DIIs take safety-first approach as macro uncertainties escalate world wide

Domestic institutional investors are flocking to the so-called recession-proof sectors in the wake of heightened global macroeconomic uncertainty.

So far this year, the sectors where they hold an ‘overweight’ position include consumer staples, communication services and utilities – three sectors traditionally considered low-risk during periods of economic uncertainty.

The DIIs are overweight on consumer staple stocks by 310 basis points over the sector’s weight in the Nifty 50 index while their overweight position on utilities is higher by 210 basis points, according to data compiled by Morgan Stanley.

“We opine that we are in a macro-driven market, implying that sector positions should be wider than normal as we have been doing since 1Q2022,” brokerage firm Morgan Stanley said in a note.

Global equities have been under siege, barring the recent bounce-back, owing to surge in global interest rates in the wake of multi-decade-high inflation and uncertainty triggered by the Russia-Ukraine war.

Leading the race towards higher interest rates among major central banks has been the US Federal Reserve, which has raised the interest rates by 225 basis points, while the Reserve Bank of India has hiked rates by merely 90 basis points.

The tightness in global liquidity, coupled with relative attractiveness of US Treasury markets, has seen foreign portfolio investors pull out more than $32 billion from Indian stocks over the past year.

While the Nifty 50 and Sensex had fallen as much as 17 percent from their record highs by mid-June, they have since rallied more than 10 percent each on active government intervention to cool down inflation and rising belief that the Federal Reserve will slowdown its rate hike momentum as the US economy slows down.

The shift to defensive sectors by domestic institutional investors suggests that fund managers are likely cautious over domestic economic growth given that several multi-lateral agencies including the International Monetary Fund have downgraded their GDP growth outlook for India recently.

IMF, earlier this week, slashed its GDP growth forecast for India by 80 basis points to 7.4 percent due to less favourable external environment and rapid tightening of monetary policy.

“Near-term earnings are also likely to be challenged by a combination of margins pressures and sluggish demand,” SBI Mutual Fund said in a recent note.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.