Morgan Stanley highlights their portfolio strategy is based on rising momentum and broadening of the economic recovery coupled with likely shifts in correlations and relative sector valuations. Investors should construct portfolios with a bottom-up approach rather than a top-down macro thought process. The easy and first leg of the bull market may be over. Their GDP growth forecast for FY21 is significantly more optimistic than consensus (4.7% vs -10%). The COVID-19 situation appears to be ebbing. A bounty crop, likely recovery in exports following global growth trends and strong monetary aggregates are skewing growth risks to the upside.

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The next leg will be accompanied by greater volatility and likely dispersion in performance. They expect stock picking to rule over a top-down macro approach to portfolio construction. Valuations and performance of sectors have moved considerably over the past 6 months.

They add HDFC, Asian Paints, Power Grid and Mahindra & Mahindra to our Focus List and delete ICICI Pru Life, Shriram Transport, Lupin and BPCL from their list.

There are five themes that are driving our portfolio strategy:

1)      Peak return correlations across stocks → narrower sector positions with focus on stock picking

2)      Stronger economic recovery than consensus expectations → domestic cyclicals over defensives

3)      Rising reforms momentum → buy industrials

4)      Peaking concentration of market cap and profits → buy SMID (small and mid-cap)

5)      Shifts in relative performance and relative valuations → sell energy, buy utilities and financials

Portfolio implication:

Morgan Stanley continues to be biased towards re-opening and recovery stocks and sectors. Thus, they are overweight domestic cyclicals including consumer discretionary and industrials relative to defensives such as technology, which continues to be our biggest underweight. A depreciating dollar index also favors cyclical sectors and is a drag for tech stocks. They add Asian Paints and Mahindra & Mahindra to our Focus List as additional discretionary exposure.

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Morgan Stanley goes underweight on Energy sector (from +300 bps to -100 bps), close out the underweight in Consumer Staples (from -200 bps to 0), go overweight Financials (from 0 to +100 bps) and Utilities (from 0 to +100 bps). They also add Power Grid and HDFC to their Focus List. ICICI Pru Life, Shriram Transport, Lupin and BPCL make an exit from their list.

(Authored by Rahul Kamdar)