KR Choksey has released its much awaited equity strategy for 2012. The top stock picks are L&T, IRB Infra, Mundra Ports, IDFC, ICICI Bank, Axis Bank, Indusind Bank, BHEL, Tata Motors, Bajaj Auto and HDFC.
KRC states that we have entered the sixth phase of the market cycle when one sees higher level of capitulation, intense FII selling and significantly decline in volume in deliverable segment. KRC opines that the market forms bottom in ~ 14 months from previous peak and it rally 25% from the bottom ~ 3.-4 months.
• Economic cycle is likely to turn relatively favorable in next 6-12 months led by reversal of monetary policy cycle, policy reform process speed up during Budget 2012, encouraging macro data flow from US economy.
• Sectoral performance data suggest outperformance in defensive sectors such as FMCG, Pharma is followed by outperformance high growth sector viz. Auto, Banks, capital goods. We believe large global institutional investors would change their sectoral weights led by improving operating environment and rotation trade possibility in global equity portfolio.
• Based on our market cycle findings, KRC is overweight on infrastructure, capital goods, banks, auto and Housing and underweight on information technology, commodities, energy, FMCG and Pharma.
• On yearly basis, Indian equities outperformed 9 times, followed by copper 5 times in 25 years
• On CAGR basis, Indian equities outperformed other asset classes significantly by wide margin of ~ 810 bps to 14.7% in last 25 years.
• The Indian Equity Market had four cycles in last 26 yrs
• Typical market cycle completes its circle in 8 years of rise and fall
• Market consolidates every four years after bull run
• After touching peak in early 2008, the market bottomed in march 2009 and it again peaked in Nov 2010
• Market cycle study reveals that the market may be bottomed out in terms of price correction, built a solid base for next bull market to set in.
• Market has been trading in the range of 14x – 20x valuation in last ten years
• In 2008, the market saw strong rebound at 9.5x bottom valuation.
• Currently, Indian equities are trading at 11.9x FY13E earnings, below five years average, offering attractive investment opportunities with medium term objective.
• Our analysis reveals that transmission of monetary tightening to lending markets occurs with a quarter lag effect, whereas translation of higher lending rates to borrowing costs of borrowers occurs with a 2 quarter lag effect.
• This entire 3 quarter lag effect also reflects in the relationship of macro-economic variables
• Long term trend in monetary policy cycle suggests that the cycle turns with a quarter lag effect from peak or bottom.
• Based on policy rates and lending rate trend, it seems that lending rates have already peaked out and policy rates are likely to reverse in near term.
• Growth and price indicators suggest that there is broad based economic slowdown led by demand moderation coupled with weaker investment
• We believe that falling interest rates coupled with fiscal policy reforms will drive investments and corporate earnings in medium term.
• We believe market would rally strongly after intense monetary policy cut cycle with quarter lag effect
• Improvement in macro fundamentals coupled with renewed focus on reform process would see higher foreign capital flow into Indian markets, augmenting rupee appreciation
Top picks for 2012
• Infrastructure – L&T, IRB Infra , Mundra Port & SEZ & IDFC
• Banks – ICICI Bank, Axis Bank and Indusind Bank
• Capital goods – BHEL
• Auto – Tata Motors, and Bajaj Auto
• Housing – HDFC Ltd