Essay On Sector Rotation

After few years of investing in the equity markets we develop certain beliefs. These beliefs might be based on something that we have experienced or something that we have heard or seen others experience.

I have one such belief.

I believe that within a 5 years time frame money is almost finite. It can be considered a closed system. To buy something, something else needs to be first sold. And this finite sum of money keeps going around. It goes around various asset classes. It goes around geographies. It goes around sectors. It goes around companies.

I need to sell shares of a company ABC to buy shares of a company XYZ. Domestic institutional investors need to be underweight on certain sectors to be overweight on certain other sectors. Foreign institutional investors need to “go short on developing markets” to “go long on developed markets”. High networth individuals need to sell their real-estate to buy a painting or gold or treasury bonds.

Sector rotation is a common topic amongst experts and amateurs alike. It is something that I have firmly believed in. But till today I had not bothered to check the facts. Today I decided to compare the performance of top 6 sectors for the period of last 5 years. (I was limited to 5 years as information about certain sectors was only available for that period)

Number (1 to 6) in the columns indicates the relative ranking of the sectors at that instance; based on how much your money would have grown if you would have invested in that sector’s index. For example if you would have invested 100 Rs in April 2012, then on 1st week of 2015 you
would have made most money if you would have invested in the Pharma sector and least money if you would have invested in Oil and Gas sector.

I suggest you observe the numbers and draw your own conclusions (do share them in the comments if you wish). Here are some of my observations:

  • Sector rotation is real. Money is flowing from one sector to another.
  • Cyclical nature of financial sector is clearly visible.
  • Oil and Gas seems to be doing great starting from 2016 to now only because it is coming from an extreme under performance during 2015.
  • Wealth destruction of the IT sector is clearly visible.
  • Spectacular wealth creation in the Auto sector is clearly visible.
  • Pharma looks weak main because it had 3+ years of amazing price appreciation.
  • FMCG is having this formation of good returns to bad to good returns.

If we total the points for each sector. We can sort the sectors from best to worst:

  • Pharma - 11 points
  • Financials - 17 points
  • IT - 20 points
  • Auto - 21 points
  • FMCG - 24 points
  • Oil and Gas - 33 points

And based on these observations here are my speculative conclusions/thoughts:

  • Financial should do well in next 12-18 months.
  • Can FMCG keeping improving the returns. Especially when we have GST being implemented this year?
  • Autos sector is at its peak and the risk reward upon investing in auto companies is not in our favor.
  • IT is currently giving the worst returns. Only way it can go is up! It is the best time to invest in IT?
  • Whatever people say about the Pharma sector currently, it has created tremendous wealth. Can it go from number 3 to 2 next year?
  • Oil and Gas sector can be avoided.
  • Even though I have not shown metals/mines and infra sector (as I can chart only 6 sectors at one shot) they perform worse than oil and gas and hence they can also be avoided.

And just for fun, on advise of a friend, I have added a column for 1st Week 2018. Will history repeat?


metals/mines may not underperform if commodity prices remain at these nominal levels. Stocks like MOIL, Coal India, NMDC, GMDC are still at cheaper valuation.Especially MOIL and Coal india can outperform in the next few yrs.

Oil and gas sector may perform better in coming years. This is my speculation.

Almost all the sectors are cyclical.
Question how to identify a turnaround in a sector.

The easiest way in my opinion is to monitor the OPM of selected companies esp the leaders in the sector.

I believe the stock of the leading company starts to rally first even when there are no clear signs of turnaround.

Macros are important.

A sector can have tailwind from govt policies. I believe the drilling sector has done well due to National seismic policy of the govt.

We have to monitor supply and demand for commodity companies and most of the companies fall in this category.

Technical analysis can help in determining a turnaround. I am not an expert on TA. still learning.

Its not easy. There are opportunity costs involved.

Generally If i am interested in a sector i prefer to monitor several companies their OPM and signs of debt reduction.

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All sectors are cyclical but some sectors are more cyclical than others!

(Thank you Animal Farm)

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Is there any site or link available where we can monitor any sector performance also the underlying stocks…like paper , reality ,plastic sector etc on a filtered and sorted condtn like 1M, 3M , 1Y basis… ?


You can check the website for sector analysis

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cant find such in the site …

We have two threads on cyclicals. Move the content there :