India Sector Rotation: Watch Energy, Financials, and Healthcare: Morgan Stanley

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Sector Rotation Model Update: In the latest run of our sector model portfolio (page 3), ranking for the Industrials sector rose to 5th (vs. 9th in October), helped by positive earnings revisions and a less-bullish consensus. Energy lost three positions to 8th, driven by negative earnings revisions and poor share price momentum. Telecoms, Materials, and Utilities are the top three sectors – unchanged from October – whereas Financials, Consumer Discretionary, and Energy are the bottom three sectors on this model.


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Model Portfolio and Focus List Update: Given the recent price action, we are watching for possible changes to our positions in Financials, Energy, and Healthcare. However, for now, we are not making any changes.
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Our sector positions are more pronounced than in recent months, and are consistent with our view that macro is likely to dominate stock picking in the coming months.
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We are overweight Energy, Materials, Industrials, Telecoms, and Utilities, and underweight Technology, Consumer Staples, Consumer Discretionary, Healthcare, and Financials.

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Portfolio Performance: Our sector model portfolio underperformed the MSCI India benchmark by 56bp in October (up 42bp year to date relative and 12.9ppt since inception versus MSCI India). Our Focus List underperformed by 79bp during the month, taking year-to-date underperformance to 129bp (since inception the Focus List has outperformed by 22.7ppt).

Sector Rotation Model Methodology
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Our sector rotation model is based on 15 factors

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Four of these factors are based on sector performance (all sectors in the model and in this discussion refer to MSCI India sectors), six are valuation metrics, three are earnings- related factors, and two metrics are associated with the consensus view – both buy and sell side.
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We rank sectors based on their position relating to each of these factors. For example, sectors that have delivered strong 12-month returns rank poorly, whereas sectors with negative sell-side views rank positively. We aggregate the scores across these metrics to arrive at the final ranks.
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We have back-tested the model and it seems to work well through market cycles with a 12-month return view

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The subsequent pages of this document detail the time series of each factor we use. We overlay our subjective macro views over these quant results to construct our sector model portfolio.