The recent rally in the benchmark indices have been carried by defensive themes like fast moving consumer goods, information technology and pharma. The shift in sentiment towards defensive plays has taken both the benchmarks to yet another record high on September 12.
The Sensex crossed the 83,000 mark for the first time while the Nifty 50 topped 25,400. However, this leg of the rally marked a contrast with previous ones. In contrast to earlier trends, the latest rally saw a pullback in the previously raging PSU stocks, as defensive sectors took center stage and attracted strong investor interest.
Kotak Institutional Equities believes the recent correction in 'narrative' driven themes- largely PSU sectors like railways, construction and defence-- hints towards a shift in preference for defensives, which have supported headline indices.
In the past week, the rally in PSU names cooled down significantly, with the BSE PSU index slipping nearly 4 percent. On the other side of the spectrum, defensive plays saw increased traction as the BSE FMCG and the BSE Healthcare indices gained around 2 percent in the past week.
KIE attributes this defensive rally to a pullback from high-beta and 'narrative' stocks as investors adopt a risk-off approach in response to global uncertainties. As for the risk off mode, the brokerage identifies the recent slew of data warning towards a slowdown in the US, ongoing stagnation in China's economic policies and the continued lackluster performance of the Eurozone economy as the culprits.
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Even as this risk-off sentiment is prompting investors to look towards fundamentals, KIE also warned against the stiff valuations of the defensive stocks, which pose further challenges to portfolio construction.
While the possibility of a gradual recovery in volumes of consumer staples started gathering pace about 2-3 quarters back, it is yet to bloom into reality. Similarly, it also remains to be seen if the much-anticipated recovery in demand for IT services would be strong enough to justify the sharp re-rating in their multiples, the firm stated.
Moving to the PSU space, KIE believes that most of the ‘narrative’ stocks trade at inflated valuations, driven by unrealistic growth and profitability assumptions. Highlighting the risks involved with this segment of the market, KIE reiterated that many of these 'narrative' stocks remain disconnected from fundamentals and could be vulnerable to further correction.
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