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

4 Oct 2024 , 10:19 AM

MACRO INDEX STORY FOR SEPTEMBER 2024

The month of September was an eventful for the markets. On the one hand, the Fed has cut rates by 50 bps which has been well received by the markets. FPI flows were robust in September 2024 overall. However, the month also saw the gradual build-up of geopolitical risk with Israel fighting a multi-pronged war with Iran and the other radical groups like the Hamas, Houthis, and the Hezbollah at the same time. Meanwhile, the NSE has just released the index-wise performance for key sectoral, generic, and strategy indices for the month of September 2024. It is not just an analysis of returns, but also of the various measures of risk as well as on the key valuation parameters. This is the sort of 360-degree view of sectors and themes; giving you the full picture of stock market performance in the month.

2024. Let us look at the broad generic indices first for the month of September 2024. In this case, the 1-month returns were dominated by the larger generic indices. For instance, the Nifty generated 2.28% in September, Nifty 100 gave 2.35%, Nifty 500 gave 2.17% while the Nifty Next 50 also gave 2.42%. The action was clearly favouring the large caps. Mid-caps at 1.6% was a laggard but the negative surprise in the month of September was the Nifty Small Cap Index, which contracted by -0.58% in the month. That was the only generic index in the negative. However, on a 1-year basis, the small cap index is still quite dominant with 51.6% returns, against just 33% for the Nifty 50.
2025. Let us quickly turn to how the thematic ideas performed for the month of September 2024. The two big star themes of the month were the India consumption theme at 6.2% and the Nifty MNC theme at 5.2% in September 2024. Among the other themes with healthy returns in the month of September 2024 were Nifty commodities at 3.6%, Nifty non-cyclical consumers at 4.7%, and Nifty Housing at 4.1%. There were also several themes that continued to drag the markets lower. Nifty India defence at -3.9% remained a drag while the Nifty CPSE at -1.9% was also a big drag. Among the business groups, the Mahindra group gave 5% in the month while Tata group contracted -2.1% in September, largely on the back of the sharp fall in TCS during the month.
2026. Let us turn to how the various strategy indices performed in the month of September 2024? For the second month in a row, it is the themes of quality and low volatility that appears to have emerged the winner in the market. Most of the alpha themes have underperformed in the market suggesting that in the volatile market, a simple low volatile theme worked much better than an aggressive approach to alpha generation. Also, many of the momentum themes have also struggled in September, largely on account of the periodic sector rotation and the change in themes due to the major global changes like US Fed dovishness, geopolitical risk in Middle East and West Asia etc. However, if you look at a 5-year perspective, it is still the momentum plus quality theme that appears to be faring quite well. This looks more like a temporary aberration.
2027. Finally, what about the performance of the various sectors in the month of September 2024? The big story in the month was the metals index gaining by 8.5%. That is not surprising considering that China has been heavily stimulating the economy through liquidity infusion and easier credit. China has long remained the biggest world market for metals and any revival in Chinese growth has immediate repercussions on the price of metals on the LME. Some of the consumer oriented stories did quite well with realty index offering 4.3% for the month, FMCG 3.9%, automobiles 3.3%, and financial services 3.6%. Among the laggards were oil & gas index contracting by -3.1% on the back of sharp volatility in global oil prices. PSU banks also contracted by -3.3% on valuation concerns. In addition, IT sector contracted by -2.0% on fears that the aggressive rate cuts may be indicative of a slowdown in the economy, which could trigger weaker IT demand and pressure on IT pricing.

Let us not focus on the sectoral picture of returns, risk, and valuation; updated for the month of September 2024.

• 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 September 30, 2024.

