Axis Top Picks basket has outperformed the benchmark by a significant margin due to thematic approach to Top Picks selection

Near-Term Volatile, Continue ‘Buy On Dips’ Strategy for Equities

As we turn the final page of 2022, we sincerely wish a ‘Happy New Year’ to all our beloved patrons and welcome 2023 with great enthusiasm. May the new year bring prosperity, peace, and happiness to all of you and your families.

Axis Top Picks basket outperformed the benchmark by a significant margin as it delivered an impressive return of 11% in 2022 as against 4.3% posted by Nifty 50 during the year. The basket, however, declined by 1.8% in Dec’22 on account of the volatile equity market but it still managed to beat the 3.5% de-growth reported by the benchmark Nifty 50 on an MoM basis. Furthermore, the basket has delivered an astounding return of 149% since its inception (May’20), which stands significantly higher than the 95% returns delivered by NIFTY 50 over the same period. Keeping this in view, we continue to believe in our thematic approach to Top Picks selection.

In 2022, the Indian market outperformed other global and emerging markets by a notable margin, which owes its credit to the country’s robust economic outlook despite multiple headwinds it faced including the Russia-Ukraine geopolitical crisis, policy tightening, rising inflation, and volatile FII flows. Against this backdrop, our benchmark index posted an encouraging growth of 4.3% in 2022 while the S&P 500 and Emerging Market indices tanked by 19% and 20% respectively. Similar to our benchmark index, the broader market in India, too, showed remarkable resilience in the last one year vis-à-vis its global peers as Mid Cap inched up by 3.5% while the Small Cap index declined only marginally by 3.6%. Moreover, Indian investors have shown a good deal of maturity in the last one year – a pivotal reason for the Indian Market to not witness adverse panic reactions as seen in other economies. On the sector front, PSU Banks, Metals, FMCG, Energy and Auto indices have closed on a positive note in the last one year while Realty, IT, Media, and Pharma have closed on a negative note over the same period.

Dec’22 was a volatile month for the market in which broader market recovery was seen during the first half of the month. However, incremental volatility was seen during the second half of the month on account of rising Covid cases in China as well as the rising bond yield in the US market. In the last two weeks, the US bond yield has inched up by 40bps, indicating an expectation of further rate hike by the US FED to the tune of 50bps in the upcoming FOMC meeting as against the earlier expectation of 25bps. This, however, still depends on the evolving data points. Led by these developments, Nifty 50 declined by 3.5% during the month while Mid Cap/ Small Cap declined marginally by 17%/1.8% MoM. On a sectoral front, all indices, except Metals and PSU banks, closed on a negative note. High-frequency indicators such as GST collection, power consumption, and E-way bills are pointing upwards on a sequential basis, indicating robust demand even after the festival season. In this context, Q3FY23 earning season remains critical. The market fundamentals are likely to be driven by earnings commentaries as well as margin recovery with a cool-off in commodity prices on a sequential basis. In Q3FY23, banks are likely to post an encouraging set of numbers on account of an uptick in credit growth. On the other hand, export-oriented themes are likely to be laggards. Currently, we foresee FY23/24/25 NIFTY EPS at 817/930/1049 with a growth of 11%/14%/13% respectively and we will revise our numbers post the earnings season.

Along with the earnings season, the market will continue to be driven by pre-budget expectations. We expect Union Budget – 2023 to be a growth oriented budget given that the state elections are lined up in over 9 states in 2023. We believe the policy reforms such as Atmanirbhar Bharat, ‘Make in India’, and the PLI scheme are likely to continue in FY24 as well and would receive further impetus in the upcoming budget. The consequent higher government spending on infrastructure development will help the economy gain further growth momentum moving ahead. The efforts are expected to continue around Defence, Railways, and Road Infra development. Moreover, infrastructure spending and the focus on rural recovery would remain key agendas in the budget with further growth thrust expected in the Affordable Housing segment.

We maintain our Top Picks recommendations unchanged for the month as we continue to focus on the thematic approach of superior-quality companies

We maintained our Dec’23 NIFTY Target at 20,400:

Base case: The Indian economy stands at a sweet spot of growth and remains the land of stability against the backdrop of a volatile global economy. We continue to believe in the long-term growth story of the Indian equity market, supported by a favourable structure, which is emerging as increasing Capex enables banks to improve credit growth. Strong earnings trajectory continues in the Nifty 50 universe. We foresee NIFTY EPS to post growth of 11%/14%/13% in FY23/24/25. Thus, we maintained our Dec’23 Nifty target at 20,400 by valuing it at 20x on Dec’24 earnings, implying an upside of 13% from the current levels. The current level of India VIX is below its long-term average, indicating the market currently being in a neutral zone (neither panic nor exuberance). While the medium to long-term outlook for the overall market remains positive, we may see volatility in the short run with the market responding in either direction. Keeping this in view, the current setup is a ‘Buy on Dips’ market. We recommend investors maintain good liquidity (10%) to use such dips in a phased manner to build a position in high-quality companies (where the earnings visibility is quite high) and with an investment horizon of 12-18 months

Bull case: In the bull case, we value Nifty at 22x which translates into a Dec’23 target of 22,500, implying an upside of 24% from the current levels. Our bull case assumption is based on the overall reduction in the volatility as well as geopolitical tensions in 2023 as against 2022, which would lead to further cooloff in the commodity prices, especially Oil. The tightening cycle in the US will likely continue in 2023, albeit at a slower pace. We could see the US FED may take a pause sometime in mid-2023. If the market sails through the next 6-9 months smoothly, we may see the next triggers for the market and money would flow to EMs, thereby increasing the overall market multiple.

Bear Case: In the bear case, we value Nifty at 18x, which would translate into a Dec’23 target of 18,400, implying almost flat returns. We assume the Russia Ukraine war to have likely continued for a prolonged period which would continue to pose inflationary challenges to the developed world. Currently, the market is priced-in for future rate hikes but the terminal rates are yet unknown. Any shape deviation in the terminal rate from current expectations may translate into a slowdown or heightened recession risk in the developed market. This, in turn, would have an impact on the export-oriented growth in the domestic market and would pose challenges to the earnings and market multiple.

Based on the above themes, we recommend the following stocks: ICICI Bank, Tech Mahindra, Maruti Suzuki India, State Bank of India, Dalmia Bharat, Federal Bank, Varun Beverages, Ashok Leyland, Infosys, PNC infra, APL Apollo Tubes, HealthCare Global Enterprises, Praj Industries, CCL Products (India), Polycab India, and Bajaj finance