Banking and Financial Services: 

Banking and Financial Services sector mainly comprises of 3 sub-sectors including banks (private and PSU banks), non-banking financial companies or NBFCs (lending, housing finance, investments and stock broking) and insurance (life, general and reinsurance) companies. 

It forms a critical part of India's economy and contributes ~6% to its GDP. It is also one of the fastest growing sectors for employment opportunities in India. 

India has traditionally been a bank-dominated financial system, evolving over time with the emergence of non-banking financial institutions as an alternative channel of credit flow, along with credit cards and securitization. In such a system, credit growth is one of the most important factors for economic growth and is dependent on savings or deposit growth, investment growth, monetary policy interest rates and stressed assets ratio. 

Post 1991 economic reforms, India witnessed high credit growth of 15-25%, but it decelerated starting 2013 due to high asset quality stress in the banking and financial services system, slowdown in economic activity and moderation in bank deposits. 

However key steps have since been taken to reaccelerate credit growth:

1. Recent financial inclusion schemes (e.g. Jan-Dhan Yojana) have helped banks tap into savings of rural and suburban areas, and promote conversion of unproductive physical savings into financial savings.

2. Accommodative stance of RBI's monetary policy and decline in interest rates. 

3. Addressed asset quality concerns of both public and private sector banks with strengthened capital positions

COVID-19 has posed a disruption to credit growth recovery with additional impact on asset quality and liquidity. While India has tackled well with the first wave of pandemic and used policy interventions to setup the sector for future growth, a resurgence in the pandemic and/or a longer than expected economic recovery continue to be the major risks for investment in this sector in the short-term.

Investment Return: The sector has ~39.5% weightage in Nifty 50 (as of Feb 2021), as compared to 31% in Sep 2015 and 18.2% in Nov 1995 (at NSE inception). If used as a proxy for investment return, banking and financial services companies have outperformed the broader Nifty 50 index by 350 bps (or 3.5%) in CAGR growth since NSE inception (14.6% vs 11.1%).

Investment Risk: The sector has a comparatively higher risk than Nifty 50 with a beta of 1.23, i.e. a 1% increase or decrease in Nifty 50 corresponds to 1.23% increase or decrease in Banking and Financial Services. 

Information Technology: 

Information Technology sector mainly comprises of 4 sub-sectors including IT Services & Consulting (including Business Process Management or BPM), Computer Hardware & Software, IT Education and Digital platforms. 

It forms a critical part of India's economy and contributes ~7.7% to its GDP. It is also one of the fastest growing sectors for employment opportunities in India. 

The IT sector in India has evolved significantly over the last 3 decades with major IT - BPM companies starting up as outsourcing partners for foreign companies seeking cost rationalization in the 1990-2000s. This was followed by inception of Computer Hardware & Software companies to assist companies work more efficiently and act as a growth catalyst in 2000-2010s. Emerging technologies, including IT Education and Digital platforms, is now making IT investments as a necessity for companies to setup their digital infrastructure.

The accelerated growth of digitization and technology adoption in a post-COVID world could lead to potential re-rating of IT companies across the world, which might lead to outperformance of domestic IT companies over Nifty 50 in the short to medium-term to match valuations of other growth sectors.

Investment Return: It is the second-largest sector with ~15.7% weightage in Nifty 50 (as of Feb 2021), as compared to 19.2% in Sep 2005 (no weightage in Nifty 50 at inception). If used as a proxy for investment return, information technology companies have underperformed the broader Nifty 50 index by 150 bps (or 1.5%) in CAGR growth since Sep 2005 (10.7% vs 12.2%).

Investment Risk: The sector has a comparatively lower risk than Nifty 50 with a beta of 0.85, i.e. a 1% increase or decrease in Nifty 50 corresponds to 0.85% increase or decrease in the IT index. It is considered as one of the major defensive sectors for equity investment in India.

Energy, Oil & Gas: Energy, Oil & Gas is the third-largest sector with ~13% weightage in Nifty 50 and a beta of 0.99, i.e. a 1% increase or decrease in Nifty 50 corresponds to nearly equal 0.99% increase or decrease in the Energy index.

