BackCyclicals and capital-intensive sectors likely to see improved interest
A large number of the upgrades in the Association of Mutual Funds in India size classification are expected
PremiumNEW DELHI : Cyclical and capital-intensive stocks are gaining the limelight amid the volatility in the markets as, despite the market correction, a large number of the upgrades in the upcoming Association of Mutual Funds in India (AMFI) size classification are expected in these sectors.
“Surprisingly, the type of stocks that will get upgraded (from small to midcap and mid to large-cap) do not indicate a risk-off environment as most of them belong to cyclical and capital-intensive sectors such as financials and industrials," said analysts at ICICI Securities Ltd. On the flip side, quite a few of the downgrades are from growth, quality and defensive buckets, the brokerage said.
Upgrades from mid to large-cap category and from small to mid-cap category are primarily from industrials, real estate, financial services, banks, and auto.
Experts cautioned that the AMFI size classification is based on market capitalization and thus does not really indicate right investment opportunities. However, economic growth is picking up and some of the cyclical and capital-intensive sectors are well placed, though investors need to pick wisely.
“The AMFI size classification list is purely based on market capitalisation cut-offs and tends to change every six months. We are more focused on earnings, cash flows and the management team of businesses. We don’t put too much emphasis on market cap," said Chandraprakash Padiyar, senior fund manager, Tata Mutual Fund.
“The focus is more on the fundamental factors, which help us identify the right investment opportunities," Padiyar said.
Among the cyclical sectors, banks and financial services are expected to have a sound outlook. Global commodities such as metals, on the other hand, are seeing a weak outlook in the near term on the back of expectations of a weak demand environment led by worries about increased prices, and higher interest rates, said analysts.
Banking and financial services stocks, however, are expected to fare well, as indicated by their fourth quarter performance. More than half of the incremental earnings growth was steered by banking, financial services, and insurance (BFSI), driven by a modest revival in credit growth and improvement in asset quality trends according to Motilal Oswal Financial Services.
For capital-intensive sectors such as capital goods, engineering, and manufacturing, the outlook is fairly robust in the near term on the back of rising capital expenditure leading to higher order backlogs and improved visibility of growth, experts said.
As of FY22-end, defence, infrastructure, and capital goods companies saw a two-year compound annual growth rate of 12% in the order book according to Emkay Global Financial Services.
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