Markets were buoyed by expectations of a hike in interest rates by the US Fed. Then the war between Russia and Ukraine intensified the sell-off.
foreign institutional investors (FII) are the best selling. 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, especially the US Federal Reserve.
So, what 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 due to low interest rates.
However, as investors worried about the impact of rising interest rates, realty stocks declined. Higher interest rates will raise mortgage rates, which in turn will reduce demand.
This will certainly not bode well for realty stocks. As a result, the BSE Realty Index fell 19.5%.
However, this decline seems to be temporary as India’s real estate sector is witnessing good growth in demand. This momentum is expected to continue for the rest of the year.
From the commercial space to the residential market, the overall market outlook for the real estate industry is bright.
#2 Healthcare
The second sector in our list is BSE Healthcare Sector.
The index is down 13.3% for the year due to declines in healthcare and pharma companies after reporting disappointing numbers for the December 2021 quarter.
The sell-off in pharma stocks was led by heavyweights, with Dr Reddy’s Laboratories falling a whopping 10.3% as its quarterly results failed to impress investors.
Weakness in Dr Reddy’s also led to heavy liquidations in the shares of other pharmaceutical companies.
Going forward, the Indian pharmaceutical industry may experience a ripple effect of the current Russia-Ukraine crisis as most of the domestic players have a strong presence in both the countries.
Pharmaceutical products are one of the main exports from India to Ukraine. India is actually the third largest exporter of pharmaceuticals to Ukraine, followed by Germany and France.
#3 Information Technology
The third sector that was most affected by the FII sell-off in 2021 was the information technology sector.
The BSE IT index has fallen 11.8 per cent during the year, outperforming the Sensex by a marginal margin.
IT stocks have been under pressure since the beginning of the year. This is despite the fact that IT companies are on a hiring spree and are swamped with projects.
Cognizant plans to add 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.
However, the market is not liking the huge recruitment numbers as it is affecting the profit margins of these companies (remember, the salary growth in this sector has been phenomenal).
With regard to the Russia-Ukraine crisis, the Indian IT sector, whose more than 30-40% revenue comes from Europe, said that the crisis did not affect its operations in Europe.
Analysts have said that since there is no direct presence in Ukraine, the crisis has not affected them.
Now that you know which sectors suffered losses, let’s take a look at those sectors that performed well during the selloff.
#1 Metal
The sanctions imposed on Russia pushed the prices of many commodities to stratospheric highs during the year.
Aluminum prices hit an all-time high, while nickel prices near decade highs.
Since Russia produces 6% of the world’s aluminum and 7% of the world’s mined nickel, signs of worsening pre-existing constraints have driven up their prices.
Moreover, as investors looked for savings to protect their capital, gold prices hit a 13-month high.
The BSE Metal index rose 11.2 per cent during the year. The index includes companies like Hindalco, Tata Steel and Coal India.
According to market watchers, Russia is a commodity powerhouse and a net exporter of many. Any disruption in supply in the country will push up the prices of other metals including aluminium, nickel and steel.
#2 Utilities
The second sector that saw buying was that of utilities.
Shares of utility companies saw investor appetite in 2022 as the market struggled to find its momentum.
As a result, the BSE Utilities Index rose over 9%.
The index includes power generation and distribution companies such as Tata Power, Power Grid Corporation and JSW Energy. This includes state-owned natural gas corporation GAIL.
Utilities stocks are considered a safe bet. As we go into a turbulent market, a lot of investors want safe stocks.
Utilities stocks can provide reliable dividend payouts that make them safe income-generating investments for investors.
#3 Power
Following on the heels of the utility sector is the power sector. It has several companies in common with the utility index such as Tata Power, Power Grid and JSW Energy.
The BSE Power Index is also up nearly 9% in 2022.
With the improvement in the demand for electricity, the power sector is booming.
Major reforms have already begun such as the Revamped Distribution Area Scheme and the Electricity Amendment Bill, which could be a big game-changer if passed.
Power reform has been talked about for some time but the biggest challenge for the distribution sector is effective implementation as electricity is a state-owned business.
The proposed Electricity Amendment Bill aims to rectify this. The bill seeks to delicense electricity distribution, lowering entry barriers for private players, which ultimately enables consumers to choose from multiple providers.
What’s next for the market?
Going forward, a high inflationary environment is expected to continue in view of the Ukraine-Russia crisis. This can become a short-term challenge for many companies as higher inflation can result in lower margins.
Market volatility 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 may cause panic, they also present a buying opportunity for long-term investors.
This can be seen in the buying activities of domestic institutional investors (DIIs), such as domestic insurance companies, mutual fund houses, pension funds, or provident funds, all of which absorb sales and push the market higher.
Investors should remain calm amid this storm and use this as an opportunity Invest in quality companies for the long term.
The prevailing geopolitical tensions will continue to be central and will be the dominant force guiding the market direction and investor sentiment globally.
How it turns out remains to be seen. In the meantime, stay tuned for more updates from this area.
Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.
(This article is syndicated from) equitymaster.com,
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