Sector Momentum in India: 26.58% CAGR, +15.34% Excess vs Sensex Over 26 Years (NSE)

India produced the highest absolute CAGR of any exchange in our 14-market sector momentum study. 26.58% annually over 26 years. $10,000 grew to ~$4.6 million in INR-denominated terms. No other market in the dataset came close.

Contents

1. The Strategy
2. What We Found
3. Sector Rotation Patterns
4. When It Worked and When It Didn't
5. Full Annual Returns
6. Limitations

The strategy is simple: every quarter, identify the two sectors with the strongest trailing 12-month returns and hold the stocks within them. Rotate when the leaders change. That mechanical rule, applied to India's NSE from 2000 to 2025, produced returns that look impossible until you study how India's sector cycles actually work.

Data: FMP financial data warehouse, 2000–2025. Updated March 2026.

The Strategy

Indian equity markets don't move uniformly. Technology ran for years. Healthcare ran for years. Utilities and Consumer Defensive showed up repeatedly as top-two sectors across two dozen quarters each. When a sector catches a structural tailwind in India's growth economy, it tends to sustain momentum for multiple rebalance periods. That persistence is exactly what this strategy exploits.

The mechanics:

Returns are in INR. Benchmark is Sensex (also INR). This is an apples-to-apples comparison. Full methodology: backtests/METHODOLOGY.md

What We Found

Start with the calendar years. In 2003, the portfolio returned +209.80% while Sensex returned +79.09%. In 2005: +77.96% vs +40.59%. In 2007: +100.37% vs +46.79%. In 2021: +89.71% vs +22.85%. In 2023: +77.59% vs +17.53%.

These aren't one-off flukes scattered across 26 years. They're a pattern. India's sector momentum strategy produced explosive calendar-year gains repeatedly, in different macro environments, driven by different sectors each time.

The aggregate numbers reflect that:

The up capture of 167.70% is the central result. When the Sensex rises, this strategy rose two-thirds faster. That's what 26.58% CAGR over 26 years looks like mechanically: sustained outperformance in up markets. The down capture of 100.93% tells an honest story: the portfolio doesn't protect during Sensex declines. It falls roughly in line with the local benchmark when markets sell off. The outperformance is earned almost entirely in bull markets, not through downside protection.

Sector Rotation Patterns

The strategy doesn't hold one sector forever. It rotates as momentum shifts. But some sectors dominated the top-two positions far more than others across 104 quarterly rebalances:

Technology, Healthcare, Utilities, and Consumer Defensive occupied the top-two positions for 25+ quarters each. That's not random rotation. India's IT sector (Infosys, TCS, Wipro, HCL) and its pharma sector (Sun Pharma, Dr. Reddy's, Cipla) have sustained structural growth stories that produced multi-year momentum trends. Utilities and Consumer Defensive showed up in defensive rotation periods. The strategy captured all of it.

Communication Services appeared only 4 times. Basic Materials only 11. India's sector momentum is concentrated in quality-growth and defensive sectors, not commodities. That's the opposite of Canada's pattern.

When It Worked and When It Didn't

The early boom years (2002-2007)

After a difficult 2000 (-30.13%, tech crash), the strategy strung together extraordinary returns:

Five of six years with substantial outperformance. India's IT sector was in a global outsourcing boom. Healthcare was expanding domestically. The strategy rotated through these momentum leaders and captured the bulk of the gains.

2008: The severity of the drawdown

India was not insulated from the global financial crisis:

A -60.21% single-year loss is severe. The strategy's max drawdown of -63.79% came primarily from this period. The recovery in 2009 was swift, but 2008 is the honest caveat in this dataset. When Indian sectors got caught in momentum positions heading into the global crash, the drawdown was painful. And the down capture data confirms it: the portfolio fell alongside the Sensex, providing no protection.

The Modi years and beyond (2014-2017)

2014 was an election year. The BJP's decisive victory unleashed a broad equity rally across Indian sectors. The momentum strategy was already positioned in the leading sectors and captured most of that move. 2015 and 2017 continued the theme.

2022-2023: Resilience and recovery

2022 was roughly flat for both the portfolio and the Sensex. The real story is 2023: +77.59% against Sensex's +17.53% is a +60pp excess return in a single year. India's domestic demand story and sector rotation drove the gap.

Difficult years: 2019 and 2025

The strategy had two notably bad recent years:

2019 was a particularly bad miss. The Sensex gained nearly 16% while the momentum portfolio lost 7%. Indian equity markets had a split year: large-cap indices held up while the mid- and small-cap names in the momentum portfolio's sectors reversed sharply. 2025 shows a milder version of the same pattern.

Full Annual Returns

Limitations

Currency risk for foreign investors. Returns are in INR. USD-based investors face additional USD/INR exchange rate risk. Rupee depreciation periods reduce the USD-equivalent return.

The max drawdown. -63.79% is not a comfortable strategy to hold. 2008 alone produced a -60.21% calendar year loss. Any investor running this strategy through 2008 needed extreme conviction to stay in through the recovery.

No downside protection. The 100.93% down capture vs Sensex means the strategy doesn't hedge during Indian market drawdowns. You get the full decline. The alpha comes from up markets only.

Sector concentration. When Technology or Healthcare dominate the top-two positions for 6-8 consecutive quarters, the portfolio is heavily concentrated in one sector type. That works when momentum is sustained. When a sector reverses sharply, the next rebalance captures the losses before rotating out.

Data coverage. FMP's NSE coverage from 2000 is not complete for early years. The avg stock count of 90.4 reflects current coverage, but early periods may have thinner representation. Results before 2005 should be read with some caution.

Not replicable as stated. The strategy selects from all qualifying stocks in the top-two sectors. With 90 average holdings, transaction costs, slippage, and liquidity constraints on smaller Indian names would reduce actual returns meaningfully. Treat these as theoretical backtest results, not live portfolio projections.

Data: Ceta Research (FMP financial data warehouse). Universe: NSE (India). Period: 2000-2025 (26 years), quarterly rebalance, returns in INR. Benchmark: Sensex (INR). Past performance does not guarantee future results. This is educational content, not investment advice.

Part of the Sector Momentum Rotation series. US flagship blog