Sunday, December 20, 2015

Sectorwise Expectations for the Indian Stock Markets – 2016

In the previous article, I had written about what to expect from the Stock Market as a whole in 2016. We talked about blue chips, mid-caps and small-caps. But, that’s just the broader picture. The Stock Market is comprised of stocks from various different sectors and not all of them perform similarly. Some sectors do well while some don’t.

As a continuation to the previous article, in this article we are going to review the sectorwise expectations from the Indian Stock Markets for 2016…

Before We Begin: As with any article on stock markets, let me start off by saying that there is no Guarantee that whatever you read in this article will happen in 2016. There is a chance the markets may behave totally opposite of what we expect. This is just an assessment based on my judgment of the markets and future prospects in 2016.

A Word of Clarification:

When I say outlook as Positive or Neutral or Negative to summarize a particular sector, it is basically in comparison with the broader index like Sensex or Nifty. As you may recall, overall I feel 2016 is going to be bullish which basically means sectors where the outlook is Positive may Outperform the Sensex while those where the outlook is Negative may Underperform. Those that are Neutral will more or less follow the Sensex.

The Automobile Sector – Slightly Positive

The Auto Sector was one of the good performers in 2015. In fact, the single biggest gainer of the BSE Sensex in the last 1 year – Maruti Suzuki is from the Auto sector. Though other Auto Manufacturers lost some ground in 2015, they did not lose as bad as other segments. India has a good public transportation system but it is still far from world class and is definitely not enough to meet the transportation demands of our growing population. The growth in Infrastructure and increasing roads in India coupled with the increasing purchasing power of our people is going to keep the demand for Automobiles strong in 2016.

With concerns about pollution and congestion in our roads, Auto Manufacturers will be forced to invest in more energy efficient vehicles that are more environment friendly. But, the general trend will be positive and will remain that way for months to come.

I think the Auto Sector will at least meet the broader Index benchmark like Sensex or most likely even beat it. Hence the Positive Outlook.

The Banking Sector – Neutral

Three of the 4 Major Banks that are part of the BSE Sensex ended up making losses with SBI and ICICI losing over 20% over the past 1 year. If we take the overall sector, majority of the Banking stocks are in Red from their peak in January 2015.

Though majority of the banking stocks have taken a beating, this has created interesting buying opportunities which Investors would be looking to take advantage of. With India’s growing population and need for Banking & Financial services, there is no way the banking stocks are going to make horrible losses in 2016. However, with increasing competition as well as bad loans that are plaguing most banks, the chances of them being classy outperformers are pretty slim.

Though some of the banks may outperform I think that the Banking sector will be more or less in line with the broader index benchmark like Sensex or maybe even be slightly lower. Hence the Neutral Outlook.

The Capital Goods Sector – Neutral to Slightly Negative

You may be wondering what I mean by Capital Goods. We are talking about companies from Engineering, Electrical, infrastructure and other related areas. For ex: Bharat Electricals, BHEL, Siemens, Crompton Greaves etc would constitute the Capital Goods Sector.

The last one year hasn’t been so great for companies in the Capital Goods Sector. In fact, over the past 3-5 years the stocks of the Capital Goods sector have been relatively flat and have mostly underperformed the broader indices like Sensex. With many of these stocks near their 52 week or lifetime lows, chances of consolidation and renewed buyer interest are quite high. Plus, with the governments emphasis on the India Growth Story, there is a chance that the fortunes of this sector may get revived this year.


Overall, I think the stocks in this sector are going to be most likely underperformers while some may try to meet the returns of Sensex. Hence the Neutral to Slightly Negative Outlook.

The Fast Moving Consumer Goods Sector – Positive

Fast Moving Consumer Goods (FMCG) refers to majority of the products we use every day. If you are struggling to visualize what constitutes FMCG, think of  Hindustan Unilever the well-known maker of majority of our day to day utility items. If you review the statistics for 2015, HUL was one of the strong performers where investors made gains of about 15%. On the other side of the spectrum, we can see that over the last 1 year, the stock prices of majority of the FMCG Players has relatively stayed flat and have gone down.