Sectoral Index	1-Year Returns	3-Year Returns	5-Year Returns
Nifty Realty	91.44	29.26	34.01
Nifty Auto	68.22	37.82	30.60
Nifty Oil & Gas	66.19	20.46	23.19
Nifty Healthcare Index	52.68	18.84	27.72
Nifty Pharma	51.97	18.10	26.19
Nifty Consumer Durables	51.52	17.85	22.13
Nifty Metal	49.91	23.81	35.13
Nifty non-Banks	37.23	14.80	18.24
Nifty IT	34.69	8.25	24.42
Nifty FMCG	29.45	19.60	18.06
Nifty PSU Bank	29.41	41.37	25.13
Nifty Financial Services	24.82	11.21	14.28
Nifty Bank	19.89	13.24	13.38
Nifty Private Bank	15.63	11.68	10.83
Nifty Media	-5.36	0.50	4.24

Data Source: NSE Indices

The table is a melee of numbers, but there are interesting takeaways. To begin with, the good news is that 1-year returns for all sectors (except media) continue to be positive.

• Despite the pressure due to the budget capital gains announcements, the Realty Sector continues to lead 1-year returns at 91.4% returns. That is not surprising, since most of the housing companies have shown overflowing order book positions and robust cash flows and September has been positive overall for housing companies. In addition, demand is coming from warehouses, competency centres, and data centres. Realty is a top performer even over a 5-year period.
• Let us now turn to the other big gainers on one-year returns? Auto at 68.2% and Oil & Gas at 66.2% returns are following closely. Oil was better placed, but has taken a hit in recent weeks due to crude price volatility. Auto has continued to do well on signs of improving rural demand. Two wheelers and tractors stand out in this space. Then there the defensives like healthcare with 52.3% returns in the last 1 year and consumer durables at 51.5%; which have been stars despite being defensive. Metals has risen in the ranks after the latest week with 1-year returns of 49.9%.
• What about the bottom of the heap? Media was the only sector that has given negative returns, largely on account of pressure on Zee Entertainment and Sun TV Networks. Banks have been under pressure, although they have still delivered over 15% returns in the year. There are expectations of a slowdown in credit and deposit growth and the delay in the RBI cutting rates is also weighing on the stocks. Even on a 5 year basis, it is the banking and financial stocks that are under pressure. The short term 3-month momentum has been very strong for defensives like healthcare, FMCG, consumer durables and the IT sector.
• There are some sectors that have shown an interesting short term recovery. Metals and consumer durables have shown strong traction in the last 1-3 months, as has healthcare. However, the short term traction has not been too favourable for IT stocks and oil & gas stocks which have delivered negative returns in the last one month. The global slowdown fears and the volatile West Asia are taking a toll on IT and oil respectively.

Sector rotation has been quite rampant in recent months, but defensives are still holding up smartly.

• 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	29.56	1.61	0.73	0.53
Nifty Media	29.07	1.06	0.48	0.23
Nifty Realty	27.07	1.33	0.65	0.43
Nifty Metal	25.35	1.46	0.77	0.59
Nifty Oil & Gas	24.33	1.41	0.77	0.59
Nifty IT	19.19	0.77	0.54	0.29
Nifty non-Banks	19.12	1.14	0.80	0.64
Nifty Auto	17.10	0.95	0.74	0.55
Nifty Bank	16.88	1.09	0.86	0.74
Nifty Private Bank	16.64	1.05	0.84	0.71
Nifty Financial Services	16.55	1.10	0.88	0.78
Nifty Consumer Durables	15.07	0.74	0.66	0.43
Nifty Pharma	13.87	0.49	0.47	0.22
Nifty Healthcare Index	13.83	0.50	0.48	0.23
Nifty FMCG	12.62	0.44	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.

