto	66.19	31.94	24.86
Nifty Metal	65.70	25.56	29.43
Nifty Oil & Gas	57.62	20.79	19.01
Nifty Pharma	49.43	11.03	18.27
Nifty Healthcare	44.64	12.70	20.33
Nifty Consumer Durables	35.39	17.53	17.77
Nifty non-Banks	29.89	13.40	12.18
Nifty IT	13.34	8.28	17.43
Nifty Financial Services	12.74	10.25	10.84
Nifty Bank	11.99	12.25	9.98
Nifty Private Bank	8.67	9.76	7.24
Nifty FMCG	7.29	17.45	14.47
Nifty Media	6.93	2.71	-2.43

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 113.75% returns. Housing demand is robust as is evident in the spike in home registrations and the quick winding down of inventory. At the same time, the growth of ecommerce and AI is creating demand for warehouses and data centres. Most of the realty companies in India have been showing record bookings and record collections in the last few quarters, even as many of these realty players are also cutting down on debt.
Let us now turn to the other big gainers and losers on one-year returns? PSU Banks are an obvious choice with 84.66% returns, but others like Auto at 66.19%, Metals at 65.70%, Oil & Gas at 57.62%, and Pharma at 49.43% have done well too. In fact, 9 out of the 15 sectors have delivered better than Nifty returns of 23.02% over last 1 year. 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 HDFC Bank performance and Kotak Bank in recent months. Most of the large FMCG players have taken a hit on account of weak rural demand and rising crude prices. IT sector continues to reel under high frequency pressure and has also been a laggard.
Does the picture change if you look at 5-year returns? The top performing sector in terms of 5-year returns are Realty, Metals, Autos, Healthcare and PSU Banks in that order. Private banks continues to be the only theme (other than media) that has given single digit CAGR returns over last 5 years, despite the interim rally in these banks.

The markets are betting big on themes that are likely to sync with the growth of India Inc, which explains why realty, defence, PSU banks and metals stand out so sharply.

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 Media	27.59	0.98	0.36	0.13
Nifty PSU Bank	24.48	1.32	0.54	0.30
Nifty Realty	22.65	1.20	0.54	0.29
Nifty Metal	20.74	1.36	0.66	0.44
Nifty Oil & Gas	18.28	1.25	0.69	0.48
Nifty IT	17.98	0.98	0.55	0.30
Nifty non-Banks	14.74	0.98	0.67	0.46
Nifty Auto	14.14	0.90	0.64	0.41
Nifty Healthcare	13.66	0.58	0.43	0.18
Nifty Pharma	13.61	0.56	0.42	0.17
Nifty Private Bank	13.16	1.05	0.81	0.66
Nifty Bank	12.92	1.04	0.82	0.67
Nifty Consumer Durables	12.89	0.76	0.59	0.35
Nifty Financial Services	12.38	1.03	0.84	0.70
Nifty FMCG	11.65	0.67	0.58	0.34

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.

While media ranks on top, we will discount it from our analysis due to the entire sector being overly dependent 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, Consumer Durables and surprisingly, financial services. The low volatility for the financial services has come largely from the insurance players.
What about Beta; a highly popular measure of systematic risk, or that portion of risk that cannot be diversified away? Higher the Beta above 1, more aggressive the sector in terms of returns and risk. The high beta sectors in the year were metals, PSU Banks, realty, 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; all of which are defensives with beta of less than 1.
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, Realty, PSU Banks and FMCG offer the best diversification benefits on a Nifty portfolio. It is interesting that PSU banks and realty have not only given high returns, but also offer true-blue diversification benefits to the investor portfolio due to their low correlations.

PSU banks, in the last 1 year, not only emerged as an interesting high returns play; but also, a good diversification story; and the same is true about realty too.

SECTORAL INDICES AND THE VALUATION PLAY IN LAST 1 YEAR

Here, we 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	77.33	10.90	0.41
Nifty Realty	63.89	6.44	0.24
Nifty FMCG	43.73	10.92	1.19
Nifty Healthcare	38.58	5.63	0.58
Nifty Pharma	34.15	5.16	0.65
Nifty Metal	33.45	2.84	1.35
Nifty IT	27.19	6.97	2.92
Nifty Auto	22.68	6.06	0.86
Nifty non-Banks	21.60	3.25	0.86
Nifty Financial Services	16.24	3.39	0.93
Nifty Private Bank	15.35	2.75	0.71
Nifty Bank	14.97	2.89	0.88
Nifty PSU Bank	9.60	1.71	1.55
Nifty Oil & Gas	9.51	2.10	2.28
Nifty Media	0.00	1.95	0.44

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 38X to 77X. FMCG and consumer durables justify higher P/E ratio based on brand value and entry barriers; while healthcare can explain on intellectual property (IP). The case with realty is slightly more complicated and it is more because high valuations are hard to justify for realty companies even if you factor in demand growth. Realty seems to be a case of earnings struggling to keep pace with the optimism generated by prices. On the downside Oil & gas and PSU banks are still available at near-single digit valuations and the sharp correction in the last week of May could be one of the factors.
How do sectors stack up on price to book ratio or the P/BV ratio? Before we proceed, the P/BV is not applicable in all cases. For example, companies with intangible assets like brands or IP cannot use P/BV too effectively. However, the P/BV does a good job for financial services companies, where the book value to price ratio is a key parameter, and is also popularly used to compare valuations. P/BV can also be a good measure for long gestation businesses like telecom, internet, and green energy; where it takes time for the sales to translate into actual profits.
Let us finally look at an important valuation parameter; Dividend yield; It refers to the rupee dividend paid out by the company as a ratio of its market cap or you can call it the DPS/CMP ratio. At a sectoral level, companies with high dividend yield are considered relatively undervalued. The Nifty has a dividend yield of 1.28%. In terms of sectors, there is IT sector at 2.92% and oil & gas at 2.27%. Several sectors like metals, PSU banks and FMCG have dropped out of this ranking either due to prices rallying too sharply or dividend payouts coming down in FY24. This has made metal stocks and PSU banking stocks less attractive in terms of dividend yield. IT is seeing dividend yields of close to 3% for the first time, but it could also be an indication that the sector does not have too many investment and growth opportunities so it is rewarding shareholders with high dividend payouts. That may not be too positive for future valuation profile of IT.

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. Themes go through cycles. For example, private banks were the starts 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. The trick is to play this shifting momentum. Th

Related Tags