CLSA recommends shift to HDFC Bank, ICICI Bank and SBI among Financials; adds Larsen and Ultratech Cement

CLSA says that it expects portfolio adjustments for economic normalisation to favour domestic plays. So, how to implement this portfolio adjustment? CLSA says it recommends a shift to banks, cement and Larsen and Toubro from IT and pharma. It has highlighted some top stocks too. CLSA's financials team prefers SBI, ICICI Bank and HDFC Bank the most in the space. Within cement, CLSA says it likes Ultratech while among defensives; CLSA also likes Bharti Airtel and utilities (NTPC, Power Grid, IGL and Mahanagar Gas).

Economic normalisation may bring domestic stocks back into favour

 A 20% decline in India’s active Covid-19 cases from its peak and hopes of a vaccine in 2021 may drive economic normalisation over the coming months. CLSA’s index of Covid-19 resilient stocks has outperformed the index of Covid-19 impacted stocks by a massive 45 ppt YTD. Empirical data from the past 10 years shows a tendency of 60% of the performance leaders of the first nine months becoming underperformers in the last quarter of the calendar year and laggards becoming outperformers. These factors make us recommend a shift to banks, cement and L&T from I.T. & pharma.

Covid-19 in India: light at the end of the tunnel

India’s active Covid-19 cases have declined 20% from its peak. Indian Covid-19 curve may be further tamed as the calendar year 2020 draws to a close. This, along with rising hopes of a vaccine in early-2021 should make the market see the light at the end of the tunnel and start playing for economic normalisation soon.

Time to find new winners

Despite the large economic impact, the Nifty is now nearly back to pre-Covid-19 levels but this rebound has been far from even.
On one hand, sectors which are seen as Covid-19 resistant, like healthcare and I.T., are now 34-37% above pre-Covid-19 levels and others like banks, metals, power, oil & gas and capital goods are 16-27% below pre-Covid-19 levels.

CLSA’s market cap weighted index of Covid-19 resilient stocks has outperformed the Nifty by a huge 31 ppt YTD versus 14 ppt underperformance shown by a similar index of Covid-19 impacted stocks. This divergence is not just in performance but also in valuations.

While the Auto, I.T. and Healthcare Indices are at 10-year high valuations by a margin, banking, metals and oil & gas are way below 10- year average valuations. Polarisation is also evident from the fact that only 15% of this universe of Covid-19 impacted stocks are above pre-Covid-19 levels versus a much larger 70% of the Covid-19 resilient names which have surpassed their respective pre-Covid-19 stock prices.
Nonetheless, as the market repositions itself for the normalisation of the economy, core domestic sectors should start outperforming the global defensives like I.T. and pharma.

CLSA has also entered the annual portfolio rotation season in India

Data from the past few years shows an interesting trend in the change in performance of leaders and laggards of Jan-Sep in the Oct-Dec quarter of the calendar year. Over the past five years, the top 10 best outperforming large cap stocks of the first nine months of the year (Jan-Sep) have ended up underperforming the benchmark in the last quarter, i.e. the Oct-Dec quarter. Also, the 10 most underperforming stocks of the Jan-Sep period are outperforming the benchmark in the Oct-Dec quarter. Possibly, this is evidence of investors taking profit and repositioning portfolios for next year.

Banks and infrastructure may be gainers as economic normalisation trades pick-up

Six pharma stocks, two I.T. names and RIL are the top 10 outperformers for the Jan-Sep 2020 period while five financials, L&T and PSUs are the 10 biggest underperformers.

CLSA believes financials along with L&T and cement could be gainers as investors reposition portfolios for the normalisation of the economy in 2021.

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CLSA’s financials team prefers ICICI Bank, SBI and HDFC Bank the most in the space. Within cement, they like Ultratech.

Within domestic stocks, CLSA are a bit wary of high expectations (valuations) being baked into auto stocks as they expect the consumption space to pick-up only gradually. Among defensives, CLSA likes Bharti Airtel and utilities (NTPC, Power Grid, IGL and Mahanagar Gas)

(Authored by Rahul Kamdar)