Rate sensitive sectors favourite among equity fund managers

Interest rate sensitive sectors like basic materials, consumer segments and financials are favourites among fund managers as they make up for over 50 per cent of their equity fund portfolios, says a report.
According to Morningstar, equity portfolio managers have been positioning their portfolio to benefit from the turnaround in the economy and fall in interest rates.
"Sectors from the cyclical space (such as basic materials, consumer cyclical and financial services), which are rate- sensitive in nature, have been favourite among the Indian managers as these three combined account for more than 50 per cent of the portfolios of equity funds," it said.

Equity movements in consumer cyclicals rely heavily on the business cycle and economic conditions and include automotive, housing, retail and entertainment. The category is divided further into durable and non-durable sections.
Stocks from the financial services space continue to be the top pick for managers who have increased their allocation in the sector from 21.1 per cent in December 2015 to 23.4 per cent at the end of September 2016.
"Most of the managers continue to prefer and buy into some of the well managed private sector banks compared to public sector banks which have been reeling under the shadow of non-performing assets (NPA)," the report said.

Consumer cyclical accounts for a huge pie in equity funds portfolio with managers raising their exposure into the stocks from the auto manufacturer and auto ancillary space.

The segment is expected to witness increased demand from rural as well as urban population on the back of falling interest rates as well as implementation of seventh pay commission, said Morningstar, a provider of independent investment research material.
Moreover, with interest rates coming down and government's effort to increase infrastructure spending, the managers are increasing exposure in companies from basic material sector, particularly in the areas of cement, building material and steel.

As per the report, stocks from industrials sector also accounted for significant portion of the funds' portfolio.
However, the allocation to the sector has come down in the recent times owing to lack of pickup in investment demand and absence of meaningful transmission of rate cut.
Interestingly, the report noted that technology sector has been losing favour among managers in the recent times owing to the macroeconomic uncertainty due to Brexit.
"Europe is one of the largest markets for the Indian IT companies and uncertainty in the region has led to tepid outlook for the technology sector."
While noting that sentiments towards equity markets remained largely positive, the report said most managers are turning to large cap stocks. However, many still continue to hold on to small and mid-cap stocks.