• Once again, we will ignore media sector risk for now, due to its concentration of action in just a couple of stocks. 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. Over a longer timeframe like 1 year or 5 years, one can safely say that 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 negative returns despite highest volatility; making the risk-reward ratio unfavourable for PSU banks in the very short run. At the bottom, we have FMCG, healthcare, and consumer durables. While these lagged in longer period returns, they have delivered good medium term returns. Two sectors; IT and oil & Gas, which had pleased the market by compensating for higher risks, have faltered in the last one month.
• What about Beta; a highly popular measure of systematic risk. Higher the Beta above 1, more aggressive the sector in terms of returns and risk. The high beta sectors in the year were PSU Banks, metals, oil & gas, and realty. Despite a high beta, private banks and financial services performed moderately, while oil & gas faltered in the latest month. Only metals outperformed in the short run with high beta. The low beta sectors were, obviously, Pharma, FMCG, and consumer durables; with most of them delivering very attractive returns over 1 year, despite being defensive plays.
• 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. The financial services sector continues to have a very high R-Squared with Nifty, which is not surprising considering its weightage in the Nifty index. Adding healthcare and FMCG to the portfolio not only offers low risk and good returns, but also a low R-Squared, implying they can effectively hedge the portfolio risk of a diversified portfolio.

Once again, healthcare and FMCG are in a sweet spot. They are low on risk, low on beta, high on diversification benefits and have beaten the Nifty by a meat margin.

• SECTORAL INDICES AND THE VALUATION PLAY IN LAST 1 YEAR

Finally, we look at sectoral valuations on P/E, P/BV and dividend yield to identify the overpriced and underpriced sectors. The table ranks on P/E ratios as of September.

Sectoral Index	Price/Earnings (P/E Ratio)	Price / Book (P/BV)	Dividend Yield
Nifty Consumer Durables	92.60	13.85	0.34
Nifty Realty	57.09	6.25	0.35
Nifty FMCG	52.36	12.75	1.60
Nifty Healthcare Index	44.01	6.21	0.51
Nifty Pharma	38.79	5.65	0.58
Nifty IT	34.40	8.63	1.87
Nifty Metal	33.53	2.92	2.07
Nifty Auto	26.47	5.54	0.81
Nifty non-Banks	25.03	3.44	0.76
Nifty Financial Services	17.46	2.93	0.89
Nifty Private Bank	16.06	2.47	0.57
Nifty Bank	14.84	2.39	0.95
Nifty Oil & Gas	12.80	1.98	2.66
Nifty PSU Bank	8.20	1.30	2.20
Nifty Media	0.00	2.36	0.38

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 continues to be the most expensive with a P/E of 92.6X. Among other sectors with high P/E ratios; Realty and FMCG have P/E ratios in the range of 50X to 60X. Healthcare and IT are also among the high P/E segments at 30+, although we have to realistically factor in growth also. Higher P/E ratio of FMCG and consumer durables are attributed to brand value; while healthcare has IP advantage. However, high P/E may be tougher to justify for realty and metals; which are largely commodity and execution plans. At the lower end of the P/E spectrum, you have sectors like PSU banks in single digits, oil & gas at 12.8X and banks mellowed at 14.8X.
• How do sectors stack up on price to book ratio (P/BV) ratio? The P/BV does a good job for financial services companies, where the book value to price ratio is a key parameter. It also helps in businesses with long gestation. However, the results are almost matching with the P/E rankings.
• Dividend yield is the rupee dividend paid out by the company as a ratio of its market cap. At a sectoral level, companies with high dividend yield have automatic price support. The Nifty has a dividend yield of 1.16% as of September 30, 2024. In terms of sectors, some of the better picks are oil & gas with dividend yield at 2.66%, PSU Banks at 2.20%, Metals at 2.07%, and IT at 1.87%. Overall, companies have been a lot more liberal with dividends in recent years, although prices have also surged. Not surprisingly, the companies with high P/E like consumer durables and realty, also have the lowest dividend yield. That could be a concern for realty stocks going ahead.

What are the big trends we see. In fact, there are 3 trends visible. In terms of short term traction, metals have made a comeback, thanks to China stimulus, but defensives are still generating solid returns. In the banking space, the trade (long on PSU banks, short on private banks), appears to reversing now. Lastly, healthcare and FMCG are two sectors that offered high returns with low risk and high portfolio diversification benefits.