How the sectoral indices performed in September 2023?

19 Oct 2023 , 10:13 AM

The NSE has released the index wise performance for its key sectoral indices and other generic indices for the month of September, across different time periods. This analysis by NSE is comprehensive as it not only covers returns across different time periods, but also some aspects of risk measurement and of valuations. 

Sectoral indices on the NSE offer a unique way to look at the performance of sectors through the lens of various sector indices. The interesting part of this analysis provided by NSE each month is that it not only looks at returns but also at risk through the lens of key metrics like correlation, variance, and Beta. It also looks at some very critical valuation parameters like the highly popular P/E ratio, the price to book ratio and dividend  yield.

Returns, risk, and valuations

The Nifty only gives a macro picture of the market overall, but does not provide insights into aspects like which sectors generated the best returns; which sectors were the most risky and which sectors are the most attractively valued. That is what has been captured by the NSE here. It looks at returns over time frames as well as systematic and unsystematic aspects of risk. In addition, it also gives a comparative view of how the valuation parameter stack up for various sectoral indices.

Quite often, in the rush for the momentum sectors, we ignore the fact that some unfancied sectors have been the best performers over a longer term perspective. That is why the return rankings also capture the compounded annual growth rate (CAGR) returns for various sectoral indices across a 3-year period and a 5-year period. Here is a quick take on the sectoral indices as of the close of September 2023.

How the sectoral indices fared on returns?

The table below captures the key sectors and the returns they have generated across different time frames. The table is ranked on 5-year CAGR returns since short term returns can often be misleading in the case of equities.

Sectoral  Index	1-Year  Returns	3-Year  Returns	5-Year  Returns
Nifty Realty	36.25	39.97	21.75
Nifty Consumer	7.01	23.27	19.23
Nifty IT	19.87	18.99	17.20
Nifty Metal	18.97	47.67	16.59
Nifty PSU Bank	76.87	62.07	15.03
Nifty Non-Banks	25.55	25.00	14.12
Nifty Fin Services	14.21	24.04	14.09
Nifty FMCG	17.73	22.34	13.45
Nifty Bank	16.38	28.47	12.71
Nifty Auto	28.42	28.25	12.36
Nifty Healthcare	19.27	12.50	12.17
Nifty Oil & Gas	3.85	19.33	11.87
Nifty Private Bank	16.76	25.74	10.79
Nifty Pharma	19.91	10.27	9.94
Nifty Media	10.31	14.30	-0.68

Data Source: NSE

The table may look like a jumble of numbers, but there are some interesting takeaways in these numbers.

• If you take a 5-year perspective, Realty has been the top performing sector with an impressive 21.75% CAGR return over 5 years. The other leaders in terms of 5-year CAGR returns are Consumer Durables at 19.23% and Metals at 16.59%. The combination of a consumer story and metals demand appears to have played out over 5 years.

   

• There is only one sector with negative returns over a 5 year period and that is Media. However, this can be misleading since Zee dominates this space and it has been under a lot of pressure in the last few years. Other than that Pharma (despite the COVID boost) generated only 9.94% CAGR over 5 years and private banks gave only 10.79% CAGR returns in the five year period.

   

• How do sectors stack up in terms of 3 year returns. PSU banks lead the fray with 62.07% CAGR returns over 3 years and it is followed by metals and realty. The story of PSU banks has been one of turnaround in asset quality and net interest margins and SBI has led the way. However, the sectors that lagged on 3 year returns include healthcare, media, and the IT sector.

   

• One can argue that 1-year returns may not be too reflective, being a short term story. However, it is still essential for completeness. Here PSU Banks, realty and auto have been the leaders in terms of 1 year returns while oil & gas, consumer durables and media have been the laggards. 

What do we care from the returns analysis of sectoral indices as of September 2023? Realty appears to be the star with outperformance across various time frames while media and healthcare have struggled generally. The big surprise package in the last 3 years has been the PSU banks.

How the sectoral indices fared on risk parameters?

Looking at returns without looking at risk is like looking at the upsides without looking at the downsides. That is a slightly risky approach. Here we look at risk on 3 counts. Volatility is the extent to which the sector returns fluctuate. Beta captures the extent to which the sector is linked to the overall index movements. Finally, correlation shows how much of the performance of the sector is explained purely by macro factors.

Sectoral  Index	1-Year  Volatility	1-Year  Beta	1-Year  Correlation
Nifty PSU Bank	27.57	1.46	0.54
Nifty Metal	22.79	1.39	0.62
Nifty Media	21.74	0.93	0.43
Nifty Realty	19.48	1.02	0.53
Nifty IT	18.01	1.15	0.65
Nifty Oil & Gas	14.98	0.94	0.63
Nifty Non-Banks	13.46	1.04	0.79
Nifty Auto	13.18	0.79	0.61
Nifty Private Bank	12.99	1.06	0.83
Nifty Bank	12.96	1.07	0.84
Nifty Fin Services	12.29	1.06	0.88
Nifty Healthcare	12.02	0.43	0.36
Nifty Pharma	12.01	0.39	0.33
Nifty FMCG	11.45	0.61	0.54
Nifty Consumer	11.16	0.61	0.55

Data Source: NSE

We will not get into the nuances of risk adjusted returns but focus on looking at sectors based on the various risk parameters. Here are the key takeaways.

