Mixed sectoral performance in first half

Banking, realty down; FMCG, autos, IT do well; no major pick-up expected in corporate earnings

Stocks of companies in the banking, real estate, capital goods, power and consumer durables sectors have reported negative returns in the first six months of the current financial year, 2013-14, with the respective sectoral indices slipping at least seven per cent on the BSE exchange. In comparison, there was a five per cent rise in the benchmark index S&P BSE Sensex.

Interest rate-sensitive sectors, mainly banking and realty, fell sharply after the Reserve Bank of India (RBI) unexpectedly raised the policy rate by 0.25 percentage points to 7.5 per cent to control inflation, with concerns that high consumer price inflation could prompt the central bank to again do so. For these sectors, a higher cost of credit would reduce their revenue.

The BSE realty index was the top loser, cracking 34 per cent. The banking index, Bankex, slipped 16 per cent during this period. The capital goods and power indices were down 15 per cent and 7.5 per cent,, respectively.

State-owned lenders such as Dena Bank, Union Bank of India, Bank of India, Canara Bank, Andhra Bank and Union Bank of India have seen their market value decline by a little over 40 per cent each, due to rising bad loans.

The net flow of foreign investment into Indian equity more than halved. Foreign institutional investors (FIIs) made net investments of $3.25 billion (Rs 17,000 crore) in the first half, as compared to $7.3 bn (Rs 39,7450 crore) in the same period of last year.

Going ahead, there are no major macro events expected domestically. The results of home–oriented companies are expected to remain subdued. The markets will also closely watch developments on the US debt ceiling issue and any subsequent Federal Reserve decision to taper its bond buying programme. “While it is widely expected that more time will be taken to discuss the spending cuts, concerns might linger on the potential impact of any spending cuts on the US economy,” says Dipen Shah, head, private client group research, Kotak Securities.

However, stocks from the sectors of health care, fast-moving consumer goods (FMCG), information technology (IT), automobiles and telecommunications recorded handsome returns, as investors turn to safe-haven defensive scrips. The FMCG, IT and auto sector indices all have risen more than 10 per cent since April 1.

A number of individual stocks have risen a little above 24 per cent each in the past six months. Among these are Sun Pharma, Dr Reddy’s Laboratories and Lupin from pharma, Britannia Industries and Hindustan Unilever from FMCG, Reliance Communications and Idea Cellular from telecom, Hero MotoCorp and Eicher Motors in automobiles.

  Jyotivardhan Jaipuria, managing director and head (research) at Bank of America-Merrill Lynch, continues to favour global plays such as IT and pharma over domestic ones, given that rate cut expectations in the market will be further toned down. “Telecom remains another overweight for us. Given the delay in macro recovery and the demand destruction, we do not expect a material pick-up in corporate earnings. While we believe margins would stabilise, it is the poor sales growth which would result in a tepid recovery in profit growth,” he adds.

“The economy’s macro fundamentalsare out of shape; hence, markets have underperformed.  Defensive sectors were holding on for the simple reason of high FII holding in these stocks. FIIs were holding on in the hope of an uptick in the economy,” says Kishor P Ostwal, chairman, CNI Research.

The defensive sectors might hold only till a revival. If one happens, it will boost beaten-down stocks for value buying propositions. However, no fresh inflow is expected till next year’s elections, he adds.