All eyes are now on Budget 2020. And if you are looking to place your bets in the run-up, experts suggest you should not ignore the ‘high beta’ space.
Benchmark indices have been hitting fresh record highs consistently since December. Even small and midcaps, particularly from the high beta space, have done better.
The S&P BSE Sensex has rallied 2.8 percent since December compared to over 6 percent surge in the S&P BSE Smallcap index, and little over 2 percent gain in the S&P BSE Midcap index in the same period.
High beta stocks usually find favour among investors ahead of the Budget, largely on hopes of policy measures that could be announced in the Budget, expectations of improving growth outlook, and valuation comfort.
“With broader market showing a good performance, we can expect an edge on high beta stocks ahead of the Budget as they can give good returns compared to their peer stocks,” Gaurav Garg, Head of Research at CapitalVia Global Research Limited- Investment Advisor told Moneycontrol.
“Though high beta stocks are considered to be riskier, they have the potential to provide better returns in good times. Hence, exposure to these stocks can be a good bet for the pre-budget rally,” he said.
The government will announce the Budget on February 1, 2020. The stocks of housing finance, infrastructure and cement companies could witness a rally in anticipation of favourable pro-growth reforms that could be announced in the Budget.
There are as many as 15 stocks in the S&P BSE 500 index which have risen 20-40% since November. The names include Minda Corp, NMDC, Welspun Corp, Avanti Feeds and Adani Green.
High beta stocks within the Nifty50 have significantly outperformed the low beta stocks (12.3% for beta >1 and 2.4% for beta < 0.9) since September-end, which is a sharp trend reversal seen during the first three quarters of CY19 when low beta and quality stocks outperformed, said a report.
Other risk assets such as small and micro-caps which currently have higher ‘margin of safety’ have also started outperforming since December 2019.
'High beta' has outperformed selectively and is not broad-based, especially in the small and micro caps. This single fact makes us believe that since the risk perception for stocks continues to be relatively high, the investment risk is rendered relatively low for the broader market, especially micro/small caps,” ICICI Securities said in a report.
“Preferred picks with high Beta: Tata Steel, Jubilant FoodWorks, Tata Motors, SBI and UltraTech Cement,” he said.
What is driving High Beta?
Given the fact that India's growth was lowest in over 5 years in the September quarter, all eyes are on the government to introduce measures to boost growth.
Not every stock in the high beta space is rising, but companies that have a strong business model, low leverage on the balance sheet, as well as a sustained business model are likely candidates.
“Factors such as high quality, asset lightness, low financial leverage, high RoE, and growth have outperformed since FY10 in a sustained way except for short spurts of ‘high beta’ outperformance,” said the ICICI Securities report.
The report further added that such rallies have been driven by optimism on policy measures, improving growth outlook, rising liquidity and low rates in the past.
“Among domestic factors, hopes of a capex and credit growth revival due to the government's infrastructure push going ahead and declining interest rate environment is positive for sentiment towards 'high beta' stocks,” added the report.
Will the rally fizzle out?
The rally could fizzle out if Budget 2020 fails to meet expectations or global factors such as the escalation of a trade war between the US and China, or geopolitical concerns could derail the rally, suggest experts.
“It is usually the quality of earnings and quality of growth that really matters when it comes to sustaining gains. Temporarily, it may be seen that some high beta shows high positive variation,” Pritam Deuskar, Fund Manager, Bonanza Portfolio Ltd told Moneycontrol.
“But, if growth is to stay and not to fizzle out, it has to have a strong trend, good fundamentals and tailwinds for the sector,” he said.
The global shock could increase risk aversion thereby halting the global risk-on rally, and thereby capping gains in the small & midcap space. Back home, with inflation running at a 5-year high, the central bank will be reluctant to cut rates further.
ICICI Securities report highlighted that the eventual follow-up on execution will determine the sustainability of the current rally.
“We have observed several false triggers on this front since 2010 which have resulted in the fizzling out of beta stocks. Rising consumer inflation poses a risk to local monetary policy conditions and is hence a risk,” it said.
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