From under-performer to out-performer: How value investing can take advantage of the reversion in performance
Value investing is a long-term investment strategy that involves buying undervalued companies and holding onto them until the market recognizes their true value. One key principle of value investing is the belief that markets are cyclical, meaning that they tend to move in cycles of expansion and contraction. This cyclicality is evident in many industries, as certain sectors tend to outperform or underperform at different times.
You can capitalize on the evident reversion in performance, where industries that underperform in a given year often have the highest potential to outperform in the following year due to market cycles. By identifying undervalued companies in sectors that have recently underperformed and holding onto them for the long-term, you can too potentially achieve strong returns
This is how industries in India have performed over the past year !
The IT sector has underperformed over the past year due to the Federal Reserve's (FED) aggressive interest rate hikes. To capitalize on the reversion in performance, an investor should consider looking for opportunities in the IT and pharmaceutical sectors.
5 Best Performing Industries in 2022
Though they had poorly performed with negative average returns for the three years from 2018 through 2020. “Forest Materials”, paper stocks and related companies was the best performing industry of 2022 averaging 40% returns. Followed, closely by Metals & Mining which were positive for the 3 consecutive years from 2020 through 2022 but were negative for the past two years.
Now, lets look at the 5 Worst Performers of 2022
Industries like IT and Healthcare, which have consistently performed for the past 4 years and 3 years consecutively were the worst performers of 2022. With IT seeing a near 50% correction.
Here’s the current Industry- wise weightage of our Value Investing smallcase
In conclusion, the cyclicality of markets and the evident reversion in performance are important considerations for value investors. By identifying undervalued companies in sectors that have recently underperformed, value investors can potentially capitalize on the reversion in performance and achieve strong returns over the long-term.