A closer look at past trends reveals that each market recovery has been led by different sectors, highlighting the importance of sectoral rotation in driving overall market performance.
The historical performance of BSE sectoral indices reveals a clear pattern of sectoral rotation, providing valuable insights for investors to strategically position their portfolios for the upcoming financial year. Understanding the cyclicality of different sectors can help investors make informed decisions while managing risks effectively.
The below chart shows financial year-wise sectoral returns of indices.
ETMarkets.com
ETMarkets.com(Source: Google Finance)
Understanding Sectoral Trends & Rotation
During periods of heightened volatility, the Banking and FMCG sectors act as defensive anchors, absorbing market pressure and mitigating downside risks. While these sectors may deliver moderate returns during rallies, they provide resilience during corrections. Notably, the Banking sector has not posted negative returns over the past five financial years, underscoring its stability.
Looking at historical patterns, the IT sector, which was a key outperformer between 2018 and 2022, has lagged in recent years. However, its cyclical nature suggests a potential recovery, positioning it for outperformance in the coming years. Meanwhile, Oil & Gas has made it to the top-performing sector list only twice since 2010, making it less predictable in terms of sustained leadership.
Cyclical sectors such as Auto, Realty, and Metals follow distinct performance patterns. The Realty sector, for instance, tends to alternate between extreme outperformance and significant declines. Data suggests that after a strong performance phase, Realty often delivers negative returns. Similarly, the metal sector exhibits a cyclical trend, typically trading as outperforming sector for two years, followed by a phase of underperformance over the subsequent two years. Given this cyclical pattern, the metals sector could continue its previous trend, demonstrating bullish outperformance.
Past data also indicates that the IPO index performs exceptionally well during bull markets, as investor sentiment fuels enthusiasm for newly listed companies. However, IPO stocks tend to be the first to decline when markets correct, making them more vulnerable to downturns. If the broader market rally continues, we may witness IPO stocks leading the next uptrend.
Meanwhile, Midcap and Smallcap indices consistently remain in the middle ranking of 4 to 9 performing segments, generating robust long-term returns. Midcaps, in particular, have demonstrated strong growth potential while exhibiting lower drawdowns compared to more aggressive sectoral indices.
Investment Discipline: The Key to Market Success
While historical trends offer valuable insights, it is important to recognize that markets do not follow an exact script. The market operates under a set of rules – those who understand and follow these rules stand the best chance of achieving sustainable and superior returns.
As we enter into a new financial year, investors must remain agile, diversified across defensive, cyclical, and high-growth sectors, and prepared to capitalize on emerging opportunities while managing risks prudently.
Here are the rules which we can call the “Rules of the Jungle (Market)” in order to generate higher returns.
- Markets always revert to the mean in the long run. Up moves will be followed by down moves and vice versa.
- Markets are dynamic. There isn’t a constant. So, be prepared for change.
- Never put all your eggs in one basket. But don’t over-diversify either. Keep a well-balanced yet concentrated portfolio.
- Unfortunately, there isn’t a one-size-fits-all rule for diversification or concentration. Find your own sweet spot.
- Don’t be overjoyed when markets are good. Don’t be sad when markets are not going your way. Remember: This too shall pass.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
