Investors betting big on cyclicals
After playing safe during the initial phase of the pandemic in 2020 and sticking to defensive plays, such as pharmaceuticals, fast-moving consumer goods (FMCG), and information technology (IT), investors are now betting big on cyclical recovery after a sharp economic contraction, with most related stocks doing well at the bourses.
Until June-july, defensive sectors like pharma and FMCG were leaders, followed by IT, as investors wanted to play safe given the uncertainty around the pandemic, its impact on the economy, and fortunes of India Inc, analysts say. From August-september, cyclicals like auto and banking & financials picked up pace. After the Budget, stocks of infrastructure firms, industrial companies, and public sector undertakings have rallied.
On a year-to-date (YTD) basis, auto, bank, infrastructure, realty and metal indices have outperformed on the National Stock Exchange (NSE), with gains between 10 per cent and 32 per cent, as compared to 9 per cent upmove in the Nifty50, ACE Equity’s data shows. On the other hand, IT, media, pharma, and FMCG indices have underperformed.
The sharper-thanexpected economic recovery back home, analysts say, can fuel a further rally in domestic cyclicals, industrials, and financials as global central banks continue with their easy money policy, ensuring ample liquidity in emerging markets, including India.
“The calendar year 2020 (CY20) was all about Covid and staying safe — healthwise and in the markets. CY21 is seeing people take risks. As a result, cyclical stocks are doing well, which are momentum-driven high beta plays. The ‘defensive’ story played out well in 2020 and investors are now looking at next avenues of growth. Hence, there is a churn from defensives to cyclicals,” explains G Chokkalingam, founder and chief investment officer at Equinomics Research.
That said, a large part of the recent stock churn in India has been on account of the Budget proposals. The government’s divestment agenda, proposal to set up a ‘bad bank’, privatisation of select public sector banks (PSBS), and focus on infrastructure have been the key catalysts that triggered a rally in the related stocks.
“Defensives, such as pharma, IT, and FMCG can take a pause. However, pharma and IT can still find a place in the portfolio. Especially in the IT sector, growth is likely to improve this year. Deal visibility is stronger and IT companies should see steady earnings growth. Although pharma and IT may underperform on a relative basis, they can provide protection in case of any downturn in the market,” says Mahesh Patil, chief investment officer for equity at Aditya Birla Sun Life Mutual Fund.
Even at the global level, fund managers are now betting on a V-shaped economic recovery, which they believe can fuel a rally in cyclical stocks. Bofa surveyed 225 mutual fund, hedge fund, and pension fund managers globally with $645 billion worth of assets under management (AUM) between February 5 and 11, 2021. Findings of the fund manager survey (FMS) suggest investors are preferring cyclical stocks, high exposure to commodities, emerging markets, industrials, and banks relative to the past 10 years.