Budget 2017 market strategy: Dump defensives, buy cyclicals

Trade

• Watchlist
• Portfolio
• Message
• Set Alert

 

 

Choose Stock Exchange: BSE LIVE NSE LIVE

26 Aug, 2025 12:21

Volume

Todays L/H

More

×

Malini BhuptaMoneycontrolIn uncertain times, defensive sectors are good places to hide, but a contrarian view this time around would be more profitable. Even though 2017 is expected to be a year of uncertainties, equity strategists are advising cyclical stocks over safe havens.While impact of GST rollout and pace of economic recovery after demonetisation are known domestic variables, Trumponomics and the impact of protectionist policies adopted by several developed economies remain key global uncertainties. In such challenging times, a good place to hide would be defensive sectors like consumer, pharmaceuticals and IT services, but this time around the market is betting on cyclicals, in the hope that infrastructure spending will get a boost in this year’s Budget.Don't expect consumption to revive anytime soonThe economy may be limping back to normalcy after high value currency notes were invalidated in November; consumer companies are not likely to see a 'U’ shaped recovery. Small wonder then that the market is placing its bets on cyclical stocks. While IDFC Securities expects relatively higher fiscal stimulus on the consumption side (compared to capex), it believes the move will only help bring consumption demand back to normal levels (which was dented by demonetization). Hence, the brokerage prefers non-consumption themes – B2B businesses, high dividend yield stories and businesses with stronger outlook outside the country.Earnings of cyclicals to outpace defensivesEarnings recovery in some sectors is another trigger for select cyclicals. Given that select commodity prices have been moving up, earnings trajectory of metal companies is expected to improve. Religare Capital Markets expects earnings growth of energy and metals to rise to 16.5 percent while IT is expected to report stagnant earnings. Cement, construction & infrastructure and capital goods are among the few sectors that are expected to report double-digit earnings growth.   According to Motilal Oswal Securities, December quarter’s earnings growth would be driven by cyclicals – cement, capital goods and oil & gas are expected to post 24 percent, 59 percent and 42 percent earnings growth, respectively. Consequently, the share of defensives in overall earnings will also decline in FY17.Budget to give a leg-up to cyclicalsThe immediate trigger for cyclical stocks will come from the Budget, scheduled to be presented by the Union Finance Minister Arun Jaitley on February 1. By now it is an accepted fact that the government will deviate from the path of fiscal consolidation and stimulate the economy by transferring more money in the hands of tax payers to ease the pain of demonetisation. If this were to actually happen in a meaningful way, consumption would get a boost. But given the FM's limited fiscal room, a section of economists believe that the stimulus may come in the form of higher capital expenditure by the government.Morgan Stanley’s base case view is that the government will not use fiscal stimulus to revive domestic demand, considering the starting point of tight fiscal space. Sectoral analysts at the global investment bank expect the Budget to be positive for autos, cement & metals, consumer, Internet and e-commerce, media and real estate. Most economists and strategists do not expect remonetisation to substantially revive consumption to levels higher than the pre-note ban era.Scorecard for key stocksTop Performers of 2016 Hindalco (+83 percent), Yes Bank (+59 percent), Tata Steel (+51 percent), BPCL (+42 percent) and Power Grid (+30 percent).Worst performers of 2016Idea (-49 percent), BHEL (-28 percent), Aurobindo (-24 percent), Sun Pharma (-23 percent) and Bharti Infratel (-20 percent) were the worst performers.Winners for five straight yearsSix Nifty stocks – Eicher, Maruti, IndusInd Bank, Zee Entertainment, Asian Paints and Kotak Mahindra Bank – delivered positive returns for five straight years.Stocks that delivered negative returns for first time in five year.Stocks delivering negative returns for the first time in the last five years wereAurobindo, Lupin, M&M, HUL and HCL Tech.