FPI bullishness on major cyclical trade is petering out as Covid cases surge

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MUMBAI: After six months of consecutive buying, foreign portfolio investors have turned cautious on Indian capital goods companies over the past two months as rising Covid-19 cases shrouded India’s economic recovery in uncertainty again.

Between August and January, foreign portfolio investors net bought capital goods stocks worth Rs 13,000 crore, as portfolio investors globally rotated towards economy-linked sectors in anticipation of rollout of Covid-19 vaccines and large fiscal stimulus plans from the US.

Capital goods manufacturers, whose fortunes are closely tied to economic cycles, benefitted from this rotation towards cyclical stocks, as investors perceived that vaccine rollout will result in economic boom and a surge in industrial manufacturing.

In February and March, though, foreign investors turned net sellers on these counters, as rising Covid-19 infections in India amid a slower-than-expected vaccine rollout created uncertainty around economic recovery and the start of a new investment cycle.

Foreign investors have net sold capital goods stocks worth Rs 900 crore in the past two months, data available on NSDL showed. Market participants believe the selling was driven by some booking of the sharp gains seen in the sector since October. The BSE Capital Goods Index had risen 56 per cent between August 2020 and February 2021.

The rollover in the upswing in industrial manufacturing activity already started in January, when daily Covid-19 cases in the country were at their lowest after hitting a peak in September. The index for capital goods fell to 92.6 in January from 94.3 in December, data released by the government showed.

The cautiousness in FPIs’ outlook towards capital goods stocks may not hurt them in the interim, given the bullishness among domestic mutual funds. Capital goods stocks hold the biggest overweight position in domestic mutual fund portfolios given the belief among fund managers that India’s capital expenditure cycle is on the verge of a revival.

“I am quite bullish on the infrastructure and the capex segments. This is one space where we are in the opposite of a bubble — sort of an anti-bubble — which has not performed for many years. This is a space to watch out for in the coming years,” Nimesh Chandan, head of investment for equities at Canara Robeco Mutual Fund told ETNow.

While the optimism for the sector remains pretty high even though valuations remain reasonable, investors will await commentaries from companies during March quarter earnings announcements to gauge how badly the second wave and the renewed lockdowns have affected the recovery.

That said, muted commentaries from capital goods companies in the coming week might trigger some profit taking by foreign investors.

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