I remember back in 2012, the stock market had been reduced to literally 10 stocks. The question often was when to buy one of those 10, and when to sell. Most of those stocks were from the so called defensive sectors – FMCG and Pharmaceuticals, may be automobiles and IT to a certain extent.
Continued revival in the global economy and the policy decisions taken by the Government of India has set the ground for a long lasting bull market in India. Of course, in hindsight it is always easy to say something like – “Of course financials had to outperform, that’s the first sector to pick up at the beginning of any bull run” or that – “Sector X was so beaten down back then that it could only go up”. In this article, I will try to list sectors which will outperform and lead the market in the next Bull Run. As with any other analysis, anywhere published, one part of this article is based on research and the other – on prediction i.e. opinion.
Some of the sectors which were hit hardest in the recession will at some point start yielding returns. This may happen in the next 3-4 quarters or may be in a bit longer. But am I ready to buy real estate companies? – may be not right now.
Sectors which will outperform- 2015-2016
1. Financial Services
Banking and financial services reflect the state of the economy. Their shares are the first to rise when growth in the economy picks up. Shares of some of the banking companies like HDFC Bank, Kotak Mahindra, Axis Bank, ICICI Bank and Federal Bank touched their all time highs in Nov-Dec 2014. This indicates a beginning of the next economic cycle.
|Company||22 Dec 2013||22 Sep 2014||22 Dec 2014||Yearly return (%)||3 months return (%)|
|Kotak Mahindra Bank||731.75||1044.20||1257.45||71.84%||20.42%|
* Prices in Rs.
This trend will most certainly continue as the economy revives and as investment opportunities for both corporate and individual clients grows. Demand for loans/credit will increase. Favorable economic indicators like falling commodity prices – especially crude, declining fiscal and current deficit and falling inflation will lead to a fall in interest rates. Further, the big story here will be financial services more than banking companies. In the banking space – stick with private sectors banks – while no public sector bank will go bankrupt and having accounts in those banks is safe – shareholders in PSU banks will continue to suffer.
- Automobile Sector
An expected fall in interest rates in the coming quarters and declining fuel prices are expected to create a favorable environment for growth in the automobile sector. The BSE Auto index rose 50.33% to 18,618.79, for the one year period ending 23 December 2014.
As other sectors of the economy like infrastructure and cement revive, there will be a recovery in demand for commercial vehicles. Infrastructure sector is the chief demand driver for commercial vehicle sales. Construction of roads, bridges, buildings etc require equipment materials like cement to be transported to construction sites. At the peak of this activity in 2008, there was an oversupply of commercial vehicles in the system. As this fleet now starts getting older and the activity beginning to pick up, sale of heavy transportation vehicles like trucks will get a big boost.
Further, given the improving consumer sentiments on the back of an improved economic outlook, the passenger vehicle segment is poised to post double-digit growth over the next two years. According to The Society of Indian Automobile Manufacturers (SIAM), 5-10% growth is expected in passenger car sales in FY 2015. All these factors are likely to advance share prices of automobile companies. This however is a sector where valuations have run up very quickly for some of the companies. What is needed is – Extremely careful stock selection. Big story – look also at auto ancillary companies.
- Pharma Sector: Pharma Sector is also expected to outperform in the next bull market run. Indian Pharma companies including Torrent Pharmaceuticals, Glenmark Pharmaceuticals, Cadila Healthcare, Aurobindo Pharma, Ranbaxy Laboratories, Sun Pharmaceuticals and Lupin, all are expected to perform well due to growth in the US generic market. Other factors which will drive growth in this sector are the generic injectables, dermatology, controlled substances and oral contraceptives. This is a sector where we expect a lot more M&A activity, particularly given the huge cash reserves on the books of some of these companies.
Dark Horses – Highest Returns in % terms likely from ‘well placed companies’ belonging to these sectors.
Oil and Gas Sector: with crude oil trading at multi-year lows, all oil exploration companies have taken a beating. Some of the companies in this sector are clearly oversold, while others have invested heavily in their efforts to find new oil fields. However, a meaningful impact on their share price would require crude oil prices to bounce back to higher levels. In June 2014, Brent crude was trading at US $115 per barrel. By mid-December, it had fallen nearly half to US $59 per barrel.
In past many decades we have seen that crude oil prices rise up just as sharply as they fall. The 2008 crash and recovery of crude oil is the perfect case in point. Despite a complete collapse of the global economic system, crude oil bounced back to its pre-crash levels almost immediately – in 25 trading sessions to be precise.
Companies like Cairn India and ONGC have strong fundamentals and are available at attractive valuations. These companies have the potential to provide attractive returns to investors over the next couple of years.
Infrastructure Sector: The Government of India is focusing to build high class infrastructure in the country and has allotted Rs. 40.9 trillion in the Twelfth Five Year Plan (2012-17) towards this. The new government proposal to build new cities in India is an attractive growth driver for this sector.
Similarly, Real Estate Sector looks promising but requires a ‘very’ selective approach as there are many companies in the sector which have (i) too much debt, (ii) are heavily exposed to the high end luxury housing market, which is on the decline; and (iii) lack growth visibility.
Power Sector: This sector faces major structural problems like shortage of coal, shortage of funds with the electricity boards, and lack of distribution reforms. For things to improve in this sector, the government has to first sort out issues related to fuel supply and more importantly losses of state electricity boards, may be better fund these boards. India’s need for energy will continue to grow at faster rates as is the case for any developing country, which indicates the sector’s potential.
Defensive bets like FMCG and Information Technology (IT) sector were instrumental in driving the market for 2-3 years. In a large part, these sectors cushioned the fall of other sectors and helped the Sensex sustain its 19-21K range between – 2009-2013. In the next bull market, sectors which will outperform are not likely to come from these defensive bets. By definition, a new bull market has to be driven by a new list of stocks/sectors, not the old ones. If the same ones are still driving the market, you can conclude that you are seeing a continuation of trends and not the beginning of a new bull market.
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