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Last Updated : Jan 10, 2020 02:04 PM IST | Source: Moneycontrol.com

Axis Capital rules out V-shaped economic recovery; favours 9 Nifty stocks

Like every other brokerage, Axis also feels the fiscal management is the key for government in current year considering cut in corporate tax rate.

 
 
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The market has rallied 22 percent since October 2018 lows (around 10,000 on the Nifty) and has climbed more than 12 percent since the start of 2019 despite the slowdown in economy. The rally was driven by a few stocks only.

But the broader markets underperformed benchmarks in 2019 against sharp outperformance in 2017. The Nifty Midcap index gained 6 percent since October 26, 2018, but fell 3 percent since the beginning of 2019 which indicated that the story is yet to broaden.

Once the broader markets start performing well ahead of benchmarks then one can say the economy is back on track, till then the quality stocks will be rewarded strongly by the market, experts feel.

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"While the real economy continues to struggle, market has already decided on the winners and just a handful of stocks (33 of BSE 500) are up around 40 percent despite the broader markets going nowhere, whereas 350 stocks together lost 31 percent of their value," Axis Capital said in its latest Strategy report.

Stocks which performed outstandingly well were from insurance, AMCs, privatisation (from government), exceptional businesses and managements, and industry leaders. "The message market is giving us is to invest in 4 broad themes," Axis Capital said.

The brokerage is overweight on BFSI (banking, financial services and insurance), capex plays (engineering/infrastructure and housing), telecom and pharma stocks, which are part of its core portfolio.

As per its strategy, it has overweight call on these top 9 Nifty50 stocks - Bharti Airtel, GAIL, HDFC Bank, Hindustan Unilever, ICICI Bank, Infosys, L&T, SBI, and UltraTech Cement.

Among non-Nifty picks, it has Apollo Hospitals, Avenue Supermarts, Container Corp, Coromandel International, SBI Life, Thermax, Torrent Pharma, and Varun Beverages in its portfolio.

"We don’t see a change of narrative on the likely market theme for 2020 given that V-shaped recovery is ruled out. As growth has nearly bottomed, we are likely to see gradual recovery ahead," it said.

"In the medium term, we are likely to be in low-growth, low-inflation phase and companies that demonstrate volume growth (given pricing power would be a rarity) would do well. Hence, portfolio positioning with industry leaders and exceptional managements will continue to be the key theme in 2020 as well," it added.

However, the brokerage has an underweight call on consumers discretionary (autos/durables) and staples.

Axis Capital in normal case sees Nifty around 13,500-level (i.e. 10 percent potential upside from current levels), but ruled out its bull case for Nifty (17,200 levels) given economic recovery is likely to be gradual.

"Also, Nifty earnings growth ex-BFSI is still anaemic. We would watch progress on investment cycle turnaround for broader market outperformance. Stagflation (high inflation; low growth) is the key risk for the markets," it added more reason for ruling out bull case.

Similar to other brokerages, Axis Capital also feels the economic growth would bottom in Q3FY20 with only few factors supporting improvement like rural income uptick due to strong reservoir levels, falling bank interest rate due to excess banking sector liquidity and corporate tax cuts filtering through as price cuts.

Most domestic as well as global brokerages expect the third quarter growth to be around 4 percent in October-December quarter 2019, but they expect it to back around 6 percent in 2020.

Axis Capital expects Nifty earnings to grow 15 percent in FY20 and 26 percent in FY21 led by financial space which forms 40 percent of the index. "Financials are estimated to contribute 72 percent of growth in FY20 and 54 percent in FY21."

Excluding financial space, index earnings are expected to grow at 4 percent in FY20 and 12 percent in FY21, according to the brokerage.

Like every other brokerage, Axis also feels the fiscal management is the key for government in current year considering cut in corporate tax rate.

"The key macro uncertainty in 2020 comes from fiscal management where the government is under pressure to spend for growth and also provide a credible plan on how it will compensate for revenue loss from corporate tax cuts. The only option we see is privatization and opening up more aggressively to foreign capital," it said.

Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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First Published on Jan 10, 2020 02:04 pm
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