How to Outperform the Sensex in 2017?

Now that Budget Day has come and gone, investors can finally get back to focusing on picking the right stocks without worrying about extreme market wide volatility affecting their portfolio’s performance. As it turns out, the markets seemed to have liked the Budget, as evidenced by the Sensex having jumped 2% since it was announced on Feb. 1.

 

What caused the 2% move? One big announcement was the fact that despite worries Finance Minister Arun Jaitley would amend the holding period for long term capital gains taxes, no changes were actually made. This is a huge boon for investors who hold on to shares for the long term and take advantage of the fact that they are not required to pay any long term capital gains taxes on profits, as long as the shares are held on to for at least 1 year.

So it is safe to say that the markets are bracing for a favorable 2017, seeing how the markets have responded so well these past two days. It’s generally a good idea to focus on sectors, instead of companies, so that the screening process becomes easier.

How to Gauge Sector Performance

It can sometimes be difficult to know how different sectors are performing. Looking at just ICICIBANK, for example, might not be an indication of the entire banking sector. Lucky for us, the BSE has created multiple indices to track all the major sectors.

IT, Auto, Banking, Capital Goods, Consumer Durables, FMCG, Housing, Metal, Oil and Gas, Power, PSU, Pharma, and Technology each have their own indices. Each index is made up of the major companies within that sector. This is highly useful: we can, for example, see how each sector reacted to the Budget by seeing which indices performed the best since Budget Day. While the overall Sensex gained 2.03%, out of all 13 sectors that have indices available, one sector clearly stood out: housing.

The Green Light for Realty

The BSE Housing Index moved up a staggering 4.33% from the opening price of Feb. 1 through the closing price of Feb. 2. It is made up of 11 leading housing companies, including DLF, NBCC, Oberoi Realty among others. It makes a lot of sense, therefore, to be bullish on housing when the markets react so optimistically within 48 hours. Demonetization affected housing companies severely: the BSE Housing Index fell a staggering 18% from Nov. 1 through Dec. 1. When an entire sector falls so sharply, exuberance in the markets plays a factor in it.

It takes a strong reason for an entire sector to turn around, and the Budget did not disappoint: a strong focus on “affordable housing” and giving the green light for Realty companies to push forward on projects is just what the sector needed.

Diversification is Important

Apart from Housing, FMCG and Banking stocks also did well. Therefore, it’s a good idea to look at companies from these three sectors to build up your portfolio. Within each sector, look for companies that have underperformed compared to their sectoral peers. Unless you can find a good reason for the underperformance, these are the types of companies you should invest in.

And while you are at it, don’t just look at large cap stocks. It’s been shown numerous times that when the markets do well, small cap stocks tend to outperform mid cap stocks, which tend to outperform large cap stocks. The inverse is also true: when the markets are not doing well, small cap stocks fall more than mid cap stocks, which fall more than large cap stocks.

Since we are expecting a strong 2017 overall, it makes sense to look at some mid cap and possibly small cap stocks within these three sectors. Through proper diversification among sectors and capitalization of companies, you can benefit tremendously and outperform the Sensex in 2017.

(The author is a Co-Founder of Upstox, a leading online discount broker. )