Cyclical stocks likely to remain top mutual fund picks
Mutual funds expect to benefit from anticipated economic recovery, but cut back holdings in export-oriented sectors
Mumbai: Mutual funds increased their bets last year on so-called cyclical stocks, which are expected to benefit from an anticipated economic recovery in India. Asset managers expect such stocks to remain popular in 2015 as the growth cycle is seen picking up starting in fiscal 2015-16 and beyond.
Cyclical stocks are those that move in tandem with economic activity. In the Indian context, this would include stocks of banking, finance, auto, engineering, and heavy equipment companies. These stocks tend to do well when the economy is in expansion mode and vice-versa.
Banking stocks accounted for 21.88% of total assets under management (AUMs) of equity funds at the end of December 2014, compared to 17.66% at the end of December 2013.
Those of finance companies, including non-banking finance companies (NBFCs), accounted for 5.95% from 4.86% a year ago.
“Since the Indian economy was on a recovery path, we placed our bets on cyclicals. The focus towards cyclicals might increase from here on, as the economy is expected to recover over next two to three years," said S. Naren, chief investment officer, at ICICI Prudential Asset Management Co.
Funds also bought auto stocks, which accounted for 4.76% of the total AUMs at equity funds as of December-end 2014, from 6.3% a year before.
Other cyclical sectors also saw increases: auto ancillaries from 2.85% to 3.48%; industrial products by 131 basis points; and consumer durables by 63 basis points.
One basis point is one-hundredth of a percentage point.
“In view of a decisive political mandate, improvement in the macro situation and with expectations of reversal of interest rate cycle, there has been portfolio shifting towards cyclicals—financials, and consumer discretionary and industrials," said Navnneet Munot, chief investment officer at SBI Mutual Fund.
Munot’s reference is to the Bharatiya Janata Party (BJP) winning a majority in last year’s Lok Sabha elections and anticipated interest rate cuts by the Reserve Bank of India (RBI), the first of which was announced on 15 January. “Going ahead, it is better to look at individual stocks from a bottom-up perspective," Munot added.
The average AUMs at equity funds rose 71.68% to ₹ 3.6 trillion posting the best calendar-year gain for the category since September 2010, according to the Association of Mutual Funds of India (AMFI). The surge in AUMs was due to valuation gains on the existing portfolio as well as fresh inflows seen for the category in 2014.
Meanwhile, the mutual funds have cut back holdings in export oriented sectors.
They reduced their exposure to software stocks, for instance, because of increased headwinds being faced by most major global economies.
Software stocks accounted for 10.2% of the AUM of funds as on 31 December 2014, down from 13.84% in the year-ago period.
“Export-focused sectors were not in focus (in 2014) as the global economy is not in as good shape as domestic economy with the exception of the US", said Naren, adding that only select export sectors have been doing well.
In 2014, mutual funds pumped in a net of ₹ 6.2 trillion into Indian equities—the largest net investment since 2000.
“2014 marked an inflection point in flows for domestic investors as domestic equity mutual funds received approximately $7 billion in eight months, which helped them recoup cumulative outflows of almost six years," Deutsche Bank AG said in a note on 8 January.
“While 2014 did mark a turning point in allocation towards financial assets, we believe that the transition will continue well into 2015 and even further," the note added.
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