FIIs dump cyclicals, churn defensives in Q2

Cyclical stocks, which are currently not in favour with foreign institutional investors due to their sell-off ‘risky assets’ strategy in not only markets but also sectors, will be back in action soon. Reason: imminent revival of the economy coupled with relatively cheap valuation.

In the September quarter, FIIs sold cyclical stocks while their strategy was balanced with regard to defensives. Of the 85 cyclical company stocks, FIIs bought into 26 companies and sold 58 companies.

Most cyclical indices such as CNX Auto, CNX PSU, CNX Energy, CNX Metals and CNX Real Estate are down 1-39 per cent year-on-year, while CNX IT, CNX Pharma and CNX FMCG are trading firm in the range of 4-22 per cent. Among the cyclicals, Bank Nifty and CNX Finance are up 3-6 per cent.

The average price-to-earnings multiple of cyclical sectors according to the NSE stands at 21.2 times compared with 43 times for defensive sectors.

“Cyclicals is the only option to buy as the economy is on the revival path. Valuation-wise too, cyclicals are trading at much cheaper valuations. But it all depends on how much patience one (the investor) has,” said Daljeet Kohli, head of research at IndiaNivesh Securities.

However, R Sreesankar, Head — Institutional Equities at Prabhudas Lilladher, and Vinod Nair, Head — Fundamental Research, Geojit BNP Paribas Financial Services, differ.

Sreesankar prefers a stock-specific strategy, at least till the end of the March quarter since he believes cyclicals currently are going through an adjustment phase as expectations have run ahead of reality. Correction in valuation of defensive stocks is also warranted as there is a limit to which they can rise, he added.

In contrast, domestic institutions mostly churned their cyclical portfolio as they increased their presence in 48 cyclical companies and sold in 36.

Like FIIs, DIIs also adopted a balanced approach with buying and selling activity in almost equal number of companies despite high valuation of most companies.

Nair of Geojit believes that clarity on FII strategy will emerge after the US finally hikes rate. “While FIIs are selling emerging markets, DIIs will continue to buy cyclical sectors as they did before the new government was even formed,” he said.

In the September quarter, DIIs net bought shares worth ₹27,258 crore while FIIs net sold ₹18,000 crore not only due to lack of clarity on rate hike in the US, but also due to China slowdown followed by yuan devaluation. As a result, CNX Nifty declined 6 per cent in the quarter.

In October, while FIIs resumed buying heavily with net investments of ₹6,600 crore and DIIs sold less at ₹1,417 crore, this has led to the Nifty gaining 1.4 per cent.

Most market participants expect the outcome of Bihar elections to impact sentiments. However, rate hike in the US, widely expected in December, will have a lesser bearing, feel some market participants.

But in both scenarios — positive or negative — cyclical stocks are expected to witness greater action than defensives. Anxiety has been higher in the case of cyclicals as financial performance continues to disappoint and business prospects remain grim.