The BSE IT index is the only sectoral index to gain this year, with a 7.57% rise. In contrast, the BSE FMCG index and the BSE Healthcare index are down 1.71% and 7%, respectively. Meanwhile, the benchmark Sensex is up 0.65% for the year.
In 2017, the IT and healthcare indices rose 10.83% and 0.5%, respectively, underperforming the benchmark Sensex, which gained 28%, its best yearly performance since 2014. The BSE FMCG index, meanwhile, gained 31.54%, beating the Sensex.
“This is too small a correction to change the strategy. The message from global and domestic market is clear—economic growth is back, earnings will come back. In a scenario like this, sitting on growth stocks i.e. cyclicals may be a good idea from a long-term perspective," said Anand Shah, deputy CEO and head of investments at BNP Paribas Asset Management India Pvt. Ltd.
“That said, given the recent decline, defensives may outperform cyclicals over the very near term. Among defensives, FMCG and IT look good at this point, while pharma is not yet attractive. That said, we are not changing our long-term stance of focus on growth stories," said Anand.
The likelihood of an increase in tech spending has spurred the outlook for export-focused Indian software companies. On 15 January, Morgan Stanley upgraded its view on the Indian IT industry to “attractive" from “neutral". “…we believe a turnaround in IT spending is imminent, which could quickly turn sentiment on these stocks," analysts Parag Gupta and Gaurav Rateria said in a note.
“While structurally the sector faces risks from automation and a slower pace of market share gains from global vendors, we believe a cyclical rally could be in the offing," they added. Morgan Stanley also upgraded Infosys Ltd, Tech Mahindra Ltd, HCL Technologies Ltd and Mphasis Ltd to overweight from equalweight, and raised the rating for sector leader Tata Consultancy Services Ltd (TCS) to equalweight from underweight. For fast-moving consumer goods (FMCG) companies, higher minimum support prices announced and greater emphasis on rural development in the Union budget would mean more cash in the hands of rural population, driving rural consumption.
In a note on 1 February, IDFC Securities pointed out that this would be positive for FMCG companies, especially Hindustan Unilever Ltd, Dabur India Ltd, Colgate-Palmolive (India) Ltd and Emami Ltd which have prominent sales from rural market.
“In the short term, defensives are making better sense in the Indian market," said Andrew Holland, chief executive of Avendus Capital Alternate Strategies.
“IT and FMCG look better placed in the defensive space. In pharma, I think pain may not be over as yet, and are still not good value yet," Holland said, echoing Shah.
It may not be time for sector rotation as yet, and some are sticking by their strategy.
“We expect earnings recovery and therefore believe that one should play the growth cycle to capitalize on the earnings pick-up cycle," said Gautam Duggad, head of research, Motilal Oswal Financial Services Ltd.
Duggad said his preference is with select retail and corporate-focused banks in the banking, financial services and insurance (BFSI) space, autos, speciality retail, liquor in the consumer discretionary pack, and cement, roads, and industrials, in the playing-the-private-capex story. He preferred pharmaceuticals in contrarian bets.