Fund managers press pause button on defensive sectors

Cut allocations to pharmaceuticals, FMCG, banks; favour automobiles, telecom, metals.

Defensive sectors like fast moving-consumer goods (FMCG) and pharmaceuticals are no more attracting fund managers as stocks become highly valued. Fund managers are not increasing holdings in the sectors and have pressed the pause button. Rather, other sectoral stocks which became relatively cheaper came on the radar.

During the first four months (April-July) of the current financial year, stocks in these sectors had emerged as good picks when equity markets were showing signs of weakening.

For instance, the exposure of mutual fund houses on FMCG in their equity assets was continuously on the rise till July, with an additional 100 basis points were allocated to the sector.
 

DEPLETING SHARE Allocation of equity assets to different sectors                (All figures in %)
Sector	March	July	August
Auto	3.97	4.06	4.18
Banks	17.20	16.96	16.09
Consumer non-durables	6.61	7.59	7.52
Pharmaceuticals	6.24	7.52	7.41
Telecom services	2.5	3.56	3.83
Mineral/mining	1.63	1.70	1.82
Source : Securities and Exchange Board of India

One basis point is a hundredth of a percentage point. Similarly, in pharmaceuticals, fund managers increased exposure by 125 basis points during the same period.

However, a nearly double-digit erosion in benchmark indices in August forced fund managers to apply brakes on their strategy of increasing exposure on the defensives. Amid this, fund managers also reduced their allocation in banking stocks. The cut in bank stocks was relatively larger, at 85 basis points in just one month. This led to money flowing across the sectors.

Gopal Agrawal, chief investment officer at Mirae Asset Global Investments (India), says, “During August, when corrections got deeper, stocks in other sectors became relatively cheaper than the defensive ones. Money got invested in sectors like information technology, metal and telecommunications, among others.”

Auto continued to attract more allocation of equity assets. Maruti Suzuki, Bajaj Auto and Hero MotoCorp remained big bets of fund managers.

In August, the Bombay Stock Exchange FMCG Index slipped 3.5 per cent, while the Health Care Index was down 7.15 per cent. Shares of Marico, which had rallied the most, collapsed 11.2 per cent and those of ITC were down four per cent. In the pharma space, Ranbaxy got hammered by over 12 per cent, while stocks of Cipla and GlaxoSmithkline Pharmaceuticals lost between nine and 10 per cent of their values.

Kaushik Dani, head of equities at Peerless Mutual Fund, explains, “Valuations in the FMCG space were expensive and caution was being built up on the sector as inflation remained high. Inflation impacts the demand and higher input prices hit companies’ margins. So, investments got re-balanced in other sectors.”

Investments by fund houses in equities had hit a three-year high last month when around Rs 2,500 crore was injected into the markets. As on August 31, equity assets under management stood at Rs 1,88,316 crore compared with Rs 2,10,177 crore in March.