Poll dance: Cyclical stocks see buying interest as market rally broadens

Written by fe Bureau | Mumbai | Updated: Apr 29 2014, 14:42pm hrs
HDFC BankValuation gap with defensives narrows from 55% in August 2013 to 41% (AP)
The market momentum appears to be broadening even as the benchmarks continue to touch new highs. Buying interest is clearly spreading towards the cyclical sectors, which have underperformed the benchmarks for most part of the last two years, given that the number of stocks outperforming the benchmark indices has jumped in the year so far.

For instance, of the 348 stocks from the BSE 500 universe, which exist in the index since a decade, 204 have outdone the Sensex returns (7.2%) in 2014 compared to 105 in 2013.

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More than a third of these stocks belong to sectors like banking, financial services, auto, infrastructure, construction and capital goods space.

Even among the top 50 blue chips (Nifty constituents), as many as 24 stocks, or 48% of the universe, have given better returns than the benchmark, for the first time since 2009.

As the Street discounts a higher probability of a BJP-led NDA government coming to power at the Centre, investors seem to have adjusted their exposure in favour of cyclical stocks over defensives.

It is not surprising then that the banking space, especially public sector banks (PSBs) which due to their decayed financials traded at abysmally low valuations until two months back, have steered the market run since mid-February.

While leading private sector banks like Axis Bank, HDFC Bank and ICICI Bank have gained anywhere between 10% to 18% in the year so far, the top three public sector banks, SBI, BoB and PNB, have rallied 18%, 25% and 26%, respectively.

In early April, Macquarie pointed out that the valuation gap (in terms of price-to-earnings ratios) of cyclicals against defensives has narrowed from 55% in August 2013 to 41% compared to a 10-year average of 51%. The brokerage house said that the still existing divergence in relative valuation indicates that the 'E' has yet to move up for cyclical stocks.

Even power (Suzlon Energy, GVK Power & Infra, Adani Power), capital goods (Crompton greaves, L & T), and real estate (IRB infra, NCC, SREI Infra) have seen phenomenal gains of the order of 20-60% year to date.

However, following the steep rally in most of the cyclical counters, analyst are also expressing caution on the pack.

Kotak Institutional equities cited auto and PSBs as its chosen sectors to participate in the likely economic and investment cycle recovery. Although the brokerage reiterated its overweight stance on these sectors, it said that reward-risk balance is not as favourable as it was 2-3 months ago for these names.

Morgan Stanley, which projects a CAGR growth of 28% in the net income of the industrials over FY14-FY16, acknowledged that a good portion of this turnaround is already priced in.