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Which Sectors are Mutual Funds Buying and What are they Avoiding?
11 Apr 2023

One of the very important metrics that investors tend to look at is what are institutional investors buying in the equity market? While MF buying decisions cannot be taken as an investment cue, they definitely offer an interesting insight into what are the themes and sectors that the mutual funds are having a preference for. Here are 5 such key themes and the reasons why mutual funds are chasing these themes. Of course, there are positive themes and there are also themes where mutual funds are selling. We have largely relied on the portfolio change data provided by Morning star and are looking at trends for a 3 month period..

Preference for banking stocks continues..

Notwithstanding the fact that mutual funds are substantially exposed to the banking and financial sector their overall interest in banking stocks continues. However, the mutual funds have become a lot more selective within the banking space in the last quarter. For example, ICICI Bank has been one of the most preferred stocks among the banking stocks. The reasons are not far to seek. The stock is quoting at a substantially lower P/BV compared to private banking peers. Also the funds expect the latent value of ICICI Pru Life and ICICI Lombard to reflect in the prices. Within the PSU banking space, the MF preference has been for SBI and BOB, which they see as the two PSU banks less vulnerable to the NPA threat. Also with the listing of SBI Life, the sum of parts is expected to favour the valuation of SBI.

Buying into leveraged stocks that are showing promise..

Some of the erstwhile infrastructure related stocks are coming under the radar of mutual funds. However, the focus has been on debt-ridden companies where there is visibility of deleveraging. For example, there has been sustained demand for stocks like Suzlon and GMR Infrastructure from domestic mutual funds. Even RCOM, which has promised to complete the sale of its towers business and reduce its debt substantially by the end of this calendar year, has come under the radar of the mutual funds. DLF has also been attracting buying interest on the back of its recent sake sale agreement with Government Investment Corporation of Singapore.

Sustained buying is seen in metal stocks..

With global metal prices ruling buoyant since the beginning of the calendar year that has kindled MF interest in metal stocks. Additionally, the rising demand from China and the country reverting to a 5-year high on its PMI-Manufacturing is also seen as a positive for metal stocks. After all, China accounts for 50% of the demand for most of the metals. Some of the preferred stocks of mutual funds in the last quarter have been stocks like NALCO, Vedanta and Hindalco. Interestingly, the preference has been more for copper and aluminium manufacturers rather than steel producers.

Energy has been another preferred sector for the Mutual Funds..

After a long time, oil and gas has emerged as a preferred buying segment for mutual funds. ONGC has attracted quite a bit of buying interest at lower levels. The funds appear to be betting on global crude prices sustaining around the $55-60/bbl mark till the time the Saudi Aramco stake sale is concluded. There has been some value picking in downstream stocks like IOCL which have corrected sharply in the last couple of months. Apart from the pure oil plays, the MF buying has also been visible in quasi energy plays like Petronet LNG and in NHPC. In fact quite a few funds have also been buying Tata Power betting that the shift to defence business may be value accretive for the company. NTPC has also attracted buying interest on hopes of a more favour power policy.

Some themes where Mutual funds have stayed neutral..

There have also been a number of themes where mutual funds have either been neutral or have chosen to further downsize their position. Broadly, there are 3 sub-themes that we can decipher here. Firstly, there is broad neutrality on stocks that have rallied and have entered the upper band of their valuation range. Stocks like Ajanta Pharma, Tata Chemicals and Reliance Capital will fall under this category. Secondly, there are stocks where the actual performance has failed to live up to the hype that got created around the stock. Funds have been neutral on stocks like GTPL and Dish where the digital dividends are not too clear. Also stocks like Aegis Logistics that attracted interest on the back of GST are now raising a question mark. Lastly, there are the sectors like IT and pharma which are currently going through a larger sectoral churn. Most funds have tried to do some marginal buying in pharma stocks like Lupin and Sun Pharma, but the interest has been cautious and tepid at best. In the case of IT stocks, funds continue to be neutral to negative as is evident in their downsizing the portfolios consistently.

Tracking the fund buying and selling surely gives us some broad insights into what the informed investors are buying or selling. Unfortunately, the urge to bottom-fish is still missing in the actions of these funds, especially in pharma and IT. That may be the key takeaway!

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