Domestic fund managers unanimously expect large cap companies to perform better over the next 12 months, and overall they have favoured cyclicals over defensive sectors.
The fund managers are overweight on sectors such as auto, IT and pharmaceuticals while underweight on FMCG and cement sectors. These were the findings of domestic fund managers survey conducted by Merrill Lynch in India through its affiliate, DSP Merrill Lynch.
As for the preferred sectors and stocks, the survey found a big shift toward the market's biggest stocks by market value. "While fund managers were split on their preference for small caps over large caps in April, a whopping 86 per cent now expect large caps to perform better over the next 12 months," the report said.
Fund managers' preferences by sector remained virtually unchanged. They remain overweight in the auto, IT and pharmaceutical sectors, and underweight in the cement and fast-moving consumer goods sectors. However, given heightened tensions between India and Pakistan, the view on preference of cyclicals over defence stocks may change, the report said.
"The only sector where we differ from the consensus is the cement sector, where we remain overweight," DSP Merrill Lynch said.
Given the recent market fall, fund managers continue to believe the market to be grossly undervalued, with near 30 per cent thinking the market is undervalued by more than 25 per cent.
In line with this, fund managers continue to be underweight cash, with cash levels being 3-6 per cent. Given the continued bullishness and low cash levels, the risk to downside remains, the report said.
Fifty per cent of fund managers now expect corporate profit growth to improve strongly, with nearly one-third expecting EPS growth of more than 20 per cent. However, DSP Merrill Lynch said it was more cautious and expect downgrades in earnings particularly in global cyclical sectors such as petrochemicals and metals.
In terms of the sectoral growth outlook, fund managers still expect pharma and auto to lead the way with FMCG and cement being the least favoured. However, DSP-ML expects an increase in profit outlook for cement companies, as it is expected that increase in cement prices would push EPS by 25 per cent higher this year.
