Equity, cyclical and value stocks will continue to outperform

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  • Capital-intensive, cyclical and value stocks have outperformed since FY21, according to a report by ICICI Securities.
  • The relative outperformance of these stocks in the BSE 200 universe is explained by factors such as high capital intensity, high financial leverage and low return on equity.
  • Stocks exhibiting any of these three factors experienced a reversal in FY21, the year marred by the Covid-19 pandemic.

Capital-intensive, cyclical and value stocks have outperformed since FY21, according to a report by ICICI Securities. The relative outperformance of these stocks in the BSE 200 universe is explained by factors such as high capital intensity, high financial leverage and low return on equity.

According to analysis by ICICI Securities, stocks exhibiting any of these three factors experienced a reversal of fortunes in FY21, the year that was marred by the Covid-19 pandemic. 19. These stocks reversed the trend seen between FY12 and FY20, when stocks that were either expensive or less volatile outperformed others in the market.

“The above trend is the longest period of outperformance observed from the above factors since the peak of India’s investment and credit cycle in 2011-12,” the ICICI Securities report said, adding that this is not a false beta rally as these three types of stocks have continued to outperform despite the aggressive quantitative tightening cycle and interest rate hikes by the US Fed.

Capital-intensive stocks are those businesses that require heavy capital investment to produce goods. UltraTech Cement, JK Cement and other cement companies are some examples of capital-intensive stocks.

Cyclical stocks are companies whose prices are influenced by macroeconomic changes in the country’s overall economy. Some examples of industries include banking, financial services and insurance (BFSI) and the automotive industry.

“The risk factors are evolving favorably”

According to analysts at ICICI Direct, stocks and sectors in its report outperformed despite risk factors such as high leverage and relatively low return on equity due to favorable change in risk factors .

“We attribute the paradigm shift in factor performance to the robust demand outlook in sectors such as construction, manufacturing, power, telecommunications, commodities, etc. which are tied to the investment cycle” , says the report.

The report further adds that the structural growth of the digital economy – a shift in commerce from the usual brick-and-mortar model to an internet-based model – will act as the driver for “dramatic binary outcomes” in the longer term.

Here are some of the top picks from the research firm:

Company CPM
SBI ₹598
IndusInd ₹1,120
L&T ₹2,013
Coal India ₹227
UltraTech Cement ₹6,750
JK cement ₹2,936
Ashok Leyland ₹143
Balkrishna Industries ₹1,955
HCL Technician ₹1,100
Indemart ₹4,435
Tata Motors ₹423
Sapphire Foods ₹1,371

Source: NSE, price at 12:30 p.m., November 21, 2022

“Extremely expensive low-volatility stocks with sub-par growth prospects are unlikely to outperform,” the report said, adding that this is a defensive strategy that has performed well during the investment down cycle. since fiscal year 2011.

Resumption of capital spending on cards, say RBI and analysts

Earlier, a report by the Reserve Bank of India said that India Inc. is poised to revive the capital spending cycle.

“Going forward, improving balance sheets of private companies, increasing level of capacity utilization, robust demand, increasing capital spending and various government policy initiatives are expected to restart the cycle of capital expenditure,” according to a report by the Reserve Bank of India.

Morgan Stanley analysts said this could trigger a further ratings upgrade for the banking sector, which has been among the outperformers since FY21. The research firm added that Indian banks are currently in a transition phase.

“The first stage is typically driven by expectations of better asset quality. The second, more sustained stage is typically driven by accelerating loan growth that defines an earnings leveling cycle, and we believe that the catalysts for this are taking place,” the report says.

However, in the medium term, banks face headwinds in terms of increasing competition to capture deposits, which could slow their loan growth.

“While this was undoubtedly an exceptional quarter, we are signaling impending headwinds in terms of slowing loan growth and a catch-up in deposit mobilization and deposit pricing,” said a report by HDFC Securities.

While the boost in capital spending is a boon for banks as well as long-term investors, returns will be determined by banks’ ability to weather the liquidity crunch.

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