Markets volatile but remain near record highs: Here are the sectors you should avoid and bet on

After multiple attempts, benchmark index Sensex hit record high levels for 2 straight sessions. After hitting a new high in yesterday's trade (June 21), the index again hit a new high of 63,601.71 in morning deals today before paring gains to turn red.

The correction in today's deals comes on the back of the weak market sentiment across the globe after US Federal Reserve Chairman Jerome Powell in his congressional testimony, retained his hawkish stance and reinforced the central bank's objective to rein in inflation as he hinted at the likelihood of further interest rate hikes.

In his testimony before the US House Financial Services Committee, Powell reiterated the fact that the central bank remains strongly committed to bringing inflation back down to their 2 percent goal and said it would be a pretty good guess that future rate hikes are in the cards if the economy continues on its current path.

"The Sensex hitting a new high will continue to sustain optimism in the market mood. The market has been bouncing back from the dips consistently, and this market construct has the potential to sustain the enthusiasm of the bulls. India stands out among emerging markets with the best growth-inflation balance. However, the big wall of worry is the rich valuation, which might invite institutional selling beyond a point. A negative trigger, from the global perspective, is the Fed Chief Powell’s statement in the Congressional testimony yesterday that the process of getting inflation back to 2 percent has a long way to go. This indicates further rate hikes, perhaps two more, in this rate hiking cycle. However, the bond markets didn’t react to this hawkishness," said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

After a rough start to the year, Indian markets recovered gracefully since April, giving positive returns in 3 straight months including June so far. The recent rally in the Indian markets comes on the back of a pause in rate hikes, moderating inflation, improving macro situation, and decent March quarter earnings. However, experts believe that the continuation of rate hikes globally or the return of higher inflation could disrupt the ongoing rally.

Sensex has gained 1.2 percent in June till date, extending gains from a 2.5 percent rise in May and a 3.6 percent jump in April. The index was completely flat in March. However, it fell 1 percent and 2.1 percent, respectively, in Feb and Jan 2023.

Overall in 2023, the index has advanced 4.5 percent and rallied 22.5 percent in the last 1 year.

Amid this backdrop, let's take a look at the sectors one should stay away from and the ones one should bet on.

Most experts suggest avoiding sectors that depend majorly on global trends like metals and IT, however, they are bullish on sectors including banks and financial services, pharma, FMCG and capital goods.

Deepak Jasani, Head of Retail Research, HDFC Securities

Sectors depending to a large extent on global factors/demand like metals, oil & gas and IT have underperformed. This situation could continue for some more time going forward.

Anand Dalmia, co-founder and CBO at Fisdom

We expect the earnings expansion cycle to be a tide that will take almost all ships higher. While every sector stands to benefit through the broader expansionary cycle, there are some that will race ahead faster in the near term and many may take relatively longer to catch up with the outperformers. Indian IT is one such sector where we believe macroeconomic headwinds and adverse global developments will continue to weigh on investor sentiments for slightly longer than others.

However, on the flip side, though the shorter term could be challenging for the broader sector, one can also expect such stress to open up opportunities to buy high-quality stocks at relatively reasonable valuations. So, in the shorter term, one could be underweight in IT. Another sector that is secularly under stress, across the board, is aviation. Aviation is a sector where every operator is witnessing a distinct set of challenges along with the broader ones applicable across the sector. Investors could probably wait and watch for developments before making investment decisions related to the sector.

Sonam Srivastava, Founder of Wright Research, an investment advisory firm

In a volatile market, it is advisable to exercise caution and be selective with sectors that carry higher risks. Two sectors to consider avoiding are the IT sector and commodity-linked sectors such as metals, oil and gas.

The IT sector is vulnerable to external factors such as global economic conditions, technology trends, and regulatory changes. Market volatility can impact client spending on IT services, potentially affecting revenue and profitability. Currency fluctuations and visa restrictions can further impact companies with international exposure.

Commodity-linked sectors are highly influenced by volatile commodity prices, which are subject to global demand, geopolitical tensions, supply disruptions, and policy changes. During periods of market volatility, commodity prices can experience increased volatility, posing risks for companies operating in these sectors.

Sectors to pick

Anthony Heredia, MD & CEO, Mahindra Manulife Investment Management

There are opportunities across sectors, and it is perhaps better to focus on individual companies and businesses rather than making absolute judgments on sectors. Broadly speaking, we remain positive on industrial and capital goods, banks, and consumer discretionary space.

Anil Rego, Founder and CEO of Right Horizons

In the midst of a slowdown in the global macro backdrop, Indian equities are near peak levels, supported by healthy profitability for the last quarter of FY23. Corporate earnings continued to be driven by financials and auto. FMCG and infrastructure added to the momentum while metals, chemicals, and power dragged.

The banking space is witnessing robust credit growth momentum, autos are in upcycle with stable demand in case of CVs and the traction in the EV trend, and the paints segment in the consumer space and building materials segment are witnessing healthy demand due to focus on infrastructure.

Sunil Damania, Chief Investment Officer, MarketsMojo

Our top picks remain pharma, owing to higher growth in the domestic market and the price of US generics stabilising. Many pharmaceutical businesses have attractive valuations. Given that the government proposed a massive expenditure of ₹10.5 lac crore in the current budget, capital goods and infrastructure companies should do well. Lower raw material costs should also aid in margin expansion.

We also prefer select IT companies. While we recognise that there are headwinds for the sector, most of them are in the price. Hence, risk-reward continues to favour select IT firms. We also prefer defence and railway stocks since the government will continue to spend a good deal of money on them.