With a bleaker outlook for the equities market, foreign broking houses have taken a sharp U-turn in strategy, asking clients to shed risky stocks and shift focus to defensive bets.
Investors typically turn towards defensive sectors when the market forecast is expected to remain bearish. Most broking houses have already cut their year-end target of the Bombay Stock Exchange (BSE) benchmark, the Sensex, and expect the market to remain subdued, due to stalled reforms and a deteriorating macroeconomic situation.
Three leading foreign firms — Nomura, Deutsche Bank and UBS — are recommending clients to go overweight on sectors such as fast moving consumer goods (FMCG), pharmaceuticals and automobiles, while asking them to remain under-invested in high-beta sectors such as real estate and banks. High-beta stocks are those tending to rise or fall faster than the markets.
Just a couple of months earlier, some of these firms were asking clients to aggressively add high-beta stocks to their portfolio. This shift in stance implies the 'risk-on' trade, which had led to a surge in Indian equities at the start of the year, could have ended.
Abhay Laijawala, head of research, Deutsche Equities India, said in a report on Monday, “We believe that investor sentiment, which is eroding rapidly, will stay subdued until India's macroeconomic indicators and policy environment become more certain, the rupee stabilises and corporate confidence improves.”
Nomura, which had cut its 12-month target on the Sensex to 17,000 points, believes the outlook for the Indian market is turning increasingly bleak due to the perilous external account position and a weak rupee, which reflects fiscal profligacy. The rupee closed at 52.74 against the dollar on Monday. It has fallen 8.3 per cent from its recent high of 48.69, touched on February 3.
Meanwhile, after gaining 12.6 per cent in the first three months of this year, the 30-share Sensex has fallen 0.5 per cent this month. It closed at 17,318.81 on Monday.
In a sign that investors have already turned towards defensive sectors, the FMCG index of the BSE was the best performer in April, gaining 6.2 per cent. On the other hand, stocks belonging to high-beta sectors, such as realty and capital goods have gone out of favour again.
The BSE Realty index declined 4.75 per cent this month, while the BSE Capital Goods index dropped 6.2 per cent. These sectors were among the top performers in the January – March period (see chart).
Suresh Mahadevan, managing director and head of equities, UBS Securities (India), has completely changed his stance from January, when he was positive on high-beta stocks. “We are turning more defensive in our model portfolio. We are reducing weights in banks, infrastructure and real estate, while adding weights to consumers, pharma, & IT (information technology),” he mentioned in a report.
Deutsche Bank is recommending clients add defensive stocks till there is more certainty on economic indicators, stability returns for the Indian currency and corporate confidence improves.
Due to the negative sentiment, April saw the first monthly outflow from foreign investors this year. After pumping in about Rs 44,000 crore in the Indian market in the first three months of this calendar year, FIIs had pulled out a net Rs 1,109 crore in this month till April 28.