Sharper-than-expected economic recovery can fuel a further rally in domestic cyclicals, industrials, and financials as global central banks continue with their easy money policy.
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 of the related stocks doing well at the bourses.
Till 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.
Post budget, infrastructure, industrials, and stocks of public sector undertakings (PSUs) have rallied.
And the data does prove this correct.
On a year-to-date (YTD) basis, auto, bank, infrastructure, realty and metal indices have outperformed on the National Stock Exchange (NSE) with a gains between 10 per cent and 32 per cent, as compared to 9 per cent up move in the Nifty50 during this period, ACE Equity data show.
On the other hand, IT, media, pharma and FMCG indices have underperformed.
Going ahead, given the sharper-than-expected 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, which will ensure ample liquidity in emerging markets, including India.
“Calendar year 2020 (CY20) was all about COVID and staying safe – health-wise 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 has played out well in 2020 and investors are now looking at next avenues of growth. Hence, there was 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.
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 have triggered a rally in the related stocks.
“Defensives such as pharma, IT, and FMCG could take a pause.
"However, pharma and IT can still find a place in the portfolio.
"Especially, in IT sector, growth is likely to improve in this year, deal visibility is stronger, and IT companies should see steady earnings growth.
"Although Pharma and IT could underperform on a relative basis, they could 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 globally are preferring cyclical stocks, high exposure to commodities, emerging markets, industrials and banks relative to the past 10 years.
“FMS shows cyclical consensus is ‘cyclical’. Fund managers’ allocation to cash is down to 3.8 per cent, the lowest since March 2013, just before the ‘taper tantrum’ era under former Federal Reserve Chairman Ben Bernanke. Allocations to stocks and commodities are the highest since February 2011,” wrote Michael Hartnett, chief investment strategist at BofA.