Defensives losing sheen in market mayhem

The market mayhem witnessed on Friday knocked the wind out of the sails of defensive sectors which had so far shown resilience amid the huge volatility in the markets.

On Friday , National Stock Exchange's India VIX zoomed 26.4% to 23.6 on Friday indicating high selling pressure in the markets. Volatility Index is a measure of market's expectation of volatility over the near term. India VIX is a volatility index based on NIFTY Index Option prices.

Shares in defensive sectors were most sought after by foreign institutional investors as investments in most other sectors include the favourite banking segment took a back seat with sharp declines in stock prices of banking majors.

Further, signs of economic recovery in the US raised worries that the US Fed would start reducing its stimulus measures sooner-than-expected, which may prompt FIIs to move out of emerging markets including India.

"Foreign institutional investors have been overweight in defensive stocks and any profit taking going forward would further put pressure on stock prices," says Prakash Diwan, Director, Altamount Capital Management.

The BSE FMCG index which touched a 52-week high of 7,600 on July 24, 2013 is now down at 6,472 with favourites Hindustan Unilever and ITC coming off their recent 52-week highs of Rs 725 and Rs 380, respectively.

BSE Healthcare index which had touched a 52-week high of 9,510 on July 15, 2013 was now down at 8,985. Sun Pharma and Dr Reddy's Labs have also come off their recent 52-week highs of Rs 581 and Rs 2,401, respectively.

The IT sector also started turning into defensive aided by the depreciating rupee which leads to higher earnings for software majors, which earn most of their income from exports. Interestingly, the BSE IT index had touched a 52-week high of 7,700 on Wednesday, August 14. TCS and HCL Tech which recently witnessed gains have also come off their 52-week highs of Rs 1,890 and Rs 961, respectively.

 
As the rupee continues to depreciate, FIIs remained sellers both in the debt and equity markets. According to market experts, the cost of hedging a volatile rupee impacts the yield differential on debt investments.

FIIs sold Indian debt worth Rs 12,000 crore double than Rs 6,000 crore of equities during July 2013. In August, net investments in equities by FIIs is just Rs 1,601 crore so far.