FIIs dump rate-sensitive stocks, rush to export earners .

Mumbai: Foreign institutional investors or FIIs are shifting from cyclical and interest rate-sensitive sectors to export-driven areas such as information technology (IT) and pharmaceuticals with the depreciation of the rupee against the dollar and India’s central bank pausing, even reversing, its monetary easing cycle.

In July, the S&P BSE IT and FMCG indices were the top sectoral gainers, up 19.2% and 5.2%, respectively, followed by the healthcare index, which was up 3%.

The bankex, an index of banks, declined around 13.7%, followed by the realty index (down 12.8%), the metal index (down 11.2%), and the capital goods index (down 9.7%).

FIIs have sold equity worth a net $2.9 billion in the past two months, after pumping in $11.3 billion between January and April, after Federal Reserve Chairman Ben Bernanke indicated on 22 May that quantitative easing could start winding down if the US economy strengthens. That triggered a sell-off in debt and equity globally.

The Reserve Bank of India (RBI) has introduced a series of measures to drain liquidity from the system to shore up the rupee, which has weakened 11.31% in the past three months.

While no fresh foreign money is flowing in, money is being moved to export-driven sectors that benefit from a depreciating local currency, said Jitendra Sriram, director and head of research at HSBC Securities and Capital Markets (India) Pvt Ltd.

Manishi Raychaudhuri, managing director at BNP Paribas Securities (Asia) Ltd, said, “Part of the money is rotating from domestic cyclical sectors such as banks into consumer staples and IT after regulatory changes have been enforced by the Reserve Bank of India.”

Gautam Roy, vice-president at Motilal Oswal Securities Ltd, agreed with this.

Net profit at IT services and healthcare companies covered by Citi research has risen 19% and 10%, respectively, from a year ago. Capital goods and auto sector firms have seen net profit decline.

Banks have reported net profit growth, but rising bad loans remain a worry. Besides, they will be hit hard by the erosion in the value of their bond portfolio with the rise in yields. Bond prices and yield move in opposite directions.

Export-related sectors may maintain earnings momentum but profit in the capital goods and industrial sectors may decline, analysts said.

For IT and pharmaceuticals, the bulk of the business is coming from US. While the growth is not secular in the US, it is still coming off low base. The recovery in the US is stronger than that in emerging markets, which are slowing, said Sriram of HSBC.

“Depreciating rupee is likely to benefit IT and pharma companies as lot of earnings are not hedged,” said Varun Goel, head of the portfolio management service practice at Karvy Stock Broking Ltd.

Despite the sluggish economy hitting consumer discretionary spends, the BSE FMCG index was one of the top gainers in July because companies are trading at high valuations. For some long term funds, consumer staples are part of the core ownership, said Raychaudhuri of BNP Paribas.

Fund exits may slow over the next few weeks as the rotation of sectors continues, analysts said.

The near-term worry is the US Fed will start tapering its bond buying, Sriram said. But, he added, the Bank of Japan may infuse as much liquidity as the Federal Reserve takes out.

The policy environment will remain fairly easy and fund flows to India will pick up after RBI renews its monetary easing, he added.

Most market analysts said India was best placed among the so-called BRIC economies consisting of Brazil, Russia, India and China, and emerging markets, even though there are near-term growth concerns. With China slowing down, North Asia is also seeing an impact because they are more export-driven economies.

“India becomes a default choice among BRIC countries and emerging markets. In a scenario where commodity prices are easing, India is better placed because the current account deficit will eventually come down,” said Sriram.

Source : livemint.com