Expect more action in defensives ahead of Q2 earnings

MUMBAI: Defensive such as technology and FMCG are holding strong despite a subdued market. The BSE IT Index, which hit an all-time high recently, is edging up and the BSE FMCG Index is the top sectoral gainer on the BSE.

Investors holding long positions in cyclicals are shifting to defensives due to their earnings predictability, analysts said. While earnings from cyclicals are yet to pick-up there are concerns that the Reserve Bank of India might not lower interest rates soon. Earnings will take some more time to show improvement and catch up with valuations.

"Foreign interest in cyclical stocks like industrials and consumer discretionary waned in August even as defensive bets turned the tide, attracting inflows," said Kotak Securities report.

According to analysts at the brokerage, there was a change in trend in August as cyclical sectors like industrials and consumer discretionary witnessed outflows. For industrials, the outflows were the largest seen since May 2012.

On the other hand, defensive stocks like information technology, healthcare and consumer staples attracted a major portion of foreign inflows during the month.

"In another 10 to 12 days, the earnings season would start and FIIs are aware of the fact that it would not be a great and a smooth season for some of the cyclicals or rate sensitives," said Devang Mehta, Sr. VP & Head - Equity Advisory, AnandRathi Financial Services to ET Now.

"The likes of DLF or some PSU banks or some infrastructure names which have run ahead of times would not deliver that type of numbers and buying is again emerging into the pockets of IT or FMCG which have a predictability of earnings," he added.