From my interaction with many market participants over past few days, I noted that most of the active traders and even some of the seasoned investors are now focused on the cyclical businesses like Textile, Paper, Cement, Sugar, Rice, Energy etc. Global food shortages and forecasts of a good monsoon have evoked interest in agro chemicals also. Given that a large proportion of stocks in these sectors are small and midcap; floating stocks are not significant; and institutional interest is low the moves are sharper – something traders like very much.
Defense is perhaps the most talked about sector amongst traders. The need to indigenize defense technology and become self-sufficient in weapon and defense equipment production in view of the international sanctions on Russia (our largest defense supplier) is driving the sentiment. The PSUs producing for the defense sector are getting re-rated. Private players are also getting heightened traders’ attention.
The attention towards FMCG and Auto is rising but no meaningful traction has been as yet. The traders seem to like the relative under ownership, short buildup in the derivative segment, potential pickup in rural demand post good monsoon and underperformance of stocks over the past one year especially. The title of a recent ICICI Securities report aptly explains the traders’ sentiment in the sector – “Hindustan Lever - Most ‘knowns’ (concerns!) in price (somewhat!); time to ADD”.
IT Services is now the least preferred sector for traders. It is ironic that IT Services, which is the fastest growing sector with strongest balance sheets and best profitability, is a contrarian play in a market struggling with growth and profitability. In absolute terms, the results so far have been good and the guidance for FY23 encouraging. This is being undermined just because the analysts were over enthusiastic in their expectations earlier.
Infra builders, that have attracted significant market interest post the announcement of union budget, are being slowly deserted. Delay in contractors’ payments resulting in higher working capital requirements and lower profitability; slower ordering in road segment; and fiscal constraints of state governments has dampened the excitement generated by the promises in the budget.
Pharma no one even cares to talk about.
Realty is a curious one. The opinions are divided on this. One group of traders believes that the real estate cycle has just started and may last 5-6years. Second group believes that asset owners should gain in the current high inflationary environment and therefore land bank owners should do well while the developers may lag. The third group is of the view that higher rates will kill the nascent cycle in real estate as well as the lenders to the home buyers and real estate developers. This group is anticipating some asset quality concerns in the housing sector.
Financials, the heaviest weight sector in Nifty, is most confusing. The results have been good. Asset quality concerns are mostly behind. Credit demand is showing signs of picking up. The credit mix continues to shift in favor of more profitable retail loans. But still Bank Nifty has hardly changed for the past one year. Traders are holding on to the positions but the unrest is visible.
Overall, it seems the small and midacp portion of traders’ portfolios (usually 20-25%) is doing very well, while the other part is struggling.
