Amid fear of heights, D-Street investors discreetly shift to defensive stocks

Mumbai: As domestic stocks continued to rally amid the Covid-19 pandemic and reached eyebrow-raising valuations, investor interest has shifted back to defensives like IT, pharma and consumption stocks, with the cyclicals forced to take a backseat.

BSE Healthcare index has been the top performing sectoral index for the year to date with over 26 per cent gain, followed by BSE IT index, which has added 11 per cent. BSE Teck index is up 10 per cent and the FMCG index 1 per cent. Benchmark Sensex is still down 11 per cent for this calendar.

BSE Bankex has been the worst impacted one, and has lost one-third of its value so far in 2020.

The coronavirus pandemic and subsequent lockdowns have led to serious economic repercussions for cyclical businesses, majorly impacting demand and future business outlook.

“There is some sense of caution over the recent rally. The earnings numbers for defensives – like we saw in the case of IT – have been better,” said Gautam Duggad, Head of Research for institutional equities at Motilal Oswal Financial Services.

The brokerage has increased its weightage for defensives in its model portfolio. The weightages of IT and telecom have gone up in its model portfolio, with Bharti Airtel and Infosys each getting by 100 basis points (bps) extra clout, and TCS and HUL 200 bps each. Bharti is now more than 2 times overweight in the model portfolio compared with a year ago.

“Cyclicals may see selective movement – and remain volatile until economic growth stabilizes and earnings growth resumes,” Duggad said.

Pharma stocks, once darlings of investors, are back in the limelight after recent years’ underperformance as regulatory and pricing woes in the US hampered prospects.

IT companies, too, were not on analysts’ top wish list for long. However, things have changed now, and the guidance from Infosys and HCL Tech suggests they now have a reasonable view of the Covid-19 impact on their businesses.

The commentaries this season have been more reassuring than at the end of March quarter.

Earnings of most of the tier-I IT companies for the lockdown-hit June quarter have beaten analysts’ expectations, and that offers a ray of hope.

Barring TCS, other top IT players Infosys, Wipro and HCL Tech smartly beat analysts’ expectations in June quarter earnings. Infosys shares have already tested record high levels, after posting forecast-beating earnings.

“The defensives – whether IT, pharma, FMCG, telecom or agrochemicals – are spaces where there is very basic consumption,” Nischal Maheshwari, CEO for Institutional Equities at Centrum Broking, said in an interaction with ETNow on July 9.

“The basic things, consumption of agrochemicals and telecom is the other space where good growth is coming,” he said, adding that there is a strong case to invest in defensives.

For consumption, green shoots are visible in rural demand, buoyed by government expenditure and normal monsoon. The interiors are relatively safer from the relentlessly spread of Covid-19 infections in their densely-populated urban counterparts.

Consumption, though, has picked up in pockets. It has been more due to pentup demand. Rural consumption is picking up on the back of government expenditure, and as hinterlands are getting impacted less by the Covid-19 disruption. However, analysts say a sustainable consumption trajectory is yet to be seen.