The Indian market is down by about 9 percent from its record high, which has laid down the groundwork along with other domestic and global factors for a short term rally in high beta stocks.
The conditions for sustained outperformance of high beta and interest rate sensitive stocks are not developing structurally due to the weak private investment cycle. But, the impact of dovish FED, rise in global liquidity, surplus banking liquidity, stimulus announcements, and valuations could result in a short cycle (3-5 months) beta rally, ICICI Securities said in a report.
The report further added that the best high beta and interest rate sensitive stocks to play the rally from the coverage universe include stocks like SBI, Axis Bank, BPCL, NTPC, Power Grid, L&T, and Ultratech Cement.
Over the past one week, NIFTY50 fell marginally (-0.2 percent), underperforming against developed markets (DMs) and Emerging Markets (EMs), while mid-and-smallcaps fared better, up 0.9 percent and 0.6 percent respectively in the same period.
Realty, PSU Banks, FMCG, and Consumers Durables led the fall while Metals, Infra, Auto and Power were up during the past week.
The valuations, too, turned favourable. Bond-Earnings yields spread is at 66bps (much below long-term averages or LTA). The market cap to GDP ratio is at 73 percent which is still lower than the LTA of 78 percent.
ICICI Securities highlights 6 factors which could lead to a beta rally in the near future (two-three months)
Impact of dovish FED on EM flows and currencies
The US FED bought treasuries worth US$14 billion over the past fortnight and is the first such instance of QE since it began its balance sheet reduction program in November 2017.
The dovish signal on rates and liquidity by the US FED and other central banks including India and China could result in a halt to the sharp portfolio outflows from EMs including India and halt the sharp depreciation in EM currencies.
Rising global liquidity will find its way to relatively high real yields for India
Trailing 30 days FPI flows (bonds+equities) have turned positive for India at ~US$300 million, which is also positively impacting the INR.
India real bond yield at 3.4 percent is amongst the highest within EMs and a stable INR could continue to attract foreign capital.
Surplus banking liquidity to surge further
The surplus liquidity in the banking system has consistently stayed above the Rs 1 trillion mark since July and could surge further based on the positive trends in the key drivers of liquidity.
The continued surplus liquidity will also result in excess bank reserves thereby boosting the money multiplier which dipped in FY19 to 5.6 from 5.8 in FY18.
Oil prices continue to be weak
Weakening oil prices thereby support the CAD or the current account deficit outlook while above average monsoon (3 percent surplus as of September 9) to support rural demand.
Government action on policy front
Pro-growth policy announcements and the room to spend after the RBI’s transfer of Rs 1.76 trillion to the government will keep optimism high.
The August PMI is soft but is still expanding MoM while the business optimism remains high. The weak growth narrative will continue but may not spring any negative surprise in the short term.
Source : http://tiny.cc/adxjcz