“From a demand perspective, domestic cyclicals connected to investment, credit and pent-up spending such as industrials, banks, financial services, auto, discretionary consumption, and real estate are largely unrelated to the current geopolitical crisis,” said Vinod Karki, equity strategist, ICICI Securities, in a report. “Hence, if the crisis recedes quickly, cyclical stocks, which have corrected largely due to the rise in ‘systematic risk’, could see the fastest recovery.”
Cyclical stocks have been outperformers in the months before the ongoing crisis as investors are betting on companies that would benefit from economic recovery. In early phase of the pandemic in 2020, investors preferred defensive stocks, including pharmaceuticals, consumers and IT.
Nifty has declined nearly 6% so far this year, while Nifty Auto and Nifty Bank indices have declined 12% and 10%, respectively, during this period.
Commodities have bucked the weak trend in cyclicals as the war between Russia and Ukraine and the economic sanctions on Moscow by Western powers have led to prices of oil and metals shooting up.
“Unlike in a typical risk-off environment, global cyclicals within commodities have been exceptions to the systematic risk given the idiosyncratic situation where the current geopolitical risk is resulting in higher commodity prices, thereby benefiting those stocks,” said the brokerage. “Elevated commodity prices also improve the outlook on capex cycle as they account for the lion’s share of aggregate corporate capex in India.”
ICICI Securities said consumption demand could take a hit if commodity prices remain elevated on account of worsening of the geopolitical situation.
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