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

8 Nov 2024 , 01:44 PM

STOCK MARKET BIG PICTURE FOR OCTOBER 2024

How did the Indian stock markets perform in October 2024, in terms of its specific generic, sectoral and thematic indices? Here is a quick dekko.

1. Let us look at broad generic indices for October 2024. In this case, the 1-month returns were negative across all generic indices. The Nifty fell -6.12% in October, Nifty 100 fell by -6.72%, and Nifty 500 fell by -6.35%. The Nifty Next-50 took a much bigger hit of -9.29% in October 2024. Among smaller indices only the small cap 100 salvaged some pride, falling just -3.00% in October. On a 1-year basis, the Nifty Next 50 and the Small Cap 50 are dominant at 59.92% and 55.74% respectively. All indices are positive over 1 year.
2. What about thematic indices in October 2024. The only 2 positive themes in October 2024 were the Nifty Capital Markets theme and the Nifty REITs / INVITs theme. All other thematic indices generated negative returns in October 2024. The worse performing themes in October 2024 in terms of returns were Mobility at -11.93%, Transport & Logistics at -11.80%, EV & New Age Automotive at -10.64%, Energy at -10.63%, Consumption at -10.49%, and MNCs at -10.27%. All business groups were down.
3. Let us turn to how strategy indices performed in October 2024? There was contraction visible across themes. However, the themes that held up with lower than expected contraction in October 2024 include the equal weight theme and the mid-small cap themes. Among the worst performance strategy indices in October 2024 were Alpha 30, Alpha Quality Low Volatility, Value 30, Quality Low Volatility etc. Clearly, most of the strategies were under pressure in October 2024.
4. Finally, what about the performance of the various sectors in the month of October 2024? The sectoral theme to contract the least was PSU Banks which fell just -0.46% in October 2024. Pharma at -2.34% and financials at -2.42% were better off. The worst hit were automobiles at -12.99%, oil & gas at -12.95%, Consumer Durables at -10.23%, and FMCG at -9.65% and Realty at -9.05%. These sectors took it on their chin.

HOW SECTORAL INDICES FARED ON RETURNS IN LAST 1 YEAR?

The table captures the returns on key sectors with ranking on 1-year returns.

Sectoral Index	1-Year Returns	3-Year Returns	5-Year Returns
Nifty Realty	66.22	26.49	30.47
Nifty Healthcare Index	56.80	19.61	25.73
Nifty Pharma	55.88	18.80	24.53
Nifty Oil & Gas	50.24	15.37	17.99
Nifty Auto	48.82	28.80	24.00
Nifty Metal	45.31	20.52	32.09
Nifty Consumer Durables	40.32	12.10	18.69
Nifty PSU Bank	37.28	35.22	22.82
Nifty IT	34.87	7.61	23.38
Nifty Non-Banks	29.35	12.34	15.45
Nifty Financial Services	25.63	9.34	12.87
Nifty Bank	21.21	10.51	12.00
Nifty FMCG	17.72	17.72	14.80
Nifty Private Bank	14.33	8.48	9.32
Nifty Media	-7.82	-3.00	3.18

Data Source: NSE Indices

There are some interesting takeaways. To begin with, the good news is that 1-year returns for all sectors (except media) continue to be positive.

• Realty Sector continues to lead 1-year returns at 66.22%; largely toned down in last one month. Realty at the top is not surprising, since housing companies have overflowing order book positions and robust cash flows. Fresh demand is coming from warehouses, competency centres, and data centres. Realty also leads over a 5-year period.
• Who were the other big gainers in 1-year returns. Healthcare at 56.8%, Pharma at 55.88%, and oil & gas at 50.24% are the leaders in terms of 1-year returns. Metals have also seen good traction in recent months on the back of China stimulus traction. 14 out of the 15 sectors have given double digit returns in the last 1 year.
• What about the bottom of the heap? Media was the only sector with negative returns, largely on account of pressure on Zee Entertainment and Sun TV Networks. Private Banks and FMCG are among the bottom performers in terms of 1 year returns. While private banks were hit by NIM concerns, FMCG took a hit on falling urban demand. The bias appears to be shifting towards the defensives.

HOW SECTORAL INDICES FARED ON RISK IN LAST 1 YEAR?