Energy, Oil & Gas has been an underperforming sector in the past 2-3 years with significant dependence on global cues such as crude prices, which makes it volatile and exposed to geo-political risks. It was also one of the most COVID-impacted sectors with sudden drop in demand due to travel and industrial activity restrictions across the world.

While the global economic recovery across the world is expected to benefit the sector in the short-term, it is expected to face longer-term impacts from COVID with lower demand for work or leisure-related travel compared to pre-COVID levels for the foreseeable future.

Consumer Goods: Consumer Goods (or FMCG) is the fourth-largest sector with ~10% weightage in Nifty 50 and a beta of 0.68, i.e. a 1% increase or decrease in Nifty 50 corresponds to just 0.68% increase or decrease in the FMCG index.

FMCG has always been considered as one of the defensive sectors for equity investment in India, given India's high population and emergence of an upper-middle class section that aspires to consume high quality products. 

Domestic FMCG stocks also command high valuations as compared to other sectors due to the stability it provides during a crisis, as domestic consumption is insulated from any geo-political crisis or events. Therefore, it was also one of the least COVID-impacted sectors.

Pharmaceuticals, Healthcare Services & Diagnostics: Pharma sector has ~3% weightage in Nifty 50 and a beta of 0.45 , i.e. a 1% increase or decrease in Nifty 50 corresponds to 0.45% increase or decrease in the Pharma index, which makes it the most defensive sector among equities in India and a potential hedge to high beta sectors such as Banking & Financial Services. 

However, the Pharma sector had considerably underperformed all equity sectors since mid-2015 with almost negligible returns for ~4.5 years prior to onset of the COVID pandemic in early 2020. 

The COVID pandemic seems to have triggered an evolution in the industry with unparalleled healthcare spending (government, corporate or social welfare grants) across the world, while driving pharmaceutical companies and drug controllers to revamp their R&D, manufacturing, testing & approvals processes and timelines. It has also driven adoption of diagnostics & healthcare services.

India pharmaceutical sector is expected to be a big beneficiary of this evolution with possible re-rating in the short-medium term. However, dependence on foreign pharmaceutical drug controllers (e.g. FDA) and price control regulations would continue to be the key risks for the sector. 

Infrastructure: Construction, cement, telecom and utility services sectors combine to account for ~7% weightage in Nifty 50 and a beta of 1.01 , i.e. a 1% increase or decrease in Nifty 50 corresponds to 1.01% increase or decrease in the Infra index. It has performed on par with benchmark equity indices.

The infrastructure sector not only generates employment but also enables growth of other business sectors as it provides easier connectivity for movement of people, goods and services.

This sector is expected to be a key beneficiary of the National Infrastructure Pipeline FY 2019-25 launched by the government of India with 9000+ planned projects for a total cost of nearly $2 Trillion.

Manufacturing: Manufacturing as an industry in India is identified as superset of individual sectors (based on their end-products) such as Auto, Consumer Durables & White Goods, Chemicals, Fertilizers & Pesticides, Textiles, Electronics etc. totaling to ~6% weightage in Nifty 50 and a consolidated beta above 1.

The Indian manufacturing industry has struggled to stay competitive globally due to lack of structural reforms encouraging manufacturing (ease of doing business, ease of compliance burden, etc.) and market reforms (land, labor and capital), along with the emergence of China as the dominant manufacturing partner across majority of product supply chains globally. 

However, the recent clarion call for an Atmanirbhar Bharat (or self-reliant India) along with several measures to drive self-dependence, including Production-Linked Incentives (PLIs) across manufacturing-related sectors and higher import tariffs, is expected to reinforce emphasis on Indian Manufacturing. 

Also, a 'China Plus One' strategy being implemented by many companies to avoid overconcentration of business interests in China and diversify operations to other countries in Asia is expected to attract investment for manufacturing in India, which makes it a theme to invest in for the next decade.