'High-quality' trade losing steam as valuations reach unsustainable levels

The rally in ‘high-quality’ stocks has been a dominant theme this year. But, analysts believe the trade could have run its course.

“After hanging in with ‘high quality’ for several months, year-to-date trends have started to accommodate turnaround performers. The past month’s trend shows the market’s move toward companies with lower sales growth, higher capital intensity and higher leverage,” says Ravi Muthukrishnan, head of research, Elara Capital.

Typically, high quality stocks are those which score highly on metrics, such as return on equity and profit growth.

An analysis by Dolat Capital shows majority of high quality stocks lagged in November. While stocks in the highly leveraged sectors, such as metals and telecom, did well.

Analysts say valuations for several high quality stocks had reached unsustainable levels, pushing investors to look elsewhere.

JSW Steel, Tata Steel and Bharti Airtel were among stocks that fared well last month while stocks like Titan and TCS saw correction.

“Collectively, we read these signs as the beginning of market broadening from a narrow set of ‘high quality’ performers and expect this trend to continue among Nifty50 stocks and across the broader markets,” says Muthukrishnan.