India’s benchmark equity index Nifty is expected to climb higher but gradually. The observation provided by Standard Chartered Securities underlined several aspects including increased retail participation and outperformance of key sectors.
On the flip side, the IT sector’s performance is expected to be below expectations, which has prompted the brokerage to downgrade its ratings to neutral.
Strong flows from retail investors and declining COVID-19 cases have offset the pessimism led by the US Federal Reserve’s signals of two rate hikes before 2023 end. This led headline indices to scale lifetime highs in June despite several hiccups during the month.
Standard Chartered Securities believes some of the high-frequency data remain buoyant as India comes out of the short but furious COVID 2.0. The optimism around recovery coupled with strong domestic (retail) flows is likely to keep the momentum intact.
“We do expect Nifty50 to reach fresh lifetime highs, but more gradually vs the pace at which it rose in the last 12 months. On this basis, we expect the heavyweight banking sector to take the lead and reverse its recent underperformance,” Standard Chartered Securities said in a report.
The brokerage, however, finds some market headwinds given full valuations across sectors, the limited scope of earnings upgrades, and a likely increase of global and domestic bond yields.
The Fed’s hawkish announcements, rising bond yields, and rising crude oil prices are the key known negatives, it said, adding that any unknown risk could lead to a swift correction given the historically high valuations across sectors.
The brokerage remains bullish on the long-term prospects of Indian equities. It continues to prefer large-cap stocks that have leadership moats and strong balance sheets for long-term wealth creation.
In the medium term, it expects the Nifty50 index to hit new lifetime highs and then retrace.
Standard Chartered Securities has upgraded its view on financials to ‘overweight’ from ‘neutral’.
“We remain positive on private sector banks and diversified financials, but continue to be neutral on public sector banks and NBFCs. The banking sector has underperformed headline indices in the last three to four months given concerns of the impact of COVID 2.0 on asset quality. The normalisation of credit cost and adequate provisioning buffer provides the safety of margin,” it said.
Its top picks from the financial sector are HDFC Bank, ICICI Bank, HDFC.
The brokerage has downgraded the IT sector to ‘neutral’ from ‘overweight’ driven by a potential shrinkage in EBIT margins, which could lead to muted bottom-line performance vs strong top-line growth going ahead.
“Consensus earnings estimates are likely to see a cut, impacted by higher wage increments and increased attrition rates across the sector. Additionally, current valuation (higher than the historical five-year average) commands a 12-15 percent YoY revenue growth in FY22E, followed by a 10-11 percent YoY growth in FY23E, leaving less margin of safety,” the brokerage said.
It continues to prefer large-cap IT companies over their mid-cap peers and Infosys is its top pick in the IT sector.
Here are Standard Chartered Securities sector preferences on a 12-month horizon:
: The views and investment tips expressed by investment experts on CNBCTV18.com are their own and not that of the website or its management. CNBCTV18.com advises users to check with certified experts before taking any investment decisions.)