• Volatility is measured by the standard deviation of returns and measures the extent to which the returns vary from the mean returns. Volatility is the most popular measure of risk. In terms of 1 year volatility measurement, PSU banks, metals and realty have shown the highest degree of volatility. All 3 sectors are also among the return leaders, so these returns have come at the cost of higher risk. In terms of low volatility, you have sectors like consumer durables, FMCG and healthcare; which is quite obvious.

   

• Another way to look at risk is the Beta. While volatility, discussed above, measures the overall risk, the Beta measures the systematic risk that cannot be diversified away. The argument is that the market will only compensate for systematic risk since that cannot be diversified by shifting your portfolio The sectors with the highest Beta are PSU banks at 1.46. metals at 1.39 and IT and 1.15. These are highly aggressive sectors and a beta of 1.46 means that for every 1% move in the Nifty either way, the PSU Bank index moves 1.46%. On the downside, the lowest Beta are healthcare at 0.43, FMCG at 0.61 and Autos at 0.79. These are substantially less vulnerable to the Nifty moves and while others are expected, auto being low beta is rather surprising.

   

• We finally move to correlation of the sector with the Nifty or how much of the returns are explained by market factors. The financial services sector overall has a very high correlation with the Nifty while healthcare, realty and FMCG have he lowest correlation. That means a lot of returns on financial services is explained by the macro factors while it is a lot more sector specific in case of healthcare, realty and FMCG.

PSU banks and metals have been virtual proxies for the Nifty while a number of sectors are largely divorced from the Nifty moves. The investment strategy would be to focus on sectors with low correlation and high level of CAGR returns. That would be alpha candidates.

How the sectoral indices stacked up on valuations 

Finally, we look at how the sectoral indices stack upon valuations. Obviously, the P/E ratio is the most popular and we cannot miss that out. However, P/BV has a lot of importance for banks and other sectors that are either in losses or have long gestation periods. Dividend yield is normally more useful at a macro market level but they can give good insights when combined with the P/E ratio and the P/BV ratio.

Sectoral Index	Price/Earnings  (P/E Ratio)	Price / Book  (P/BV)	Dividend  Yield
Nifty Consumer	63.30	9.23	0.45
Nifty Realty	47.68	3.66	0.35
Nifty FMCG	42.64	10.77	1.86
Nifty Healthcare	36.75	4.63	0.68
Nifty Pharma	32.55	4.20	0.85
Nifty IT	26.74	6.93	2.51
Nifty Auto	25.61	4.61	1.04
Nifty Metal	24.88	2.06	3.11
Nifty Non-Banks	20.19	3.29	1.03
Nifty Fin Services	18.46	3.09	0.83
Nifty Private Bank	18.38	2.64	0.65
Nifty Bank	16.39	2.59	0.83
Nifty Oil & Gas	8.91	1.44	2.40
Nifty PSU Bank	8.01	1.20	2.04
Nifty Media	0.00	2.44	0.39

Data Source: NSE

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

• What are the most expensive by P/E ratio. Consumer durables are at the top with an average P/E ratio of 63.30X; followed by Realty at 47.68X and FMCG at 42.64X. FMCG and consumer durables have traditionally commanded high P/E ratios on non-cyclical earnings, although FMCG has a longer history of holding such valuations. Realty may be seeing concerns as the really has been much sharper than the earnings growth in the last few years. In terms of low valuations, PSU banks continue to trade at a P/E ratio of 8.01X while oil trades at 8.91X. However, both these sectors have traditionally commanded low valuations in the market and single digit P/E ratio has been the norm.

   

• We now move to rankings on P/BV and here again it is the likes of FMCG, consumer goods, IT and healthcare that trade at very high levels of P/BV. However, this ratio is most relevant to banks and that is where the dichotomy is the maximum. For instance, NBFCs are trading at P/BV of over 3.2X while private banks are trading at 2.64X price to book. In comparison (despite the sharp rally in the last couple of years), the PSU bank index is still very reasonably priced at just 1.20X price to book.

   

• We finally turn to dividend yield which is arrived at by dividing the rupee dividend by the stock price. Metals, IT, oil & gas, and PSU banks are offering the best dividend yields as a sector. IT has seen a spike in dividend yield in recent years as companies are now more inclined towards more generous distribution. In the case of oil & gas, it is more due to government pressure on PSU oil companies to pay out larger dividends. Let us now turn to the sectors with the lowest dividend yields. Realty, consumer durables and private banks are at the bottom of the heap. Clearly, in these cases, the price run up has been disproportionate with what the company distributes to its shareholders and that calls for caution on the part of investors.

We leave with some final thoughts on the overall ranking of sectoral funds. PSU banks and metals have done well in terms of returns, but also have valuations in their favour. However, valuations may be a concern for sectors like private banks and realty, which appear to have run ahead of valuations. But then, as Keynes said, “Markets have the capacity to stay irrational, for much longer than you can stay solvent.”