Asian cyclical stocks that move in line with economic trends are showing unusual resilience at a time of sluggish regional growth, in a sign that investors are taking on risk again.

The outperformance of these cyclical stocks against their defensive peers suggest the market’s recent correction on growth concerns will not turn into a bear market.

Cyclicals, typically in industries that do well in strongly growing economies, have risen since an Aug. 24 trough. Materials stocks are up 9.6 percent, and information technology shares and consumer discretionary stocks are up 5.8 percent.

Defensive sectors, by contrast, which hold their own even amid economic weakness, have risen by much less. Consumer staples have gained 1.6 percent since the trough and lost 2.2 percent this month. While healthcare stocks are up 4.1 percent since the trough, they are down 1.9 percent this month.

The outperformance of cyclical stocks is unusual given that Asia’s sluggish growth, earnings downgrades and weak consumer demand would typically prompt investors to dump them in favour of defensive shares.

That was indeed exactly what they did until late August. Materials stocks plunged 30 percent from an April peak to an August trough, and consumer discretionary shares fell 21 percent, while healthcare companies sank 13.6 percent and consumer staples dropped 8 percent.

However, that aggressive selling has made cyclical stocks so cheap they now appear to be good value, said Josh Crabb, head of Asian equities at Old Mutual Global Investors in Hong Kong.

“Cyclicals have been beaten up and the market is pricing them like they’re never going to turn,” Crabb said. “That’s why they’re now turning.”

Information technology and healthcare stocks are trading at around three times book value, while cyclicals are at half or less, Thomson Reuters DataStream data shows.

The gap, while narrowing, remains near levels seen during the 2008 global financial crisis, according to Credit Suisse.

This is despite cyclicals offering returns on equity at or above what defensive stocks offer, DataStream shows. (http://bit.ly/1iswG2n).

That’s a shift from the usual pattern of equities bottoming 1 to 1-1/2 years before an improvement in fundamentals.

In 2008, returns from cyclical stocks were 8.4 percent less than defensives, Credit Suisse data show.

Crabb, who is shifting cash directly into cyclical sectors – skipping the typical move into defensives first – sees selective opportunities in large low-cost mining companies, Korean automakers and some Chinese financials.

Manishi Raychaudhuri, Asia-Pacific equity strategist at BNP Paribas, said that an across-the-board recovery was unlikely, however.

For instance, while software and service providers, particularly in India, appear robust, hardware and component manufacturers are facing increased competition and falling demand. BNP has reduced exposure to the latter, he said.

Aberdeen Asset Management is also selectively buying cyclical stocks.

“In a contrarian sense, it’s a good time to be thinking about these things,” said Managing Director Hugh Young in Singapore.

Companies such as Australian miner Rio Tinto “still make a decent amount of money, even with their key commodity having collapsed,” he said.

Not everyone is seduced by the valuations, however.

Cyclical stocks, such as materials, shipbuilding, mining and metals, “have been plagued by excess investment/capacity,” Peter Sartori, head of Asian equities at Nikko Asset Management in Singapore, said.

“We are not surprised to see these sectors catch a bid,” he said, but added “we don’t feel compelled to invest in these sectors currently.”

The BSE Sensex wiped off its initial gains in the second half of the trading session on Tuesday and closed 541 points down at 25,652. Nifty closed 165 points down at 7812. (Photo: PTI)

The BSE Sensex wiped off its initial gains in the second half of the trading session on Tuesday and closed 541 points down at 25,652. Nifty closed 165 points down at 7812.

Here are few reason why domestic equity markets plunged today:

1. Weak European Markets: Sentiments dampened after European shares fell on Tuesday in early trade, led lower by miners as copper prices slid on worries over Chinese demand, while the dollar hit its highest in almost two weeks after Federal Reserve officials signalled US interest rates could still rise this year.

2. F&O Expiry: Offloading of bets by participants ahead of September expiry in the derivatives segment on Thursday queered the pitch.

3. Weak Rupee: Fresh weakness in the rupee, which depreciated around 15 paise to Rs 65.8450 (intra-session) against the dollar, dampened mood.

4. Selling pressure: Metal stocks witnessed selling pressure on Tuesday after London copper hits a two-week low after China increased copper imports in August but not enough to absorb a surplus while jitters persisted over its appetite for metals. As a result, the BSE Metal index slid 4.24 per cent on Tuesday. Share price of Vedanta and Hindalco declined 6.29 per cent and 6.22 per cent to Rs 92.35 and 73.15, respectively.

