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Volatility likely to continue until elections; RIL, Dabur among top picks by Edelweiss

Edelweiss believes that with new leverage constraints, capital access challenges and diminished risk appetite, India’s cyclical recovery could be more normalised or relatively muted.

October 16, 2018 / 02:20 PM IST
Edelweiss Financial Services share price rise 18 percent in the last one month and currently, it is trading at Rs 50.15. But still, trades 73 percent below its 52-week high of Rs 182.50

Edelweiss Financial Services share price rise 18 percent in the last one month and currently, it is trading at Rs 50.15. But still, trades 73 percent below its 52-week high of Rs 182.50

 
 
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Nifty is likely to trade in the 9,800-10,500 range over the next 12 months. The volatility is likely to remain high until elections in May 2019, but will offer reasonable value across select higher-quality businesses, Edelweiss Securities said in a note.

“We believe there will be uncertainty and volatility in the run-up to the elections in May 2019 — in the backdrop of the risk reset that has taken place and potential economic growth risks that are rising thereof,” it said.

Edelweiss believes that with new leverage constraints, capital access challenges and diminished risk appetite, India’s cyclical recovery could be more normalised or relatively muted. This should bring India to its longer-term averages: on valuations (15–16x), earnings growth (15–16%) and portfolio biases (consumption, quality).

Taking the froth out should: a) continue to keep the markets in a relatively moderate trading range; b) limit froth in valuations, and c) put earnings at risk for the current year: with consensus earnings for FY19 at 23% while 1HFY19 has generated about 7% growth.

“Any material moves beyond this relatively narrow band (9,800-10,500) should push the market beyond its fair valuation (on either side),” said the Edelweiss Securities report.

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What should investors be prepared for?

The run-up to the elections in May 2019 is likely to be marked by uncertainty and volatility, but there are certain themes which should do well and will dominate over the medium term as the market settles into a lower-risk environment.

These are a) expansion of leverage will be slower b) liability gatherers and capital providers will be at a premium. c) market share consolidation (precipitated by the recent risk reset) will most likely continue d) rural dynamics will continue to improve e) growth could see some reset down, particularly capital- and leverage-sensitive.

Edelweiss sees the stock profile also becoming more distinct – and bias itself towards greater quality, and relatively more defensive in its nature. We see dominant stock characteristics that would generate a relatively high return (and keep a check on risks) in the following :

a) A higher quality, scale, and market leadership bias

b) Staple consumption - away from discretionary

c) Reasonable valuations for higher quality businesses

d) A defensive bias in the business

Edelweiss Securities rejigged its model portfolio — raising consumer staples to overweight and altering their top pick recommendations. It believes that high volatility (in what should be a relatively narrow market trading band) will throw up stock and portfolio opportunities that have not been available in India for a while.

This could well make the Indian market a very good stock-hunting ground – as risks appear to have reset down, even as risk perceptions have gone up.

Some of the stocks which are under Edelweiss' top portfolio picks are RIL, Infosys, ICICI Bank, L&T, M&M, Dabur, Hindalco Industries, ZEE Ent, Dr. Reddy’s, and Lupin.

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