How FIIs / DIIs Rotate Stocks from Sector to Sector to Maximize Returns ?

Even though the constituents of Index are evenly distributed across sectors, however, at times certain stocks run so high that their weightage keeps rising in the Index. Sometimes more stocks from the sector gain an index entry, making the sector weight swell further. Ultimately, valuations rise to a level that overestimates future growth leading to what is usually a dramatic drop in the weight of the sector.

Background with illustration on Sectoral Boom
In the mid-90s we saw industrial de-licensing and the quest of companies for global scale capacity in the sector. Materials Sector Stocks weighed as high as 40% in the SENSEX which gradually declined to 10% by 1999.

From Materials, Investors Started Switching to Consumer Staples which saw its peak in 1998 at 35% of the BSE SENSEX as demand for high return and high free cash flow companies was rising.

This was followed by the Information Technology boom which attracted more tech names to the index and sector the achieved a 45% weight in the index at its peak. Before the Boom, Siemens was the only stock representing IT / Automation.

Which Sector is in Vogue Today – Financials or Consumer Staples ?
Analysts say its consumer staples all over again. However, the weight of the consumer sector is only 10% currently. The sector that is riding the wave is actually financials, backed by market’s growing love for private sector banks Financials account for 28% of the index weight. However, the rise of Financial sector has been steady. During 2008, it hit a high of 30% and came down to 20% after the Western Financial Crisis.

Finally, just for sake of comparison, materials weight went from 40% to 5% in 90s, consumer staples from 35% to 4%, and technology from 45% to 11% during their weight correction phases. Thus Financials will gain weight in the next 12-18 months but as the weight climbs higher, the risk of a fall will keep increasing.