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In an era of severe unrest and intensified volatility, alpha generation in equity investing has become ever more challenging! A capital allocator today has to form a perspective on multiple factors viz. macro (economy/central bank action/rates), geopolitics, technology disruption, sector allocation, stock selection, etc. before taking a concrete decision.
Given this backdrop, we look at the roles of two big and critical domestic sectors in relative alpha generation over the last decade – Banks and Information Technology. These sectors together constitute ~41% of Nifty50 and ~31% of NSE-500 weights to date.
In this note, we present several viewpoints around the same and highlight how relative divergence between these two sectors has played an important role in determining the relative out/underperformance of Indian markets.
We analysed the yearly performances of key sectoral indices over the last 10 years. Nifty-50 with other key indices posted a healthy double-digit growth during CY12-22. Nifty-50 reported 12% compund annual growth rate, while the other top performing indices, i.e., Nifty Bank and Nifty IT clocked 13% and 17% CAGR, respectively.
During CY12-22, the weightage of Banks in Nifty-50 grew 820bp to ~38%; whereas, the weightage of IT rose 260bp to 14%.
Further, the market cap contributions of Nifty Bank and Nifty IT constituents in Nifty-500 were higher by 40 basis points and 60 bps to 12.0% and 10.3%, respectively, during CY12-22.
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