The Indian market consolidated in September after a robust performance in July and August with more volatility ahead of the US Presidential elections and rising coronavirus cases across the globe.
Midcaps and smallcaps performed well during the month but most key indices, barring pharma, auto, and IT, delivered negative returns. In September, Nifty50 declined by 1.2 percent while the midcap and smallcap indices delivered a 1.8 percent and 3.5 percent returns in this period respectively.
Going ahead, October is packed with events that are both global and local. Global events include the run-up to the US elections, news flow on the COVID vaccine, and earnings for technology companies. Whereas, local events include the Q2FY21 earnings season, monetary policy committee meet, etc.
So how should investors react in this action-packed month?
Brokerage house Axis Securities believes that volatility is bound to rise in the month and therefore, the theme of flight to quality will remain intact.
Moving on to model portfolio, the brokerage removed ITC from its top picks as the stock continues to see business challenges. It added Dr Reddy’s in its place which is seeing a structural improvement in business prospects.
The brokerage expects that near-term headwind could weigh on ITC resulting in an underperformance from a near-term perspective.
However, it further reiterated that over the longer-term horizon, ITC offers immense growth opportunities. It also gives a higher dividend yield of over 5 percent and is attractively valued.
Other top picks include ICICI Bank, Manappuram Finance, Bharti Airtel, HCL Tech, Mindtree, Varun Beverages, CCL Products, Aarti Drugs, Biocon, Minda Industries, NOCIL, and Endurance Technologies.
Here are the themes the brokerage had in mind to come up with these picks:
1) BFSI underperformance
The bank index has declined 10 percent in September mainly due to a rise in
NPAs and rising stress in the banking system. Management commentary leading up to the end of the month was tepid but has not been too alarming.
However, Q2FY21 will shed light on the stress in the system. Axis Securities believes that the stress will be much skewed across the system but the large private banks are likely to perform quite well on the stress challenges.
"Even though the banking system might be able to manage stress better, growth and return on capital challenges are likely to persist in the near
term. The sector is unlikely to re-rate in the near term but offers good value picks across the system. We maintain our top picks ICICI bank and Manappuram Finance in the BFSI sector," the brokerage noted in its report.
2) Mid and small caps likely to see traction
The market seems to have turned in favour of small and mid-cap stocks which are more reasonably valued and offer greater upside potential.
The recent spate of IPOs and their success clearly indicates the
appetite for mid and small-cap stocks, Axis Securities stated. In top picks the brokerage has a disproportionate allocation to small and mid-cap stocks which have resulted in significant returns like Mindtree, Varun Beverages, CCL Products, Aarti Drugs, among others.
The upcoming volatility will present with challenges for the mid and small-cap stocks but will also present with good opportunities, it added.
3) US election and ensuing global volatility
According to the brokerage, the US elections present a conundrum from market volatility as well as dollar volatility.
"Based on the current opinion polls, the Democrats have a strong footing and have a better chance but polls can change as they did in 2016. Also, a shift in policy stance from republicans to democrats will mean medium-term market volatility as an increase in corporate tax or capital gains tax could mean a market sell-off," Axis noted.
It further stated that a strong democrat win will mean dollar stability but near term market volatility.
While all these challenges will be seen for the global market, it believes that it would be wise to model for near-term market volatility and volatility even post-elections as a change of regime seems more likely and volatility will persist.
Quality as an investment style is more likely to outperform over the medium term, it added.