Pharma stocks have performed well after Budget and private banks are likely to do well; analysts don't see rise in realty stocks as sustainable
Contrary to expectation that policy- and reform-related stocks will continue to do well after the Union Budget pushes key policy changes across sectors, investors seem to have altered allocations in favour of defensive plays like pharmaceutical stocks.
In the run-up to the Budget in February, stocks from the real estate, infrastructure, capital goods, information technology (IT), fast-moving consumer goods (FMCG) and power sectors outperformed the markets; their respective indices gained between nine per cent and 19 per cent, compared with a six per cent rise in the BSE Sensex and a seven per cent gain for the National Stock Exchange’s Nifty.
Gains in the capital goods stocks were also aided by the government’s ‘Make in India’ programme, especially in the defence segment, ahead of the Budget.
However, since presentation of the Budget, NSE’s pharma index has outperformed the broader markets with a rise of around 10 per cent, compared with around 1.3 per cent fall in the benchmark indices since the Budget presentation (as of Monday). The BSE healthcare index had on Thursday touched a new high of 16,896 in intra-day trading.
G Chokkalingam, founder & managing director, Equinomics Research and Advisory, explains: “There were two types of expectations among a majority of investors. One argument was that the government might push a lot of reforms in the Budget, especially after the outcome of the Delhi Assembly election, and the markets could crack in a big way after the event.
So, investors preferred to stay with defensive stocks like IT and healthcare. The other set believed the Budget would announce incentives for the housing and infrastructure sector. So, they invested in related sectors.”
FMCG stocks, though a classic defensive play, lost 5.4 per cent after Budget (as of Monday), as investors dumped ITC after the Budget raised the excise duty on cigarettes beyond market expectations. The NSE realty index, which outperformed the benchmark indices in the run-up to the Budget, also underperformed the benchmark indices.
Outlook
Now that the two key events — the Union Budget and a rate cut by the Reserve Bank of India (RBI) — are over, which sectors should you invest in for high gains?
Private Banks, analysts say, are likely to continue to do better than their PSU counterparts, against the backdrop of the Budget proposals. They do not think the upmove seen in the real estate space will be sustainable.
Over the next few months, the markets will watch corporate earnings and the likely growth commentary for a few quarters, besides implementation of the reform-oriented measures announced by the government.
“Industrial growth is stagnating and growth in the gross domestic product (GDP) is mainly due to a change in the calculation methodology. The ground reality continues to be bad. Against this backdrop, affordable housing will not help all real estate players. IT and healthcare/pharma are defensive bets and are affected by the rupee’s movements. RBI is maintaining a close watch and I don’t think the rupee will appreciate much. It may stay around the 62-a-dollar level, or depreciate a little.
As a result, IT companies should gain. Going ahead, I expect the mid-cap segment to outperform the markets. There can be movement in select auto stocks,” Chokkalingam says.
In a post-Budget analysis report, Jyotivardhan Jaipuria, India head of research, Bank of America Merrill Lynch, reiterated his positive outlook on the equity markets and said he expected the BSE Sensex to reach 33,000 by the end of December this year.
“However, our near-term view is that we are in a consolidation phase in the market, with a flat to slightly negative return over the next few months. We are overweight on rate-sensitive, operating leverage plays (we are overweight on autos, banks, cement and oil as a reform play). We also have pharma as an overweight to play a tactical consolidation in the market in the near-term,” he said.