Returns just represent one side of the coin. A look at risk tells us if such returns have come at the cost of higher risk, or despite higher risk. Here is a ranking on volatility.

Sectoral Index	1-Year Volatility	1-Year Beta	1-Year Correlation	1-Year R2
Nifty PSU Bank	29.53	1.58	0.72	0.52
Nifty Media	29.27	1.05	0.48	0.23
Nifty Realty	27.46	1.35	0.66	0.44
Nifty Metal	25.51	1.44	0.76	0.57
Nifty Oil & Gas	24.62	1.42	0.77	0.60
Nifty IT	19.58	0.74	0.51	0.26
Nifty Non-Banks	19.32	1.16	0.80	0.64
Nifty Auto	18.00	0.99	0.74	0.55
Nifty Bank	17.26	1.10	0.86	0.73
Nifty Private Bank	17.06	1.06	0.84	0.70
Nifty Financial Services	16.87	1.10	0.88	0.77
Nifty Consumer Durables	15.65	0.78	0.67	0.45
Nifty Pharma	14.38	0.48	0.45	0.20
Nifty Healthcare Index	14.27	0.49	0.46	0.21
Nifty FMCG	13.36	0.46	0.46	0.21

Data Source: NSE Indices

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

• In terms of standard deviation of returns, the more aggressive plays were PSU banks, realty, and metals. Over a longer timeframe higher volatility has been compensated by higher returns. However, that is not true if you look at very recent performance, where PSU banks have given flat returns despite high volatility. FMCG and healthcare are lowest on volatility, with healthcare offering the best reward to risk trade-off.
• What about Beta; a highly popular measure of systematic risk? The high beta sectors in the year were PSU Banks, metals, oil & gas, and realty. In the recent 2-3 months, low beta names like healthcare and pharma have done very well. While FMCG, among low beta names, is plagued by demand factors, healthcare has been the big star.
• Finally, let us look at correlation and R-Squared; with the latter measuring how much of the returns are explained by the market and how much by individual factors. Not too surprisingly, financial services sector continues to have a very high R-Squared with Nifty. Adding healthcare to the portfolio not only offers low risk and good returns, but the low R-Squared also makes it a good diversification bet for investors.

SECTORAL INDICES AND THE VALUATION PLAY IN LAST 1 YEAR

Finally, we look at sectoral valuations ranked on P/E ratios as of October 2024.

Sectoral Index	Price/Earnings (P/E Ratio)	Price / Book (P/BV)	Dividend Yield
Nifty Consumer Durables	79.78	12.43	0.38
Nifty Realty	47.56	5.69	0.38
Nifty FMCG	46.99	11.52	1.79
Nifty Healthcare Index	42.43	6.08	0.52
Nifty Pharma	37.34	5.52	0.59
Nifty Metal	32.08	2.67	2.26
Nifty IT	31.99	8.32	2.10
Nifty Auto	23.11	4.82	0.93
Nifty Non-Banks	22.67	3.28	0.82
Nifty Financial Services	16.70	2.89	0.90
Nifty Private Bank	15.10	2.34	0.59
Nifty Bank	14.14	2.31	0.96
Nifty Oil & Gas	13.16	1.72	3.05
Nifty PSU Bank	7.80	1.30	2.21
Nifty Media	0.00	2.36	0.39

Data Source: NSE Indices

Here are key takeaways from the three valuation parameters.

• On P/E ratio; consumer durables remain the most expensive at 79.8X. Among other sectors with high P/E ratios; Realty, FMCG and healthcare have P/E ratios of over 40X. Overall Nifty P/E is at 22X, which is lot more reasonable. PSU Banks are at single-digit P/E levels while banks and oil & gas are also very low on the P/E ratio scale.
• How do sectors stack up on price to book ratio (P/BV) ratio? The results are almost corresponding with the P/E ranking, although P/BV is more suited to financials.
• What about dividend yield? The Nifty has a dividend yield of 1.27%. Better picks are oil at gas with dividend yield of 3.05%, metals 2.26%, PSU banks 2.21%, and IT at 2.10%. In the correction, a number of sectors have again started to look attractive on DY terms.

What are the big trends? Defensives like healthcare are generating solid returns with low risk and low correlation benefits. That is the real takeaway!