Worst Performing Sectors of 2023. Will These Stocks Turnaround in 2024?

India is a diversified economy. It consists of several sectors with their own traits contributing to overall economic growth.

Their weights in the Indian stock market are broadly in line with their contribution to GDP.

This is unlike the US, where the S&P 500 index has been called the 'S&P 7' where the top tech stocks take up most of the weightage.

Each sector in the Indian stock market has its own cycle containing phases of growth and decline.

In this article, let us look at the worst performing sectors of 2023 and what 2024 has in store for them.

To calculate sectoral performance, we have considered the BSE sectoral indices data.

Biggest Losers of 2023

The graph below shows the 4 biggest underperforming sectors in 2023.

The oil & gas and energy sectors were the top underperformers generating negative returns of 5% and 1%, respectively. This is followed by banks and commodities sectors.

Although these three indices gave positive returns, they underperformed frontline indices by 8%, 5%, and 2.1%, respectively.

The BSE Sensex, during the same period, gave positive returns of 8.4%.

4 Big Underperformers in 2023

Let look at the 4 big underperformers and their potential to be showstoppers in 2024.

#1 Oil & Gas

The S&P BSE Oil & Gas index was trading at 21,000 levels at the end of January 2023.

Since then, it has dipped to a low of around 17,000 by the end of February 2023.

However, from March 2023 till date (24 November 2023), it recovered around 14.3%.

So, does this sector have the potential to head northwards in 2024?

In 2024, the global liquid fuel production is likely to increase by 1 million barrels per day (b/d), says the recent report of the US Energy Information Administration (EIA).

The ongoing production cuts from OPEC+ countries will likely offset the production growth from non-OPEC countries. Currently there is no impact of Israel-Hamas war on physical oil supply.

To diversify from transportation fuels like petrol and diesel, Chinese refiners are increasing their petrochemical capacities.

The demand for these fuels is likely to decline amid expected increase in the demand for electric vehicles (EVs). China is the world's largest producer and consumer of petrochemicals.

It is adding new petrochemical capacities to improve self-sufficiency. In China, the net imports of PP have declined to 10.7% in 2023 from 26.7% in 2013.

Apart from this, Europe is also posing demand concerns due to high inflation and interest rates. This will result in excess supply due to lack of global demand.

The global demand for polypropylene (PP) and Polyethylene (PE) is projected at approximately 90 million metric ton (mmt) and 118 mmt, respectively. In this, China accounts for nearly 40% in PP and 34% in PE.

Hence, these developments are likely to have an impact on the Indian petrochemical industry.

Reliance Industries Ltd. (RIL) is planning to expand its petrochemical value chain by calendar year (CY) 2026.

By 2030, Indian Oil Corporation Ltd. (IOCL) is planning to enhance its petrochemical capacity from 4.1 million metric ton per annum (mmtpa) to 15 mmtpa.

With propane dehydrogenation technology, GAIL is setting up a 0.5 mmtpa PP plant at Usar, Maharashtra. This plant is likely to be commissioned by 2025.

Moreover, GAIL is also setting up a 0.6 mmtpa PP plant in a petrochemical complex at Pata. This is expected to be commissioned by 2024.

We have seen suppression in margins of petrochemicals since the beginning of 2023. In 2024, we could see RIL, GAIL and IOCL posting weak petrochemical margins.

This is due to production capacities leading to supply exceeding demand.

Thus, the oil & gas sector is likely to continue its subdued performance in 2024.

#2 Power

According to the forecasts by the central electricity authority (CEA), the peak energy demand in India would be 257 gigawatts (GW) in FY 2024-25.

The peak energy demand has been rising steadily over the past few years.

On 1 September 2023, the peak energy demand recorded was 240 GW of which coal accounted for 70% of the generation, hydroelectricity 14%, renewables 9%, and remaining 7% by lignite, nuclear, gas, naphtha, and diesel.

India is heavily relying on coal for their electricity generation and the share of renewables is lower than expected. The government steps in to ensure there is no shortage of coal supplies to thermal power plants.

The increase in the energy demand is due to increased industrial activity coupled with lack of rainfall.

The lack of rainfall led to an increased use of pump sets for irrigation with groundwater. The energy demand in 2024-25 is expected to touch 1,736 billion units.

Energy sector has a lot of opportunities as the energy demand is outpacing supply. This is specifically true in the case of renewables.

Therefore, renewable energy stocks would likely see good set of numbers.

The goal of the Indian government is to achieve 500 GW of non-fossil energy capacity by 2030. As on 31 March 2023, the total installed electricity generation capacity is at 416 GW of which 172 GW is of renewables.

The government has come up with several measures and schemes to support renewables. New renewable purchase obligation (RPO) targets were released, with an exclusive category of wind energy created to bolster the segment.

