Laggards try to play catch-up

Capital goods, power, PSUs outshine traditional defensives in recent weeks; markets still cautious on recovery in core economy

Since the beginning of September, core sector indices such as capital goods and power have outperformed the bellwether Sensex on the BSE exchange and traditional defensive sectors such as fast-moving consumer goods (FMCG) and information technology (IT).

The BSE capital goods, metal, public sector undertakings (PSU) and power indices were up 12.3, 10.8, 11.2 and 10.8 per cent, respectively. In contrast, the BSE Sensex was up 8.1 per cent.

Market watchers say much of this is after a huge correction in these stocks. Ownership levels in these stocks have been low; with more investors moving out of some of these, even a small buy tends to have a large impact on prices of these scrips. Says Motilal Oswal, chairman, Motilal Oswal Securities: “A lot of these stocks were beaten down in the past year. This recovery has nothing to do with any improvement in the fundamental story. Businesses are still not seeing a growth pick-up.”

Market watchers say these indices have been moving up since the sentiment has improved on the external front, especially with the rupee rebounding to 61.79 from a low of 68.83 against the dollar (August 28). The BSE Auto index gained 12.2 per cent.

Even as these core indices show signs of strength, the ground environment remains a concern. Says Dharmakirti Joshi, chief economist, CRISIL: “A decisive upside is definitely not in sight. There is some improvement. Even if there's a mild uptick, it will be probably in the second half. Sentiments are improving because there's more comfort on the currency front and attempts are being made to clear projects. But problems are still big in the economy, as the investment cycle has not picked up. I am very cautiously optimistic.”

Experts also feel the government’s recent policy announcements on fuel supply for the power sector are adding to the positive sentiments. Says R Krishna Kumar, head, equity, Sundaram MF: “On the ground, what the government has done for the power sector where fuel cost can be passed on is being viewed as a positive. Changes in the road concession agreement is also in the works and that's benefiting road companies.”

The government's proposals to provide coal and gas to power companies also saw stocks in these sectors show handsome gains. GMR Infra rose 68.1 per cent and JP Power Ventures by 27.9 per cent.

Many PSU stocks also gained on the back of the government's steps. Mahanagar Telephone Nigam and Engineers India were up 52.2 and 30.6 per cent, respectively. Bharat Heavy Electricals surged 24.4 per cent.

In July, industrial production rose 2.6 per cent compared to a contraction of 1.8 per cent in June. Capital goods production in July rose for the first time in four months, by a surprising 15.6 per cent. Says Kumar: “There has been some improvement in the core sector in the past month and maybe there are some green shoots (of recovery) but we need to see sustainability.”