Back-testing: Cyclical Sectors that are likely to outperform in 2019

In the last three election years, the Nifty has always given strong returns and has exhibited a robust performance even seven months post the election phase with average returns of 26.67%.

Jan 18, 2019 06:01 IST IIFL Derivative Desk Raushan Kumar |

To get a sense of the sectors that are likely to outperform in this election year, we have considered historical data from 2004, 2009, and 2013, all of which were election years.
 
The table below displays sector returns in the last three election years.

Election Year Trend (Return in %)

Sectors 

Sector's Nature

Year 2004

Year 2009

Year 2014

5-Months Pre-Election

7-Months Post-Election

5-Months Pre-Election

7-Months Post-Election

5-Months Pre-Election

7-Months Post-Election

Nifty

Index

-8

22

26

43

13

15

Auto

Cyclical

-12

45

16

120

28

80

BFSI

Cyclical

0

46

5

70

20

43

Capital Goods

Cyclical

-12

67

6

89

23

44

Cement

Cyclical

-2

67

10

69

33

53

Infra

Cyclical

-8

63

37

112

38

28

Energy

Cyclical

-11

36

52

58

22

14

Metal

Cyclical

-25

77

34

124

17

-1

Power

Cyclical

-14

52

37

45

13

16

FMCG

Defensive

-5

51

38

82

7

27

IT

Defensive

-27

55

9

119

8

34

Pharma

Defensive

1

39

28

89

11

31

Consumer Discretionary

Defensive

-20

83

-5

106

20

36

History says...

  • In the last three election years, the Nifty has always given strong returns and has exhibited a robust performance even seven months post the election phase with average returns of 26.67%. 
  • During these seven months (post-election), all sectors outperformed and clocked double-digit gains.
  • During the three election years, pharma & BFSI remained positive, whereas auto, capital goods, construction, and infra relatively outperformed.
  • Among defensives, FMCG and pharma have relatively outperformed five months prior to elections. In contrast, consumer discretionary and IT have outperformed seven months post the elections.
 
Remarks

The markets behaved indecisively five months prior to elections, but during seven months after, all sectors outperformed and clocked double-digit gains. Our top recommendation is the FMCG sector and our top picks are Nestle, Britannia, Godrej Consumer Products, Berger Paints, Pidilite, Hindustan Unilever, Titan, and Marico. Use the Pair Strategy (buy outperformers and sell underperformers) in the derivatives segment for the cyclical sector through a derivatives expert.

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