*When choosing sectors, bet on the dark horse* *Given that the sectors and stocks that lead each new bull market are quite different from the previous one, investors should cash in on outperformers and look for sectors that have not participated..*
Aarati Krishnan I t is the third time in a decade that the BSE Sensex has emulated the Great Indian rope trick; it has doubled in value from its trough. So, if you're looking to sell some stocks and lock into the outsized gains that you're sitting on today, which ones should they be? Going by history, stocks from consumer durables, fertilisers and construction should be first on your ‘sell' list. Analysis of the three bull markets of the past decade shows that it is the top performers of the bull market that go into a free fall when the inevitable correction sets in. Sector reshuffle Even if the Sensex does manage to rise again, phoenix-like, don't expect the same old sectors to take wing. Every new bull market over the past decade has been led by a new ‘theme' — a fresh set of sectors and stocks that didn't star in the previous rally. The leaders of the 1999-2000 boom — the media, software and telecom triad — weren't the star performers when the markets took off again in June 2006 (and went on to new highs in January 2008). That time the frontrunners were power, banks and steel. In the latest bull market, the top gainers have once again come from unexpected quarters — sectors such as consumer durables, fertilisers and construction. Analysis of how different sectors have behaved in the three separate bull markets since 2000 has many interesting lessons for investors; and here they are. We classified all NSE-listed stocks into key sector groups in order to arrive at our conclusions. Top gainers turn top losers Reckoned from its March low, the BSE Sensex is up 126 per cent in absolute value. The previous bull market from June 2006 to January 2008 saw the index rise 141 per cent; the dotcom boom from November 1998 to February 2000 took it up by 120 per cent. This fact, combined with the stiff-ish price-earnings multiple of 21 that the broader market trades at today, makes this a good time for investors to skim off some profits from their equity holdings. Now, having said that, where should investors look to take those profits? Probably in the stocks and sectors that made the maximum gains from March 2009. At last count, the top performers of this rally were consumer durables (up 325 per cent), fertilisers (up 242 per cent) and construction/infrastructure (up 237 per cent). In the event of a market fall, steel, auto and finance stocks may not get off too lightly either, given that these sectors sport gains of 178-222 per cent. It makes sense for investors to take profits in the top performing sectors simply because, going by history, the stock prices of these are likely to crumble the most in a correction. Remember the 2008 market meltdown? It is no coincidence that a majority of the stocks that crashed 90 per cent-plus came from the realty space. Stocks such as Unitech, BL Kashyap, Ganesh Housing and Ansal Housing lost over 90 per cent off their peak during the bear phase that lasted from January 2008 to March 2009. These were stocks that clocked 200-300 per cent gains in the preceding rally. Those who experienced the dotcom boom will recollect that the same pattern played out in the crash of 2000-01 too. Media, software and telecom stocks managed breathtaking gains, multiplying seven to thirty-fold between end-1998 and February 2000 on astronomic growth expectations from the ‘New Economy'. When rationality set in, it is these sectors that were mercilessly battered, they gave up over 90 per cent of their earlier gains. Even if the recent bull market has not seen excesses comparable to 1999-2000, the underlying lesson — that outperforming sectors are usually the most vulnerable to a correction — may still hold good. A combination of high valuations, heavy ownership by institutional investors and the human tendency to take profits ahead of losses, may suffice to ensure a repeat of this trend. New ‘defensives' All right; if the outperformers in a bull phase turn out to be the top losers during a fall, where should one look for the ‘defensive' stocks — ones that don't cave in during a market correction? Though investors automatically perceive sectors such as FMCG, pharma and software as ‘defensive' bets, flocking to these sectors may not deliver the best results this time round. That's because these sectors have participated rather actively in the 2009-10 rally, notching up gains of 115, 138 and 168 per cent respectively from March lows. With foreign and domestic institutions all hopping on to the consumer bandwagon, FMCG and pharma stocks today sport substantial institutional ownership, as well as premium valuations. It would also do well to remember that FMCG, pharma and IT stocks proved very poor ‘defensive' bets in the market meltdown of 2000-01; mainly because they were active participants in the preceding 2000 rally. Thus, the best place to scout for defensive picks after the market's breathtaking move, may be in the sectors that have remained mute spectators to this rally. However, for investors who would like to shield their portfolio against losses during a market fall, it is best not to place their bets too early. A study of the two previous boom-bust phases suggests that even sectors that don't participate actively in a rally may give in to market declines, though they may not suffer as much as the favourites. For instance, automobile stocks actually posted a decline in the 2006-2008 bull market; but they still suffered a 26 per cent decline in the crisis-induced crash of 2008. Software stocks were underperformers, with only a 34 per cent gain between 2006 and 2008; yet (thanks to their global linkages) they fell as much as 63 per cent when the corrective phase set in. Textile stocks lost twice as much in the crash as they gained in the rally. However, if there is a substantial market correction, the sectors worth looking at would be those which were underperformers not just over the past upcycle, but over the past two. Seen in this context, it is telecom (up 12 per cent), oil (61 per cent) and cement (63 per cent) that fit the bill as they have lagged far behind other sectors both in 2009-10 and 2006-2008. Realty stocks, after their steep falls of 2008 and muted returns in this rally, too may offer opportunities for selective buying. -- For Anything related with Stock market be Online at http://www.niftyviews.com/ Get free updates on your mobile phone. 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