Top Performing Sectors in 2021

Stock markets across the globe shattered in March 2020 as the impact of the Covid-19 pandemic on economies created havoc.

More than sixteen months later, the pandemic situation remains the same but the stock markets are telling a different story. Benchmark indices have scaled fresh all-time highs.

While most of the sectors were adversely affected, they have made a strong comeback. Sectors including IT and healthcare outperformed others in 2020 in the wake of the pandemic, while others underperformed.

Let's have a look at the best performing sectors of 2021.

#1 Metal

You guessed it right. Metal would be anyone's first guess in terms of outperformance in the recent past.

Since January 2021, the BSE Metal index has outperformed all other indexes and gained a whopping 79%.

The major contributor here is index heavyweight Tata Steel, which has gained 120% since the start of this year.

Following Tata Steel, we have APL Apollo Tubes which is up 104% since January 2021.

Other constituents of the index Vedanta, JSW Steel, Hindalco, and SAIL are up in the range of 80-93%.

Coal India is the sole laggard from the index which has gained a mere 6% on a year to date (YTD) basis.

If there's anything more surprising than the recovery in markets since March 2020, then it's the performance of metal stocks.

Metal stocks have seen a rally by estimates of record growth in domestic demand plus China putting export curbs on metal over green concerns.

There's still a huge scope for new mining capacities in iron ore, bauxite and coal and considerable opportunities for future discoveries of sub-surface deposits.

Moreover, infrastructure projects continue to provide lucrative business opportunities for steel, zinc, and aluminium producers.

Iron and steel make up a core component for the real estate sector and likewise, demand for metals is set to continue given strong growth expectations for the residential and commercial building industry.

In fact, Brijesh Bhatia, senior research analyst at Equitymaster, had called it the sector of the year at the start of 2021.

Brijesh is yet bullish on the sector. He believes metal stocks are all set to kick off the next leg of their rally.

Watch this video for more.

If you want to know how long the rally in metals will last, read this: Top 5 Stocks Riding the Metals Rally. Do You Own Any?

#2 IT

Following metals, we have the information technology (IT) sector.

The BSE IT index has gained 30% since the start of this year.

The index has 51 constituents amongst which Majesco (436%), Happiest Minds Technologies (324%) and Brightcom Group (318%) have outperformed others on a significant basis.

Other significant gainers include Tata Elxsi (129%), eClerx Services (140%), Sonata Software (122%), and Persistent Systems (109%).

Among large IT stocks, Wipro has gained 54%, while Mindtree rose 69%. Infosys and TCS have gained 32%, and 13%, respectively.

The only laggard in the index is Ramco Systems, which has lost 17%.

The Covid-19 pandemic added a spark to existing trends as people shopped from home, sought entertainment from OTT platforms. IT companies have benefitted from this trend.

Brokerage houses are bullish on IT stocks opining reasons as strong demand environment, improving visibility, sustained margins, and improving free cash flow.

Not only have IT companies seen some of their best results in the June quarter but they are also facing an uptick in attrition rates due to a war for talent in the sector and as lateral hires can put pressure on company margins this has led to increased hiring of new graduates.

As per The Economic Times, the IT sector is expected to witness a five-year mega growth cycle due to the speed at which American enterprises transform themselves digitally.

#3 Realty

The BSE realty index has gained 28% on a YTD basis.

Only one stock from the index has doubled investors money, Mahindra Lifespace Developers, which has gained 105%.

Other gainers include Indiabulls Real Estate (76%), Sobha (76%), and DLF (48%).

There are many reasons which have supported the real estate sector.

• Increase in demand for housing.
• Lower interest rates.
• Good results by top companies

One must be careful while selecting stocks from the realty sector.

Here's what Tanushree Banerjee, Co-head of Research at Equitymaster, has to say about the realty sector.

• The biggest drag on real estate players is high debt and with interest rates moving up, investors need to be wary of realty companies with the tendency to pile up debt and dines with poor cash flows.
  
  Also, this is a sector where investors have to be very careful about the management quality. Poor accounting and lack of corporate governance has been the reason for many large realty companies performing poorly in the past.

With realty stocks being on a roll, how long do you think the rally will sustain?

The outlook for the sector looks much better than what it was a year ago, but with the pandemic far from over, there can be volatility.

It remains to be seen how the realty sector performs as the activity reopens.

#4 Power

Indian power sector has been one that has achieved reformatory successes through the years.

At present, India is the fourth largest energy consumer in the world, with projected growth between 2019-2040 accounting for a whopping one-quarter in global power demands which is the highest in history.

One important feature for India's energy segment is that the government has opened 100% FDIs in the sector for investments and private energy players to enter at ease.

The BSE power index is up 28% since the start of this year.

Major contributors to this gains are Adani Transmission and Indian Energy Exchange (IEX) which are up 120% and 89%, respectively.

Other gainers include Adani Power (79%) and Tata Power Company (71%).

The only laggard here is Adani Green Energy whose shares have fallen 15% since January 2021.

#5 Healthcare

Just like last year, the healthcare sector is at the mainstage, performing well at hard times.

The BSE healthcare index is up 21% since January 2021. The index has 70 stocks and the gains in these individual stocks are much higher than the index.

The top contributor here is Hikal, which has gained 275%. At second place is Max Healthcare which has surged 102%.

Other contributors include Laurus Labs (99%), Shalby (94%), Poly Medicure (85%), and Caplin Point Labs (81%).

Healthcare was one of the top performing sectors of 2020. It continues to do well in 2021 as there's an ever increasing demand for life saving drugs, immunity boosting supplements. Of late, people have been focusing more on buying healthcare products.

With vaccination drive in full swing, there's a good opportunity for pharma companies as India looks forward to various types of vaccine.

The pharma market witnessed a growth of 37.2% in value terms for June 2021 quarter, partly aided by the Covid-19 portfolio.

Going forward, the outlook for the sector would depend on the management commentary on growth outlook in India, update on restart of USFDA inspections, price scenario in base US business, and traction in specialty products.

Performance of other sectoral indices

All sectoral indices are trading in green if compared their YTD performance. Have a look at the table below to see performance of other sectoral indices.

Sectoral Indices YTD Performance

Index	1-Jan-21	9-Aug-21	% Change
BSE Capital Goods	18,946	23,588	25%
BSE Consumer Durables	30,360	36,455	20%
BSE Telecom	1,286	1,489	16%
BSE Bankex	35,799	40,994	15%
BSE Finance	7,057	8,067	14%
BSE Oil & Gas	14,140	15,565	10%
BSE Auto	20,986	22,937	9%
BSE Energy	6,038	6,571	9%
BSE FMCG	12,696	13,666	8%

Source: Equitymaster

To conclude...

One needs to look for good companies in a sector to do well over the long run. Companies which have decent financials, preferable market leaders as these companies will be the least affected in a crisis.

Also, an important aspect is asset allocation.

Equitymaster's asset allocation guide is an effort to highlight the various factors influencing asset allocation in equities. In this guide, we look at how best to allocate your equity investments so as to achieve optimum returns from them.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...