Markets are getting back to risk-taking mode. In the last two weeks, the benchmark NSE Nifty has gone up 6.5 per cent, taking Nifty’s annual returns to the double-digit territory for the first time in two years. At first glance, these numbers may look small, but dig dipper and they reveal a big shift in the asset preference on the street.
“For the first time in many years, I see money moving from safe haven stocks in FMCG (fast-moving consumer goods), pharmaceuticals and IT (information technology) sectors to riskier and cyclical sectors such as capital goods, banking, real estate and banking among others,” said Ajay Bodke, head-investment strategy and advisory at Prabhudas Lilladher.
The shift is clearly visible in the relative performance of various sectoral indices. The best performing sectors in the last two weeks have been government-owned banks with the NSE CNX PSU Bank index up 20 per cent followed by CNX Realty (15.6 per cent) and CNX Finance (10.6 per cent). In contrast, the CNX Pharma index declined 3.1 per cent and CNX FMCG was down 0.6 per cent during the period.
The IT sector was marginally better and remained flat during the period. This is in complete contrast to the previous 12 months when FMCG stocks such as ITC, Hindustan Unilever, Godrej Consumer, Marico and Tata Global were top performers, followed by pharma makers, private sector banks and IT companies. This has prompted brokerages and fund houses to recalibrate their portfolios in favour of cyclical and interest rate-sensitive sectors (Look at the chart below). “Too much of bad news was factored into their stock prices. With the sentiment turning positive, there is value buying in these counters. A majority of the public sector banks, for instance, were available at less than half their book value,” says Devang Mehta, vice-president and head- equity sales, at Anand Rathi Financial Services. According to him, this risk-rally may continue for some time as the earnings cycle in India seems to have bottomed out and it can only get better from here on. He is advising investors to book some profits in defensive stocks and invest the proceeds in good quality ones in banking, capital goods and infrastructure and infrastructure finance companies.
Others are keeping their fingers crossed. “The government is finally showing the resolve to solve the macroeconomic problems, which is positive but the fundamentals haven’t changed much on the ground. Markets have gone up because foreigners are buying, leading to short covering. Nobody knows what will happen once they have exhausted their India allocation,” says Raamdeo Agrawal, joint managing director, Motilal Oswal Financial Services. Given the uncertainty, he cautions investors against turning away from defensives and embracing riskier and high beta stocks.
The view is shared by long-term investors, many of whom are still sceptical about the earnings growth in cyclical counters given policy overhangs and slump in investment demand. “The rally could be speculative as I don’t see earning visibility in any of these sectors in the near term. In contrast, consumption-driven sectors such as FMCG and pharma continue to show strong earnings growth. We will wait and see how earnings growth pans out in the next few quarters before tweaking our long-term investment strategy,” says Swati Kulkarni, executive vice-president and fund manager (equities), UTI Mutual Fund.