Moreover, the government also released guidelines for the second tranche of the productivity-linked incentive (PLI) scheme worth Rs 195 bn to promote solar manufacturing.

The EV industry also is witnessing growth with sales in India crossing the 1 million mark in less than 9 months in 2023. Entire 2022 was needed to achieve this milestone.

Around 1.4 million EVs were registered with regional transport offices till November 21, as per the Ministry of Road Transport and Highways' Vahan Dashboard.

Moreover, a report titled 'India Electric Vehicle Charging Infrastructure & Battery Swapping Market Overview' says that between 2022 and 2030, the Indian EV charger market is set to grow at a compounded annual growth rate of 65%.

It could achieve annual sales of 3 million units. This will help achieve charger requirements by 2030 as per the national EV scenario (NEV).

The whole world including India is set to shift to non-fossil energy and become carbon neutral.

Therefore, the energy sector could potentially perform well in 2024.

#3 Banking

Although the S&P BSE Bankex gave positive 1% returns in 2023, it significantly underperformed Sensex.

The index saw a 10.5% decline from January 2023 to mid-March 2023.

However, post that, it not just recovered its January 2023 peak, but also surpassed and registered a new high of 52,499.23 in mid July 2023.

From here onwards, the index again started to decline to make a low of 47,463.91 at the end of October 2023.

Can banks head higher from current levels in 2024?

As per the Reserve Bank of India (RBI) data as of 8 September 2023, bank credit grew by 19.8% year-on-year (YoY) to Rs 150 trillion.

If we exclude the impact of the merger of HDFC Ltd with HDFC Bank, then bank credit has surged by 15.1%.

In recent years, personal loans have supported overall credit growth. However, in the first quarter of FY 2024 it witnessed a slowdown.

Having said that, it will continue to grow well above the headline credit growth, said the RBI's State of the Economy report.

Adding to troubles, the RBI recently increased risk weights for certain categories of retail loans offered by banks and non-banking financial companies (NBFCs) and for bank loans to NBFCs.

In a circular by the RBI, risk weight for all consumer credit exposure of commercial banks and NBFCs to 125% from 100%.

This is applicable to both existing and new credits. This includes personal loans, but excludes home, vehicle, education loans, loans against gold, and microfinance.

Currently, credit card receivables of scheduled commercial banks and NBFCs have a risk weight of 125% and 100%, respectively. However, the RBI has revised these upwards to 150% and 125%, respectively.

The RBI has increased these weights due to concerns in certain unsecured loans. Most of the banks post pandemic, sought growth in the unsecured loans.

This was especially in personal loans and credit cards. This will not pose a significant impact on their earnings. However, a possible slowdown in these segments is likely.

The focus now would likely shift towards the housing, gold, and vehicle segments. Moreover, banks might increase their lending rates in the segments that are affected by the regulation.

Having said that, the capital position of most banks is healthy and the impact of the new regulations on the capital adequacy of banks will be limited.

This could have a negative impact on stocks like Satin Creditcare, L&T Finance, Aditya Birla Capital, Centrum Capital, Ujjivan Financial Services, and Sundaram Finance. These stocks have a heavy unsecured loan book.

According to the Fitch Ratings, Indian banks' net interest margin (NIM) is likely to face pressure by the end of FY24.

This is due to increased deposit rates to attract funds for sustained high loan growth. Moreover, a 10 basis points (bps) reduction in NIM does not carry a significant impact on their profitability in the near term.

Income from higher fee, higher loan growth, and revival in treasury gains would offset the higher credit and funding costs pressure. However, if the margins drop beyond 50 bps, this would have a significant impact on the banks' NIM.

Banking sector is likely to show a modest performance in 2024. However, if you believe in contrarian investing, then banks can be a sector to consider.

#4 Commodities

Probability of a global recession leading to a sharp global growth slowdown is having an impact on commodity prices.

According to a report from World Bank, if the global growth slowdown escalates, the commodity prices would likely ease in the next two years. However, it will remain above its 5-year average.

Moreover, energy prices are expected to fall by 12% in 2024. It is anticipated that the agricultural commodities and metal prices will stabilise in 2024.

The impact of slowdown is witnessed by copper and aluminium. Copper prices declined from their peak in March 2022 and demand for aluminium has shifted, impacting aluminium prices.

As per World Bank, metals are likely to fall 5% in 2024 due to slowing demand and rebound in 2025 on recovering global industrial activity. Under the baseline forecast, after a projected 24% drop this year, commodity prices are expected to fall a further 4% in 2024 and 0.5% in 2025, says World Bank

However, prices would still be higher than 2021. For metals, prices would be lower than those in 2021. Nickel is an exception to this.

So, these were the underperforming sectors of 2023.

We will be back discussing the best performing sectors of 2023 next week.

Until then, have a profitable week and 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...