Which sector to invest in jittery market?

Short term prospect of the Indian equity market appears to be jittery given slowing economic growth, stubborn inflation, declining rupee, high interest rate environment, political uncertainty in view of upcoming general election in 2014 and finally lack of interest from both foreign and domestic investors. This is the time investors should take a step back and assess market situation.

Some of the questions an investor should ask are: which sectors are yielding good return to investors and which sectors are least risky.  This article yearns to answer these questions. In this article, we shall take you to the world of different sectoral indices (IT, Pharma, FMCG, Media, Realty, etc) by Nifty and try to find out which sectors fares better in terms of return and risk in last one year.

Which Sectors ranks best in terms of risk and return?

We did number crunching on the last one year data of 10 sectoral indices and Nifty. All data is sourced from NSE website. Result is presented in the below chart:

Realty and Metal sector ranks worst, whereas FMCG and Pharma sectors ranks best in terms of risk and return. Media and IT sectors, although marginally more risky, have also done well as compared to Banking, Finance, Energy and Auto sectors. Overall, FMCG and Pharma sectors maintained their reputation of being a defensive play in challenging market environment while yielding best return to investors.

Which Sectors ranks best in terms of return per unit of risk vis-a-vis valuation (P/E and P/BV)?

Our next effort is to find which sectors looks relatively undervalued while offering best return per unit of risk.

There is no clear cut result from above chart. However, some key observations are:

• Pharma sectors looks attractive as compared to FMCG in terms of P/BV. However, story is slightly different in terns of P/E ratio wherein FMCG sector takes marginal lead.
• Pharma, FMCG and Media sectors commands huge premium valuation as compared to other sectors and Nifty.
• Realty sectors looks overvalued in terms of P/E given negative return in last one year.
• Bank and Energy sectors look relatively undervalued. However, both of these sectors are struggling with their own problems.

Conclusion

Sticking with the defensive sectors such as Pharma, FMCG and Media appears to be the best thing to do, amidst uncertain and challenging market environment. Investors may also find solace in IT sector given decline in rupee and relatively low valuation as compared to FMCG, Pharma and Media sectors. Auto sector may be avoided for the time being owing to steady decline in auto sales.