Cyclicals rule the roost in post-Budget rally

Cyclical sectors, such as banks, metals, infrastructure, oil and gas, automobiles and realty have been major contributors to the rally seen in Indian equity markets post-Budget while decline in defensives, such as information technology, pharmaceuticals and fast-moving consumer goods led to the pre-Budget correction.

Gains more, losses less While Nifty has gained 10 per cent since the Budget, the cyclical indices have outperformed with gains of an average 14 per cent led by public sectors banks, metals and realty.

Defensives have gained an average 6 per cent led by IT, FMCG and media.

In the pre-Budget correction, while Nifty lost 12 per cent in two months ending February, cyclicals and defensives lost 13 per cent and 10 per cent, respectively.

Cyclicals had lost 15 per cent even in calendar year 2015 while defensives ended with gains of 5 per cent.

Hence, any rally, going ahead, would be led by cyclicals while defensives will underperform, say market experts.

Many positives Though Taher Badshah, Senior Vice-President & co-Head — Equities at Motilal Oswal Mutual Fund, has a stock-specific approach, one-third of his portfolio is exposed to sectors benefiting from cyclical recovery.

Value buying opportunities and expectations of a cut in interest rates by the RBI following the government’s recent move to cut interest rates on small savings schemes will fuel the rally in financial services, especially banks and automobiles.

The outlook on metal stocks have improved with the US Fed going slow on rate hikes and stimulus measures by Europe and Japan, which will help commodity prices move higher.

Realty stocks are edging higher not only because of expectations of lower interest rates and positive announcements, such as passing of the Real Estate Bill.

Things are looking better even for sectors such as infrastructure (due to higher government spending) and energy (due to Hydrocarbon Exploration Licensing Policy).

Ravi Gopalkrishnan, Head of Equities, Canara Robeco Mutual Fund, prefers cyclicals compared to defensives as he believes that most of the government policies especially in the Budget was largely oriented towards reviving the capex cycle.

However, he adds that sectors, such as power transmission, railways, defence and cement are long-term themes.

Expensive valuation Defensive sectors are likely to underperform as the focus shifts to cyclical stocks. Within defensives, media is the best sector but valuation is expensive. With US hinting at a slower increase in interest rates, emerging market currencies are likely to see reversal in the depreciating trend, which is not seen good for IT stocks.

FMCG companies will remain on investors’ watch list after renewed competition from new players, such as Patanjali and Sri Sri Ayurveda. Pharmaceutical stocks have been outperformers for several years and hence experts believe that they are likely to underperform even the other defensives.

COMMENT NOW