Indian markets also saw a strong rally in November, rising 5.5 percent after a weak October following strong global cues as the risk of worst-case scenarios reduced both internationally and in India. This rally is set to continue in India, believes brokerage house B&K Securities.
It sees an around 10 percent upside potential in benchmark Nifty in the next 12 months but flows could take the Nifty much higher, it added.
Valuations Higher?
As per the brokerage, the valuations are higher than long-term averages based on Earnings and Book Value. The Yield Gap measure that we use to arrive at our Index fair value has also moved higher than average. However, given the reduction of risks including Policy risk, the Valuations could remain higher for longer, it forecasts.
Reasons behind the rally
Geopolitical threat and Interest Rate risk turn neutral in November: The Israel-Hamas conflict continues but has receded in intensity and this along with higher US crude inventories and lower demand scenario led to crude prices cooling off. Another global risk emanating from the spike in bond yields also subsided in November with US treasury benchmark yield softening from 5 percent to 4.4 percent, said the brokerage. Also, most commentary from Fed officials seems to suggest that the Fed rate has peaked and which has in turn led to the softening of bond yield and dollar index, it added.
The key risk in the US stems from the high fiscal deficit which would lead to an elevated supply of bonds, keeping interest rates elevated and if the overall economy can escape with a soft landing despite the sharp rise in interest rates, it warned.
Huge surprise in state elections: The state election results are a huge positive thus substantially increasing the probability of the current government coming back indicating policy continuity.
Growth remains strong: The erratic monsoon has played a spoilsport for rural consumption. The urban festive demand is also lower than expectations. However, growth parameters like PMIs, GST collection, E-way bills, Auto sales, electricity demand, and Rail traffic remain robust despite not so conducive external environment. The GDP data has also shown high growth in Manufacturing and Construction. Gross Fixed Capital formation and government expenditure have driven the expenditure side. The long-term story of capex cycle remains intact, noted B&K.
India growth: India grew by 7.2% in FY23. Growth was driven by Investments followed by Private consumption. As the base normalises, growth will be adversely impacted in FY24 with some moderation in private consumption; the external sector will be weak due to the slowing global economy which will keep exports sluggish, which in turn will impact both manufacturing and thus growth. The brokerage has also upgraded India’s FY24 GDP estimate to 6.9% (6.5% earlier).
Global flows have become positive: The commentary of Global Asset Allocators remains positive for India, and the flows have picked up in the second half of November after remaining negative for long. Retail flows continue to be positive. The pick-up in IPO, QIP activity, and promoter selling have been absorbed by the strong domestic flows, it stated.
Portfolio strategy
Mid and smallcap
The brokerage noted that the Mid and Small Cap Index has done much better than the Large Cap Indices. However, given the risk scenario, this may continue. Over the longer term,
it believes that bottom-up stock picking will continue to work in the Mid and Small Cap space.
However, it is not too surprising, as Mid and Small-caps do better than their Large-cap peers when the Economy does well. And if Credit Growth is any indicator, this time around, unlike in 2017-18, there is Economic Support for Small Caps, it pointed out. Also, Mid and Small Caps represent the sectors that are doing much better in a more meaningful way than the larger cap peers, added the brokerage.
Sectors
B&K believes that domestic-oriented stocks especially in B2B sectors and in select Consumer Discretionary sectors should do well. Also, export stories, which have a very low global market share will gain from China plus one and supply issues in the developed world. It remains Overweight in BFSI, Industrials, Consumer Discretionary and Underweight on IT and Materials.
The ITC Moment for some of the larger banks whose stocks have not performed may not be far, as Foreign flows have picked up and relative valuations are very compelling, it highlighted. B&K also expects Public Sector Companies to continue their outperformance as policy risk reduces.
Model Portfolio
What comes in: Welspun Corp.
What goes out: Gujarat Gas.
B&K’s Top Multi Cap picks: Axis Bank, State Bank of India, Larsen & Toubro, PNB, Bharat Electronics, Radico Khaitan, Westlife Foodworld, KSB, Welspun Corp and PCBL.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.
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Published: 06 Dec 2023, 11:32 AM IST