Sectors that drove the Nifty in fiscal year 2016-17

The fiscal year 2016-17 has just concluded and the year was marked by a sharp rise in the Nifty. The markets bottomed on budget day on February 29th 2016 and rallied sharply from those levels. On the positive side, the markets were surely impressed by the Union Budgets maintaining fiscal discipline despite higher infrastructure investment and rural spending. This was viewed positively by the global investors and the rating agencies. Secondly, the BJP coming to power in key states like UP, Goa, Uttarakhand and Manipur was also a reiteration of the reforms process and is a kind of assurance that the government is unlikely to tilt towards populism.

There have also been challenges during the fiscal year. Firstly, demonetisation was a major challenge in terms of liquidity and domestic spending power. However, that seems to have been addressed by the rapid remonetization post January. Secondly, there are worries that Trump may follow an isolationist policy and that is not great news for IT and pharma which are still largely US-centric.

How the Nifty performed during the fiscal year 2016-17…

For the full year 2016-17, the Nifty gave a point-to-point return of 18.94% and has been one of the best years in the recent past. This is all the more commendable since there were few triggers for this outperformance either domestically or globally. The Nifty outperformance was largely driven by heavy weight sectors like banking and oil and was ably supported by sectors like auto and FMCG. While metals were the real outperformers during the fiscal, they do not have a very substantial weight in the overall index.

How banking contributed to the rise in Nifty…

In a year when there were major doubts raised over the banking sector, it was a clear outperformer. With a weightage of over 30% in the Nifty, banking was the clear driver of the Nifty. For example, the Bank Nifty gave a full-year return of 32.58%, one of the best performances in recent memory. Despite the overhang of bad loans, PSU banks managed to put up a good performance on hopes that they will benefit from government support and a revival in the capital cycle. The demonetization drive proved to be a blessing in disguise for the banking sector as it was left flush with funds. In fact, most banks had to hurriedly cut their MCLR to keep pace with the rising liquidity. Private Banks had valuation concerns but most of the major private banks managed to flatter the street with their quarterly numbers. Also, the markets are betting on a surge in consolidation within the private banking space, which is likely to encompass private banks, smaller PSU banks, NBFCs and MFIs. The market is already rife with expectations that Kotak and Axis may find common ground. That will be an interesting area to watch in the coming year.

How the oil sector contributed to the Nifty…

The other major heavyweight that contributed to the Nifty outperformance was the hydrocarbons sector. With a whopping 39.54% returns during the year, oil & gas contributed majorly to the Nifty. The major outperformance came from Reliance Industries which touched a 10-year high. This was largely driven by healthy refining margins, strong petchem margins and the impressive performance put up by Reliance Jio. Other than RIL, other downstream players like IOCL, GAIL, BPCL and HPCL were the real outperformers during the year. Of course, valuations are a worry in case of some of these downstream companies but RIL seems to have enough legs. The upstream players like ONGC and OIL were subdued and may continue to remain so.

How the autos performed during the year…

That the auto stocks gave 23.04% returns during the year was commendable. Firstly, the auto sector was one of the worst hit by the demonetization. At least, demand for two-wheelers and entry-level cars took a big hit in this space. However, the key outperformance came from Maruti and Tata Motors. Tata Motors gained sharply during the year on the back of its JLR business doing much better than expected. Additionally, Maruti managed to beat the slowdown in the auto industry due to its presence across the passenger cars spectrum. We may see an impact of the shifting to BS-IV norms this year and also the losses of BS-III inventory that these auto companies (especially the two-wheelers) will have to take.

How the FMCG sector held its head high…

The FMCG space almost performed at par with the Nifty. The outperformance was led by Hindustan Unilever and ITC, both of which are heavyweights in the Nifty. Both stocks have performed well in the last quarter on the hopes that the remonetization will re-kindle demand, especially in the semi-urban and rural areas. Also, the implementation of GST is likely to be positive for the FMCG stocks as it is likely to create efficiency gains for these companies with a large-scale revamping of their logistics networks.

That in a nutshell sums up the story of the Nifty during the fiscal year 2016-17. Of course, the Nifty would have performed better had it received support from the IT and Pharma sectors. But these sectors are still suffering from the American overhang. For now, the key theme continues to be domestic consumption.

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