Breakdown on sectors impacting the overall markets in November

November was always supposed to be a tumultuous month for markets considering US elections and Fed rate outlook. However, the demonetization drive actually spooked the Nifty. Of course, FII selling also played its part in depressing prices during the month. Here is a low-down on sectors impacting the overall markets in November….

Midcaps underperform large caps…

In the first 25 days of November, the Nifty was down by (-7.95%) but the mid-cap index was down by (-13.53%). In fact, mid-caps may have lost most of the advantage over large caps that they had built up since 2015. The bigger hit to mid-caps was hardly surprising. Banking, which forms a chunk of the Nifty, was helped by the positive performance of PSU banks. Mid-caps, on the other hand, were hit badly by the liquidity squeeze, especially in case of companies operating in more vulnerable sectors of the economy.

Consumption gets hit…

Two sectors that embody the India consumption story viz. FMCG and auto were the rank underperformers during the month. FMCG was down by (-7.8%) while auto stocks were down (-13.3%). Already auto dealers across India are seeing sharply lower footfalls. The problem with most consumption stocks was also the premium valuations that they commanded. This made them all the more vulnerable to sharp corrections as compared to other sectors as was evidenced in the case of Maruti.

Why private banks faltered…

For the banking sector, it was an ironic month. PSU banks actually gave positive returns in November, but private sector banks gave negative returns of (-8.5%). Why this anomaly? Firstly, private banks are unlikely to benefit from the surge in CASA deposits. Secondly, their exposure to retail portfolio is quite high and that is the most vulnerable currently due to lower purchasing power. Lastly, interest rates are headed sharply down with surplus liquidity in the banking system. That will mean the net interest margins (NIM) of private banks will be sharply squeezed, eroding their advantage!

Big “NO” to cash transactions…

Since jewelry stocks are too few, there is really no representative index. But real estate index was down by a whopping (-24.2%) during November. The squeeze on cash transactions really curbed cash payments and holding of benami real estate assets. With realty inventories in India already at an all-time high, this squeeze could only make it worse. Estimates are pegging the likely correction in real estate prices at 30% but it will largely depend on how low sellers are willing to go. Realty could be one sector that could see the deepest impact of the cash squeeze!

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