The sharp correction in markets has prompted equity fund managers to realign portfolios, build positions in under-owned sectors, such as pharma, and cut exposure to banking, where large funds have been deployed by fund managers.
The data sourced from the Securities and Exchange Board of India shows that the share of banking sector as a percentage of total equity assets stood at 21.26 per cent in March — slipping 312 basis points (bps) from the previous month. Meanwhile, the share of the pharma sector has gone up by 133 bps to 6.58 per cent.
Fund managers say the reduced exposure to banking can be attributed to a combination of factors. “The banking sector is seen as a proxy to economic activity. However, the current environment has raised concerns on credit growth and asset quality of banks, possibly coming under pressure,” said Sonam Udasi, senior fund manager, Tata Mutual Fund (MF).
Fund managers add that a major cut in weights would be visible in smaller-sized banks and non-banking financial companies, which remain more vulnerable to the disruptions caused by the coronavirus disease (Covid-19) outbreak and the nationwide lockdown.
At the end of March, MF exposure to the banking sector in absolute terms stood at Rs 1.9 trillion.
Other sectors facing challenges due to disruptions caused by Covid-19 include metals (ferrous and non-ferrous) and the hotel industry. The two sectors saw 31 bps and 18 bps cut, respectively, in MF exposure in March.
Meanwhile, certain fund managers are eyeing value stocks, expecting such stocks to lead gains as and when there is recovery.
“Market uncertainty is a virtue for a value investor. It offers investment options with a higher margin of safety. Such opportunities could arise when the market or stocks overreact on the negative side,” said Mrinal Singh, deputy chief investment officer (CIO) at ICICI MF, which manages the Value Discovery Fund.
“We are investing in companies across sectors, mainly commodities, oil and gas, pharma, and auto. We are investing in companies which are cash-rich, available at reasonable valuation, are less leveraged, and rural-facing,” he added.
Analysts say the domestic specialty chemical players also offer opportunities, with China likely to lose its status as a global manufacturing hub, given Covid-19’s Chinese origins.
“Loss of China (25 per cent of industry) as a reliable partner and continued shifts from Europe/Japan (17 per cent /7 per cent share) mean the share of India will rise meaningfully, which is currently at 3 per cent,” Ambit said in a recent report.
MFs’ exposure to the chemical sector reduced by 12 bps in March.
Amid the health scare caused by the pandemic, pharma stocks have been seeing heavy flows from fund managers. Experts say a combination of attractive valuations and growth visibility is working in favour of the pharma sector.
“While most sectors are likely to see significant negative impact due to Covid-19, the pharma sector will see less of an impact,” said Sailesh Raj Bhan, deputy CIO, Nippon India MF.
MFs’ exposure to auto and ancillaries dipped by 38 bps in March amid weak sentiments around the auto sector caused by supply-chain disruptions and sluggish sales. “Beaten-down valuations in some of the auto stocks offer opportunities, but one needs to stay cautious,” said a fund manager.
“Value opportunities can work in this environment, but one needs to strike a balance between value and growth visibility. For instance, some pockets of economy might struggle for a while due to the oil-price shock,” added Udasi.
The data also hints at a defensive approach towards sectoral rotation. Apart from pharma, non-durables space (which includes fast-moving consumer goods) saw exposure going up by 137 bps, followed by the information technology sector, where exposure was up by 128 bps.-Business Standard