Hot Sectors to Invest

Indian stock markets are seeing a bull run for the 4th year in a row. (this implies that a major correction is just around the corner) This bull run has been mainly driven by foreign institutional investors (FII). FII’s have invested more than $8 Billion in this year alone, and there is a lot more money coming in. With a lot more money chasing few stocks, the valuations on the existing good stocks have sky rocketed - the current average PE ratios of 22.57 are too high for Indian standards. ( this is nothing when compared to NASDAQ in the Dot.com boom days where the average PE ratio was ~35) Nevertheless, high valuations are a concern.

Of the top performing sectors in BSE sensex, only three sectors have outperformed the Sensex: Banking, Media/entertainment & telecom, and IT. Even the famed Biotech/Pharma stocks have under performed the stock index in 2006. In my thumb rule of investments, any investment that has returned more than 24% is worth investing in - mainly to diversify the portfolio. Even among these sectors, I would invest only in the top performer in each category. So the sectors to invest in are:

1. Banks 74.1%
2. Telecom/Media 69.9%
3. IT 66.4%
4. Capital Goods 49.9%
5 Oil & Gas 38.8%
6 Metal 31.8%
7 Consumer Durables 31.4%
8 Health care 29.6%
9 Automobiles 28.7%
10 Consumer goods 24.9%

When compared to BSE Sensex has provided a return of 50.4% since June 2006.

Given the steady growth of the Indian Economy, all the above sectors are poised for strong growth. So investing in select companies in 6-7 of the above sectors will result in a balanced growth oriented investment portfolio.