Style & Sector Rotation A Key to Generate Alpha Going Forward
The Axis Top Picks Basket delivered a return of 15.3% in the last three months against the 11.9% return posted by the Nifty 50, outperforming the Nifty 50 by a notable margin of 3.4%. Moreover, over the last one month, the basket has gained 2.6%. We are happy to share that our Top Picks Basket has delivered an impressive return of 321% since its inception (May’20), which stands well above the 167% return delivered by the NIFTY 50 index over the same period.
India’s Domestic Economy Well-Positioned: Despite external risks, India’s domestic growth trajectory remains intact, with key macroeconomic factors supporting a stronger FY26 compared to FY25. Both the RBI and government are providing support to the Indian economy through policy measures such as a 50bps CRR cut in Dec’24, two rate cuts of 25bps each, improved bank liquidity, a consumption boost provided in the budget, an uptick in the government Capex spending, and the dividend by the RBI. All these developments indicate better days for the Indian economy in FY26 as against FY25. Furthermore, in the last one month, some macroeconomic uncertainty has reduced significantly. Nonetheless, further macroeconomic factors related to tariffs, yields, currencies, interest rates, and global growth need to be closely monitored going forward.
Bounce-back Continued in May’25: Indian market witnessed a bounce back from Mar’25 onwards as Nifty 50 went up by 12%, and Mid and Smallcap went up by 20% and 22% respectively since Feb’25 low. Multiple factors contributed to this rally: a) Q4FY25 earnings season on an expected line, b) Positive bilateral trade developments, c) Reduction of geopolitical tensions with neighbouring countries, d) Strong macro setup for FY26, and e) Positive flows supported by improving risk appetite. In the last one month, the Smallcap index went up by 9.6% and the Midcap index by 6.1%, while the benchmark index, Nifty50, inched up marginally by 1.7%. The majority of the sectoral indices closed on a positive note, except for the FMCG and Pharma indices. Overall, the breadth of the market improved significantly in the last three months.
We still believe that, at the current juncture, the macroeconomic risks such as 1) Trade policy uncertainty related to US and China, 2) Global growth rate (As the US economy saw a contraction in first quarter), 3) The direction of the US 10-year bond yields, and 4) The dollar index will continue to challenge the market direction and market multiple in near term. Keeping this in mind, we believe the market needs to sail through another couple of months smoothly before entering into a concrete direction of growth. As a result, we expect near-term consolidation in the market, with breadth likely to remain narrow in the immediate term. Hence, our focus will remain on style and sector rotation along with earnings recovery. Going forward, we expect the Indian market positioning will likely be divided between the domestic facing and export-facing sectors. We also believe that, at the current juncture, the risk-reward balance favours domestic-facing sectors due to the nil to low impact of the reciprocal tax. Export-oriented sectors will be in a wait-and-watch mode, and the impact and development related to the reciprocal tax will be closely tracked.
The valuations appear attractive for the Largecaps vs. the broader market, where the margin of safety is still missing. Against this backdrop, we believe that the Largecap stocks, ‘quality’ stocks, monopolies, market leaders in their respective domains, and domestically-focused sectors and stocks may outperform the market in the near term. Based on the current developments, we 1) Continue to like and overweight Largecap Private banks, Telecom, Consumption, Hospitals, and Interest rate proxies, 2) Are upgrading certain plays in Retail consumption and FMCG sectors based on the recovery expectations in FY26, 3) Prefer certain capex oriented plays that look attractive at this point in light of the recent price correction as well as reasonable growth visibility in the domestic market in FY26, 4) Continue to maintain our underweight stance in the IT sector, as we foresee a slowdown in overall IT spending in the US market, and a probable delay in discretionary spending which may pose a downgrade risk in the upcoming quarters.
Based on the recent developments, we have made one change to our Top Picks recommendations. This includes booking profits in Dalmia Bharat and the addition of Sansera Engineering. Our modifications reflect the changing market style and a slight shift towards superior quality play.
Based on the above themes, we recommend the following stocks: HDFC Bank, ICICI Bank, Shriram Finance, Avenue Supermarts, State Bank of India, Lupin, Hero Motocorp, Max Healthcare, Colgate, Kalpataru Projects, APL Apollo Tubes, Varun Beverages, Bharti Airtel, Prestige Estates, and Sansera Engineering
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