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Surge to benefit select stocks
Poll push for cyclicals

Mumbai, Dec. 9: The cyclicals are back in play.

Market pundits believe that this is the time to tank up on such stocks — especially commodity players and industrials — as they will make the biggest gains in the run up to the general elections.

Information technology, pharmaceuticals, banking and fast-moving consumer goods (FMCG) have been at the centre of the market rally that has seen the Sensex climb 9 per cent since January.

“We expect market gains to be led by high-beta domestic cyclicals (banks and industrials, mainly) and expect defensives (consumer, pharmaceuticals, telecom and IT services) to underperform,” said Nomura in a report.

This was clearly in evidence today as sectors such as capital goods, realty, power and banks witnessed brisk buying. In fact, the BSE Capital Goods index was the largest sectoral gainer as it rose 3.14 per cent. It was followed by the Bankex, which gained 2.93 per cent, and realty by 2.61 per cent.

The major Sensex gainers were Sesa Sterlite (5.04 per cent), Larsen & Toubro (4.52 per cent), Hindalco Industries and NTPC.

Experts said the gains in these sectors were linked to the election results, particularly in the three states where the BJP fared well.

“The expectation is that these segments will benefit the most if there is a government led by Narendra Modi at the Centre next year. There is a feeling that Modi who is perceived to be industry friendly, will give a greater push to infrastructure spending and that there will be a general improvement in the investment climate,” said an analyst with a foreign brokerage.

He added that sectors such as capital goods, power, and infrastructure were some of the areas that could benefit if the NDA came to power in 2014. While some of these stocks have already gained over the past few trading sessions, they could rally further.

According to a note from Motilal Oswal, the UPA-2 regime has seen a huge divergence in sectoral performance with consumption driven sectors of autos and consumer goods showing remarkable performance apart from export-oriented sectors that included healthcare and technology.

At the same time, domestic cyclicals and industrials such as PSU banks, capital goods, real estate and utilities have seen significant under performance because of the slowdown in domestic economy, high interest rates and currency woes.

“Importantly, their underperformance over the last 3 to 5 years is so severe that a turnaround in business cycle and a positive investment climate can lead to significant returns for them,” the brokerage added.

A look at the year-to-date performance of various sectors shows that while sectors such as the IT, telecom, private banks and healthcare have posted gains, industries such as capital goods, metals and real estate have fallen 5 to 35 per cent.

While the BSE Sensex today breached its previous high that was touched on November 3, a cursory look reveals that around 12 stocks have weakened since then. Most of these stocks are from sectors such as pharmaceuticals, consumer goods and IT. It is felt that these counters could come under pressure if the cyclicals rally from here on.

However, Nomura wasn’t confident about a rally in industrials. “We do not have conviction on industrial cyclicals, as high-frequency data such as cement sales, auto sales, railway freight and electricity demand still point to weak trends, while the capex and investment cycles are still rather weak,” it added.

Opinions are divided among marketmen about whether or not retail investors should use the current opportunity to buy stocks. While some believe that a retail investor should not miss the opportunity as domestic valuations continue to be below average and that the rally will soon extend to mid-cap and small-cap stocks, there are others who disagree.

“We estimate (Sensex) growth of 14 per cent, the best in the last four and a half-years,” said brokerage Motilal Oswal.

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