Analysts turn cautious; prefer defensives amid sporadic lockdowns

Activity levels, analysts at Jefferies believe, will take a significant hit across sectors such as infrastructure, real estate, discretionary, and durables as more local lockdowns are announced

Curbs in Maharashtra put in place in the backdrop of rising Covid-19 cases followed by the night curfew imposed in Delhi has made analysts a worried lot, with brokerages now favouring defensive stocks over cyclical plays.

With Covid-19 cases rising in the country, they feel more restrictions could follow across major cities. Though a national-level lockdown is ruled out for now, the state-level situation will be different. As such, Maharashtra and Delhi’s measures may be followed in other states in case coronavirus cases spike. As a result, the potential spread of local lockdowns would likely delay the expected recovery.

That said, the key worry is that national level sops (moratorium etc.) might be missing this time. Activity levels, analysts at Jefferies believe, will take a significant hit across sectors such as infrastructure, real estate, discretionary, and durables.

“We cut banking to underweight (earlier overweight) by removing IndusInd Bank and cutting State Bank of India (SBI). We also remove Kajaria Ceramics. We increase weight in IT (evenly between Infosys, HCL Technologies and TCS) and make it overweight. The other defensive weight addition is consumer staples to Neutral (big underweight earlier) with Hindustan Unilever (HU) being made neutral and the addition of Marico and Colgate,” wrote Mahesh Nandurkar, managing director at Jefferies in a recent co-authored note with Abhinav Sinha.

At the bourses, sectoral indexes of the classic defensives plays - fast moving consumer goods (FMCG), pharma and information technology (IT) have done well in the last one month compared to nearly 2 per cent fall in the Nifty50.

The Nifty IT index has been among the key gainers, up 5.2 per cent since then. Nifty FMCG and Nifty Pharma indices, too, have surged around 4 per cent and 3 per cent respectively during this period, ACE Equity data show. On the other hand, investors have dumped cyclical plays, such as banks and real estate with both the respective indices on the NSE slipping 7 per cent to 9 per cent during this period.

Vaibhav Sanghavi, co-chief executive officer, Avendus Capital Public Markets Alternate Strategies, too, believes that markets are likely to prefer defensive stocks in the near-term amid rising Covid cases. Over the medium-to-long term, however, the money may shift back to cyclicals as vaccination and economic recovery gathers pace, he says.

“The first half of the March 2020 quarter results season is IT heavy. The consensus expectation is that the companies will report good numbers and stable guidance. This, along with the Covid-related developments will keep IT, FMCG and pharma stocks in focus. On its part, the Reserve Bank of India (RBI) is trying to keep interest rates and the yield curve in check as the economy recovers,” Sanghavi said.

Besides Covid-19 cases, pace and efficacy of vaccination markets will keep a tab on corporate results and the guidance given by companies, bond yields, policy measures of global central banks and oil prices.

“Expeditious containment of Covid cases and accelerated pace of vaccination will provide comfort for FY22 economic growth recovery. Secondly, the expectations for FY22 earnings are running high at over 30 per cent growth in Nifty fiscal 2021-22 (FY22) EPS. Given the rich valuations, any misses on FY22 earnings delivery may act as a dampener,” said Gautam Duggad, head of institutional research at Motilal Oswal Securities.