Cyclicals are back on mutual fund radar as pandemic risk to GDP growth ebbs

The domestic mutual funds increased exposure to cyclical sectors including banking, capital goods, retail, and automobiles in December amid ebbing risk of the third wave of the pandemic to the GDP growth. Cyclical sectors tend to benefit the most from an economic recovery. According to the data from Motilal Oswal Financial Services, the domestic funds raised the weight of cyclicals in their portfolio by 160 basis points year-on-year to 58.8% in December.

The capital goods sector reported the highest traction among the domestic cyclicals amid the capital expenditure recovery theme followed by the public sector banks, and retail. The weight of capital goods companies in the domestic funds’ portfolio rose to 5.9%; it was 240 basis points higher than its weight in the BSE 200 index. Over 15 out of the top 20 funds are currently overweight on the capital goods sector. Robust tenders and rising orders improved the prospects of the capital goods sector. The trailing twelve-month order book till December end was at a record Rs 8.7 lakh crore.

The domestic funds extended the capex theme to the PSU Banks, which tend to have a greater share of corporate lending. The total bank credit growth was at a 26-month high of 9.2% in December. This brought back the PSU banks segment in the top 10 sectors by weight in the domestic funds’ portfolio.

IT, a defensive bet, has been an exception since mutual funds continued to increase allocation to the sector. The IT sector’s weight was at a multi-year high of 13.5% in December. However, the domestic funds are still underinvested in the IT sector by 200 basis points compared with the sector’s weight in the benchmark BSE 200 index.