Large investors booking profits in high beta, cyclical stocks: Analysts

The rally on Dalal Street has entered a new cycle as former leaders have turned laggards, while stocks and sectors that lagged are outperforming now. Analysts say large investors are booking profits in high beta and cyclical stocks and shifting to defensive ones.
 
The shift in the broader market is clear from the recent movement in the key BSE sectoral indices. For example, the BSE Metal, BSE Basic Material, and BSE PSU indices have turned laggards after outperforming the benchmark BSE Sensex in the first seven months of 2021. In contrast, the BSE FMCG, BSE Oil & Gas, and BSE Energy indices are now leading the rally, even though they had underperformed the broader market between January and July.
 
The BSE Metal index has fallen nearly 2 per cent since the end of July. In comparison, the index was up 81 per cent in the first seven months of the year. The BSE Basic Material index has declined 0.1 per cent since the end July after rallying 67 per cent in the January-July period. The basic material index tracks the market capitalisation of top companies across a range of commodity sectors such as metals, cement, paper, plastics and petrochemicals, chemicals, and building materials.
 
Similarly, the BSE PSU Index has inched up 1.6 per cent since the end of July, compared with a 34 per cent rally in the first seven months, while the BSE Realty has risen just 4.5 per cent in the period against 28.4 per cent rise between January and July.

At the other end of the spectrum the FMCG, IT, and Oil & Gas indices have risen between 10 per cent and 16 per cent in the last month, against single-digit gains in the first seven months.
 
Among individual stocks, laggards such as Reliance Industries, Hindustan Unilever, Britannia, Bharti Airtel, Tata Consultancy Services, and Tech Mahindra among others are now leading the rally after underperforming the broader market for nearly a year.

Many analysts see this as part of a regular market cycle where investors rotate sectors and stocks every few months.
 
“The recent changes are part of the investors’ rotation out of stocks that had become too expensive and, thus, risky after a year of strong rally. They are now moving to stocks that had become relatively cheap or are defensive in nature,” says G Chokkalingam, founder and managing director of Equinomics Research & Advisory Services. He expects this process to continue for some time till new rally leaders are established and a new big move in the market starts.
 
Others say investors are now moving away from cyclical and industrial sectors to consumption-oriented ones. “The rally in the last 12 months was dominated by commodity and industrial companies that benefitted from higher metal and commodity prices. These prices are now cooling, which is a positive for user sectors such as consumer goods and this is where incremental money is moving,” says Dhananjay Sinha, MD and chief strategist at JM Institutional Equity.

Investors are also betting on a consumption-led economic recovery in India in the second half of FY22 that will benefit the top companies in sectors like FMCG, consumer durables, and retail. The IT sector, on the other hand, is expected to continue its good performance of the last one-and-a-half years.
 
Some analysts, however, see the recent move in the market as a defensive bet by investors as they prepare their portfolios for a market correction. “After the sharp up move in August the valuation in the broader market is not comfortable anymore and risk-reward ratio doesn’t favour much upside from current level. In fact, the chances of a 10 per cent correction in benchmark indices is now much greater than a 10 per cent upside,” says Shailendra Kumar, CIO of Narnolia Securities.
 
Given this, it makes sense for large investors to shift a part of their money to low beta and defensive stocks and away from riskier growth stocks.