India Index Services & Products Limited (IISL), an NSE group company, has decided to rebrand its flagship ‘CNX Nifty’ index as ‘Nifty 50’ besides renaming all its other existing indices, from November 9. (Photo: Reuters)

India Index Services & Products Limited (IISL), an NSE group company, has decided to rebrand its flagship ‘CNX Nifty’ index as ‘Nifty 50’ besides renaming all its other existing indices, from November 9.

The leading index provider will rebrand all its existing indices to include ‘Nifty’ in their names as against the name ‘CNX’ used currently.

NSE’s flagship ‘CNX Nifty’ index would be rebranded as ‘Nifty 50’ index, IISL said in a statement today.

“Over the years, Nifty 50 has become synonymous with Indian equity market both domestically and internationally. Inclusion of Nifty in the name of IISL’s indices will enhance the acceptability of products linked to Nifty family worldwide,” NSE managing director and CEO Chitra Ramkrishna said.

“Ever increasing participation in Nifty indices indicates that interests in Indian market are growing,” she added.

Nifty 50 options traded on NSE are the largest traded contract globally in equity index options category.

In addition to NSE, Nifty derivatives are also traded on Singapore Exchange, Chicago Mercantile Exchange and Osaka Exchange.

Further, 97 per cent of total asset under management of equity ETFs in India is linked to Nifty family of indices, the statement said.

Total ETF AUM tracking Nifty family of indices globally (domestic and international) is USD 2240 million.

There are six international ETFs and 11 domestic ETFs & 14 index funds based on Nifty 50 Index, as on August 31, 2015.

Moreover, 18 domestic ETFs and index funds are linked to other IISL indices.

The rebranding of IISL’s indices will be effective from November 9.

After falling over 7.5 per cent on Monday, the share price of Motherson Sumi Systems plunged further by over 7 per cent in the noon trade on Tuesday. (PTI)

After falling over 7.5 per cent on Monday, the share price of Motherson Sumi Systems plunged further by over 7 per cent in the noon trade on Tuesday. The share price of the company has been under pressure after the German automaker Volkswagen last weekened halted sales of many of its diesel power automobiles in the US, after EPA accused the company of rigging its vehicles to manipulate pollution data during vehicle testing.

Volkswagen accounts for 44 per cent of Motherson Sumi’s consolidated revenue, Bloomberg data showed. The share price of the company was down 7.30 per cent at Rs 244.60 in the noon trade on BSE.
The scrip opened at Rs 260 and had touched a high and low of Rs 260 and Rs 239.65, respectively, in trade so far. Sensex was up 0.24 per cent at 26,256.

According to JM Financial Institutional Securities, the incident will impact Volkswagen US volumes in near-medium term, lead to penalty in US and increased focus on diesel engines across key markets in the world. The brokerageg house also sees limited impact of the same on Motherson given Volkswagen’s limited revenue contribution from US, Volkswagen’s extensive brand portfolio (Volkswagen, Audi, Seat, Skoda, Bentley, Bugatti, Lamborghini, Porsche, Ducati, Scania and MAN), Motherson’s (MSS) relatively higher exposure to Audi (compared to Volkswagen brand, which will see maximum impact), MSS’s limited exposure to Americas, and MSS’s revenue diversification efforts (recently won a big order from Daimler in the US).

In a research report, JM Financial said, “We estimate that the models impacted by this incident account for less than 3 per cent of MSS’s consolidated topline (assuming 60 per cent of its US exposure comes from Volkswagen group and half of that comes from above mentioned Volkswagen brands).”

In the past one year, the share price of Motherson Sumi Systems declined 4 per cent to Rs 262.15 on September 21. Sensex lost 3 per cent during the same period.

Japanese brokerage firm Nomura has upgraded the stocks of Lupin to ‘Buy’ from ‘Neutral’ citing the high impact drug approvals that will drive company’s earnings from Q4 onwards. (Reuters)

Japanese brokerage firm Nomura has upgraded the stocks of Lupin to ‘Buy’ from ‘Neutral’ citing the high impact drug approvals will drive company’s earnings from Q4 onwards.

The brokerage firm raised Lupin target price to Rs 2,149 per share from Rs 1,698 earlier.

At 10.49 am, Lupin was trading 0.33 per cent up at Rs 1,887.50 on BSE.

Nomura added further that generic version of Glumetza, Nexium, Welchol and Renvela/Renagel will matter most for growth.

HSBC had also upgraded the stock to “buy” from “hold” last week.

Lupin stock has 23 buy, 14 hold and 6 sell ratings, according to Eikon data.

With Reuters inputs