As FII outflows continue for the 8th straight month in May, brokerage house Bank of America Securities (BofA Sec) has turned more bullish towards defensive stocks.
It upgraded Staples to 'overweight on their defensive nature and IT to neutral. It also remains 'overweight' domestic cyclicals (Financials, Industrials).
"Staples companies have significant rural exposure (up to 40 percent) and their having stepped up rural distribution post-pandemic (no of distributors up 42 percent vs FY20) could serve as a catalyst for accelerated gains on likely rural turnaround," the brokerage said.
The brokerage expects the markets to remain volatile going ahead. It also recently revised its 2022 Nifty target lower to 16,000 arguing valuations could compress amid concerns about the depreciating rupee, rising inflation and rate hikes being front-ended, along with continued geopolitical issues and global macro headwinds.
FIIs sold have Indian equities worth $3.3 billion in May so far while 2022 (YTD) outflows stand at over $20 billion. However, DIIs have continued their inflow but that has also fallen by around 26 percent, MoM. Despite the decline in May, DII inflows remain strong at over $19 billion in 2022 YTD.
It further highlighted that, in 2022 YTD, India saw heavy outflows second only to Taiwan, while Brazil led inflows. Emerging Market (EM) funds have steadily increased allocation in favor of India, the largest beneficiary of allocations cuts towards China. However, India's overweight position within EM funds is currently at near multi-year lows and with outflows continuing in May, this could fall further, cautioned BofA.
Sectorally, the FIIs have turned overweight on and increased their overweight position in financials. However, they have reduced their overweight position in energy and IT; and remain underweight on materials and industrials.
It also pointed out that FII assets under management (AUM) stood at $626 billion as of April 2022, of which, utilities and consumer staples saw higher allocation. Meanwhile, Allocation to IT and energy sectors declined, while the rest remained at similar levels.