With our rising population, the demand for FMCG items is going to continue to remain strong. However, strong competition may impact the margins of the smaller players but companies that enjoy market dominance may continue to be profitable.

Overall, I think the stocks in this sector are going to be outperformers as against the broader index and hence the Positive Outlook.


The Information Technology Sector – Neutral

The IT Sector had been the dream investment option for the better part of a decade now with investors of IT Giants like Infosys, TCS, Wipro etc making handsome gains. However, the last year hasn’t been that noteworthy for this sector. If we review the stock price movements of the IT Co’s its evident that majority of them have either remained flat or have lost ground.

With rising competition and increasing costs in India, companies are now forced to expand into other locations like China and aggressively cut operating expenses to retain their profit margins. Also, the IT spending of the companies that avail these services are under immense pressure due to the uncertain economic outlook across the globe especially in US and Europe which constitute to almost 90% of their business.

The demand for IT Services is no doubt going to be steady but, the rising operational expenses especially the cost of retaining talent and the adjustment to the pricing structure to combat the heavy competition are going to heavily strain the profit margins. This in return is going to impact investor interest.

Overall, I think the stocks in this sector are going to perform more or less in line with the broader index, hence the Neutral Outlook.

The Metals & Mining Sector – Negative

The Metals & Mining Sector has been plagued by rising costs as well as immense competition from China. Almost all the stocks from this sector have ended up losing a lot of ground with some of them losing as much as 30-50% of their market value in the last 1 year.

With no major relief in sight, I think it is highly likely that stocks from this sector are going to continue to underperform, hence the Negative Outlook.

The Oil & Gas Sector – Neutral

Companies in this sector have been under tremendous pressure & spotlight due to falling crude oil prices and a weak rupee. The falling crude prices looked like great news for the refineries but the weak rupee and the reduction in prices by the central government kind of nullified the gains.

Though the state owned Indian Oil, Bharat Petroleum and HPCL have done pretty well, the Oil & Gas Sector as a whole has lost considerable ground in the past 1 year. The global crude price situation doesn’t seem to be improving much and nor does it look like the Rupee is going to get stronger.

Overall, I think that the stocks in this sector will more or less in line with the broader indices and hence the Neutral Outlook.

The Pharma & Healthcare Sector – Neutral to Slightly Negative

With India’s rising population and healthcare needs, this is one sector where companies that have a good pipeline of products and operating model are going to be profitable no matter what. This is very much evident from how the stocks in this sector have performed in the past year. While some companies have made double digit profits in terms of stock prices, some have made double digit losses while many have stayed relatively flat.

Over the past 3-4 years many of the Pharma stocks have given investors extravagant returns and we are potentially looking at stocks at their multi-year peak prices. This could potentially trigger some profit booking which could cause some kind of correction in prices.

However, the first sentence of this paragraph is very much true and hence I think the stocks in this sector will more or less be in line with the broader index with some of them facing correction. Hence the Neutral to Slightly Negative Outlook.

Some Last Words

As you can see from the sectorwise review, the outlook is mostly Neutral or Positive and in-line with the broader expectation of a decent bull-run in 2016. That being said, I want to reiterate that if a sector is classified as Positive or Negative that doesn’t mean that all stocks in the sector are going to outperform or underperform. A good stock in the negative outlook sector it could still outperform and a bad stock in the positive outlook sector could underperform. This outlook classification is by no means applicable to all stocks in a particular sector.

If you do your due diligence and choose good stocks, invest regularly and at attractive prices, your chances of making good profits are pretty good for 2016.

Happy Investing!!!




Disclaimer: This article is by no means a recommendation to buy or sell stocks of any particular company or sector. This is just the authors interpretation of the current market situation and outlook for the upcoming year. Stock Investments are subject to market risks and the chances of losing all or part of your investments are very real. The Author does not accept any liability arising out of stock buy or sell transactions done after reading this article.


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