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2022's best and worst performing sectors so far

Foreign institutional investors (FIIs) have been selling the most. But this is not a sudden change of heart. FIIs have been net sellers in India since October 2021 in response to the changing monetary policy stance of most global central banks, specifically the US Federal Reserve.Premium
Foreign institutional investors (FIIs) have been selling the most. But this is not a sudden change of heart. FIIs have been net sellers in India since October 2021 in response to the changing monetary policy stance of most global central banks, specifically the US Federal Reserve.

  • Find out which sectors bore the brunt of the massive sell-off in Indian equities and which rose despite it

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The Sensex is down 10.7% in 2022 whereas the Nifty is down 10%.

Expectations of an interest rate hike by the US Fed was plaguing the markets. Then the war between Russia and Ukraine accelerated the sell off.

Foreign institutional investors (FIIs) have been selling the most. But this is not a sudden change of heart. FIIs have been net sellers in India since October 2021 in response to the changing monetary policy stance of most global central banks, specifically the US Federal Reserve.

So, which are the sectors that have borne the brunt of the sell off?

Here are the top 3.

#1 Real Estate

India's real estate sector remained resilient during the pandemic as home prices remained stable aided by low interest rates.

However, as investors grew worried about the impact of rising interest rates, realty stocks tumbled. Higher interest rates would drive up mortgage rates, which in turn would dampen demand.

This would obviously not bode well for realty stocks. As a result, the BSE Realty Index fell by 19.5%.

However, this fall seems temporary as India's real estate sector is witnessing a healthy increase in demand. The momentum is expected to hold for the rest of the year.

From commercial spaces to the residential market, the overall market outlook is bright for the real estate industry.

#2 Healthcare

The second sector on our list is the BSE Healthcare sector.

The index is down 13.3% for the year as shares of healthcare and pharma companies fell after they reported a disappointing set of numbers for the December 2021 quarter.

The sell-off in pharma stocks was led by heavyweights, with Dr Reddy's Laboratories falling a massive 10.3% after its quarterly results failed to impress investors.

Weakness in Dr Reddy's also resulted in a massive liquidation in the shares of other pharmaceutical companies.

Going forward, the Indian pharmaceutical industry may experience a ripple effect of the ongoing Russia-Ukraine crisis as majority of domestic players have a strong presence in both the countries.

Pharmaceutical products constitute one of the main exports from India to Ukraine. India is in fact the third-largest exporter of pharmaceuticals to Ukraine, followed by Germany and France.

#3 Information Technology

The third sector that was impacted the most by the FII sell off in 2021 was the Information Technology sector.

The BSE IT index has fallen 11.8% during the year, underperforming the Sensex by a small margin.

IT stocks have been under pressure since the beginning of the year. This despite the fact that IT companies are on a hiring spree and are swamped with projects.

Cognizant plans to onboard 50,000 freshers from India in 2022, up from 33,000 in 2021. TCS has added 77,000 freshers in the first nine months of the financial year 2022.

The market, however, isn't liking such massive hiring numbers as this is impacting the profit margins of these companies (remember, salary growth in this sector has been unprecedented).

With respect to the Russia-Ukraine crisis, the Indian IT sector, which has more than 30-40% of its revenue coming from Europe, said that the crisis does not impact its operations in Europe.

Analysts have said that as there is no direct presence in Ukraine the crisis has not impacted them.

Now that you know which sectors have been battered, lets have a look at the sectors that did well during the sell off.

#1 Metals

Prices of multiple commodities soared to stratospheric highs during the year due to the sanctions being imposed on Russia.

Aluminium prices rose to all time highs while that of nickel is close to decadal highs.

As Russia produces 6% of the world's aluminium and 7% of the world's mined nickel, signs of already existing bottlenecks worsening have catapulted their prices.

Moreover, as investors sought save havens to protect their capital, gold prices escalated to a 13 month high.

The BSE Metal index rose 11.2% during the year. The index consists of companies such as Hindalco, Tata Steel, and Coal India.

According to market watchers, Russia is a commodity powerhouse and a net exporter of many. Any supply-side disruption in the country will boost prices of metals including aluminium, nickel, and steel, among others.

#2 Utilities

The second sector that witnessed buying was utilities.

Shares of utility companies witnessed investor appetite in 2022 as the market struggled to find its momentum.

As a result, the BSE Utilities index rose more than 9%.

The index includes power generation and distribution companies such as Tata Power, Power Grid Corporation, and JSW Energy. It also includes government owned natural gas corporation GAIL.

Utilities stocks are considered a safe bet. Going into a turbulent market like we are now, a lot of investors want safe stocks.

Utilities stocks can provide reliable dividend payments that make them safe income-generating investments for investors.

#3 Power

Following close on the heels of the utilities sector is the power sector. It has many companies in common with the utilities index such as Tata Power, Power Grid, and JSW Energy.

The BSE Power index is also up around 9% in 2022.

The power sector is gaining as power demand is improving.

Big reforms have already started such as the Revamped Distribution Sector Scheme and the Electricity Amendment Bill, which when passed, could be a big game-changer.

Electricity reform has been talked about for some time but the biggest challenge for the distribution sector is the effective implementation given that power is a government owned business.

The proposed Electricity Amendment Bill is aimed at reforming this. The bill seeks to de-license power distribution, reduce entry barriers for private players, which would ultimately enable consumers to choose from multiple providers.

What next for the market?

Going forward, a high inflationary environment is expected to continue, given the Ukraine Russia crisis. This could pose a short term challenge for many companies as high inflation can result in lower margins.

Volatility in the market is also expected to continue as interest rate hikes by the Fed in the coming months are expected to keep FII investors on edge.

While such corrections can cause panic, they also give a buying opportunity for long term investors.

This can be observed in the buying activities of Domestic Institutional Investors (DIIs), such as domestic insurance companies, mutual fund houses, pension funds, or provident funds, who absorb all the selling and push the market higher.

Investors must stay calm amid this storm and use this as an opportunity to invest in quality companies for the long term.

The prevailing geopolitical tensions will continue to take the centre stage and will be the major force guiding the direction of the market and sentiment of the investors globally.

How this pans out remains to be seen. Meanwhile, stay tuned for more updates from this space.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

(This article is syndicated from Equitymaster.com)

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