Markets look poised for sectoral rotation

Focus shifts to beaten-down stocks, from FMCG, IT & pharma sectors

After the S&P BSE Sensex hit an all-time high after nearly six years, recent sessions have seen the carefree run slow. Is this a temporary pause?

Says Ashu Madan, chief executive officer, Religare Securities: “Upgrades by Goldman Sachs and Nomura are purely based on the index movement. The rise has not been on account of improvement in fundamentals but purely on the gush of liquidity.”

“Results of state elections, possible halt to buying by FIIs (foreign institutional investors) which have been investing since January 2012, concern on fiscal balance and steadily increasing headline inflation are near-term risks to the markets. However, they are unlikely to correct beyond five per cent,” feels Naveen Fernandes, fund manager, Centrum Broking.

Most analysts agree the markets are likely to consolidate at the current levels and an across-the-board sell-off is unlikely. Sector rotation, however, is imminent, given the spike seen in October.

Suggests Ambareesh Baliga, managing partner - global wealth management, Edelweiss Financial Services: “We’re already seeing some correction and this is healthy. There will be some sectoral rotation, with mid-cap stocks coming back into favour. I don’t think large-cap stocks merit a sell at the current levels, since the correction will not be very deep.”

Given investors’ preference for defensive bets in a volatile market like fast moving consumer goods (FMCG), pharmaceutical stocks and the information technology (IT) pack, given the rupee-dollar equation, most of these stocks seem richly valued at the current levels.

“In my opinion, pharma, IT and FMCG stocks will take a breather. However, they are not ‘sell’ candidates. Unless there is a huge dose of adverse news, I don’t see the Nifty breaking 6,000 levels on the downside. Once there is sector rotation, stocks from capital goods, infrastructure and the metal pack are likely to move up, on the back of value buying,” says Baliga.

Deven Choksey, managing director, K R Choksey Securities, suggests the money is moving out of FMCG, IT and partly from pharma stocks. “ITC and HUL are seeing some profit booking. Wipro, TCS and Infosys in IT, and Sun Pharma in the pharma pack, are some of the stocks facing pressure and where I see limited room for appreciation. Mid-caps are looking attractive, given the valuations most stocks are quoting. Select stocks have a re-rating potential,” he says.

Fernandes feels state-run banks and overvalued stocks in the pharma sector might be worst hit. He says investors should exit large-cap cement stocks and in the mid-and-small cap space, infrastructure and capital good stocks that have run up without corresponding profitability, stocks with high promoter pledging and high borrowing.