Defensive Sectors' Market Share Plummets to 13-Year Low as Cyclicals Gain Momentum
ICICI Securities reports that defensive sectors (FMCG, IT, healthcare) have seen their market capitalization share drop to about 20%, the lowest since 2011, down from 30% in 2020. Their profit pool share has decreased to 16% from 40% in FY21, with projections of further decline to 14% in the next two years. Despite this, these sectors maintain premium valuations with an overall trailing P/E of 32 times compared to the broader market's 25 times. The IT sector, in particular, has seen its market cap share fall below its profit share for the first time since FY13. Meanwhile, cyclical sectors like discretionary consumption and industrials are gaining traction, with significant increases in their price-to-book ratios since 2020.
*this image is generated using AI for illustrative purposes only.
In a significant shift in market dynamics, ICICI Securities reports that defensive sectors, including FMCG, IT, and healthcare, have seen their market capitalization share decline to approximately 20%, marking the lowest level since 2011. This represents a substantial drop from their peak of 30% in 2020, indicating a changing landscape in investor preferences and market trends.
Profit Pool Share Decline
The profit pool share of these defensive sectors has also experienced a notable decrease, falling to 16% from about 40% in FY21. Projections suggest a further decline to 14% over the next two years, highlighting the ongoing challenges faced by these traditionally stable sectors.
Premium Valuations Persist
Despite their reduced market presence, defensive sectors continue to command premium valuations:
| Sector | P/E Ratio |
|---|---|
| FMCG | 42.00 |
| Healthcare | 39.00 |
| IT | 24.00 |
The overall trailing P/E for defensive sectors stands at 32 times, compared to the broader market's 25 times, indicating that investors still value the stability these sectors offer.
IT Sector's Significant Decline
Among the defensive sectors, IT has experienced the most pronounced shift. For the first time since FY13, the IT sector's market cap share has fallen below its profit share, marking a significant milestone in its market positioning.
Rise of Cyclical Sectors
As defensive sectors face headwinds, cyclical sectors are gaining ground:
| Sector | Current P/B Ratio | 2020 Low P/B Ratio |
|---|---|---|
| Discretionary Consumption | 5.90 | 2.60 |
| Industrials | 5.40 | 1.50 |
This substantial increase in price-to-book ratios for cyclical sectors like discretionary consumption and industrials reflects growing investor confidence in these areas.
Market Implications
The shifting landscape presents both challenges and opportunities for investors. While defensive sectors have traditionally been viewed as safe havens during economic uncertainty, their declining market share suggests a potential reallocation of capital towards more cyclical and growth-oriented sectors.
Investors may need to reassess their portfolio strategies in light of these trends, balancing the premium valuations of defensive stocks against the growth potential of cyclical sectors. As always, a diversified approach that considers both defensive stability and cyclical growth opportunities may be prudent in navigating the evolving market dynamics.
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