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Foreign portfolio investors’ (FPIs’) bet on cyclical sector stocks seems to be paying-off well in the last few months. This is due to the strong run in the stock prices of companies in these sectors on signs of a ‘V’ shaped economic recovery after the pandemic.
FPIs’ assets under custody in cyclical and economy-oriented sectors such as capital goods, automobile and auto components and metals and mining have recorded a sharper growth between April 2020 to January 2021 compared to investments in defensive sectors such as FMCG, IT and pharma.
Cyclical stocks belong to companies which are engaged in the manufacture of discretionary goods and services. These stocks closely follow the trends in the overall economy and rise and fall with the economic cycle.
Capital goods
According to depositories data, FPI assets under custody (AUC) in the ‘capital goods’ sector jumped 159 per cent to ₹1.46-lakh crore as on January 31, 2021 from ₹56,250 crore as on March 31, 2020. Similarly, FPI AUC in ‘automobiles & auto-components’ — a sector that is considered to be a leading indicator of economic progress — increased 113 per cent to ₹1.89-lakh crore (₹88,463 crore) during the period.
Among the cyclical sectors, FPIs assets in the ‘banks and financial services’ sector witnessed highest growth at 77 percent between March-end 2020 and January-end 2021. FPIs AUC in financial services stood at ₹12.55-lakh crore as of January 2021 (against ₹7.09-lakh crore in March 2020).
However, the spike in FPI AUC in financial services is on account of massive inflow into the sector during October to December 2020. Banking and financial services sectors are the highest recipient of FPI inflows in FY21. The sector received ₹63,809 crore between April 2020 and January 2021, which accounts for 27 per cent of the record inflows of ₹2.38-lakh crore pumped in Indian equities during the period.
“In March and April 2020, FPIs went underweight on banking and financial and sold massively from these sectors but they have realigned to the sector by pumping huge sums of money during October to December 2020,” said Abhilash Pagaria, analyst at Edelweiss Securities.
Growth in AUC
In contrast, sectors like capital goods, automobile and auto components, metals and mining sectors did not witness any substantial inflow. The growth in AUC in these sectors are driven by the increase in stock prices. Improving macro-economic sentiment, sooner-than-expected recovery from the pandemic and government's push for higher capex are some of the factors that have pushed the stock prices of these economy-oriented sectors.
“We have not seen major inflows into these sectors but there is not much of an outflow as well,” Pagaria said, adding, “AUM has increased mainly because of the stock price increase.”
In its recent report, ‘FFI - Foreign Sectoral Flow Insight’, Edelweiss said capital goods ($580 million), auto ($477 million) and telecom ($355 million) were the three sectors that saw maximum FPI inflows in January while banks & financial ($345 million) witnessed outflows in the one-month period ending January 2021.
Within capital goods. Some gainers are Lakshmi Machine Works, which gained 149 per cent between April 2020 and January 2021. Bharat forge (138 per cent) and Havells (114 per cent) also gained substantially in the same period. In the auto sector, Tata Motors (283 per cent), Ashok Leyland (210 per cent) and Bajaj Auto (107 per cent) are some of the top gainers.