Back in biz: Equity investors turn aggressive on red-hot defensive stocks

Most of the rise in the defensive sector weightage in the index has so far been led by pharmaceutical manufacturers but FMCG and IT Services companies out-perform the broader market in July

After underperforming in the broader market for two years, the stocks in the defensive sectors — FMCG, IT Services and pharmaceuticals — are once again finding favour among investors. The combined weight of these three defensive sectors have now increased 27.6 per cent from the four-year low of 27.1 per cent in December 2023.
 

The surge has been led by pharmaceutical manufacturers but FMCG and IT services companies out-perform the broader market in July.

Top pharma companies such as Sun Pharmaceuticals, Cipla and Divi's Laboratories have, however, been among the top performing index stocks on a year-to-date basis.

The combined weight of the four pharmaceuticals in the index has nearly doubled year-to-date to 3.65 per cent from 1.84 per cent at the end of December 2023.

In comparison, FMCG and IT sectors remain an under performer on a year-to-date but these sectors saw a turnaround in fortunes in July.

The top stocks in both these sectors out-performed the broader market last month leading to a rise in their index weight.

The FMCG sector weight is up from 10.5 per cent in July to 10.7 per cent currently. Similarly, IT services weight has increased to 13.2 per cent from 12.3 per cent at the end of July 2024.

The analysts expect this trend to continue in the near term and attribute this switch in market sentiment from a risk-on to a risk-off trade.

“There is widening of the market funnel in the first six months of the current calendar year and investors took bets on relatively riskier segments such as mid and small caps and stocks in cyclical sectors. In the past month we have seen a risk-off sentiment in the market and investors are moving to relatively safer stocks that offer downside protection,” says Dhananjay Sinha, co-head research and equity strategy at Systematix Institutional Equity.

The shift in investors sentiment favours top companies in IT services, FMCG and pharma, most of which have a debt-free balance sheet and report high double digit return on capital employed and return on equity. This makes their finances resilient to a growth slowdown.

According to Dhanajay, a better show by these sectors on the bourses in the recent months has also been supported by a relatively better earnings growth by defensive sectors in Q1FY25 so far.

“The overall corporate earnings in Q1FY25 have performed below expectations but most companies in IT services, FMCG and pharma have done relatively better and reported better financial metrics than companies in other non-financial sectors.”

A relatively better show by defensives also ties-in with the union government's new focus on promoting demand and employment in the country.

The Union Budget 2025 announced a major programme to expand the country’s formal job market by providing financial incentive to companies to hire 10 million interns over the next five years.

It also announced a cut in personal income tax under the new tax regime and a lowered import duty in gold, silver and mobile phones.

Experts say these policy measures will put more money in the hands of individuals giving a boost to private consumption which is positive for FMCG and pharmaceutical companies.

Analysts say the move towards defensives is more prominent among experienced investors.

“The benchmark indices are at an all-time high and valuations in mid and small cap space have reached new highs. Many experienced and big investors are moving towards defensive sectors to protect their portfolio from a sudden correction in the broader market,” says G Chokkalingam, founder & managing director, Equinomics Research and Advisory.