Indian markets have been pretty volatile since hitting record highs in October 2021. It has seen nine distinct cycles of corrections and recovery since then. As per a Bank of America Securities (BofA) report, of the 9 cycles, 5 were correction cycles with an average 6.3 percent fall while the remaining 4 were recovery cycles with an average 5 percent returns.
In a recent report, the brokerage has analyzed these cycles and identified patterns in sectoral behavior during these market swings.
"While history might not necessarily repeat and reasons for these past patterns could be different across each of these cycles, we believe they could serve as some reference going forward, as volatility is only likely to continue given the current environment. We too continue to recommend caution, at least in the immediate term," BofA said in the note.
Index performance during identified cycles
For investors with short-term horizons
As per the report, the sectors that recovered most during the 4 cycles of market recovery include Industrials, Discretionary, Cement, Metals and IT. These sectors delivered higher returns during Nifty recovery cycles.
Let's now look at the brokerage's preferred stocks within these sectors. It likes Bharat Heavy Electricals due to its robust outlook on localization, export push, diversification. Among IT stocks, it prefers Tech Mahindra and HCL Tech due to relative valuation comfort and headroom to manage margin pressures. It also likes Shree Cement on the back of higher exposure to improving east India market and steep capacity additions and Hindalco for its strong aluminum fundamentals.
Meanwhile, sectors that corrected most during market correction include Cement, Industrials, Autos, and Financials. Within these sectors, BofA remains cautious on ACC, BHEL, Tata Motors, and PNB Housing.
Among sectors that corrected the least or outperformed during market correction cycles are most defensives. Utilities, Healthcare, Comm., services, IT and Materials are these sectors. Among these, BofA analysts like NTPC, Sun Pharma, Bharti Airtel, Tech Mahindra and HCL Tech.
For long-only investors
For long-term investors, defensives with metals are the best choice amidst market volatility, noted the brokerage.
Utilities (+8.3 percent), Comm. Services (+8.1 percent), Metals (+7.6 percent), Discretionary (+6.4 percent), and IT (+5.3 percent) outperformed Nifty the most since October 2021, while Cement (-5.7 percent), Staples (-3.9 percent), Autos (-3.8 percent) and Financials (-3.5 percent) underperformed the benchmark.
Going ahead, the brokerage feels factors including COVID Omnicron Variant, Russia-Ukraine Crisis, surge in oil prices, RBI repo rate hike and beginning of Fed rate hikes are some key events that will impact markets in 2022.