Time to raise high-beta bets as markets eye new highs, say Analysts

Amid moderation in inflation, markets seem to have moved past fears of interest rate hikes and investors are now anticipating strong foreign inflows into domestic equities, analysts said

Staging a strong turnaround from the year's lows, equity markets have swiftly reclaimed their 52-week highs. Since July when the markets started moving north, the S&P BSE Sensex and the Nifty50 have rallied around 17 per cent each, respectively.

The BSE Sensex breached the 62,000 mark on Wednesday after over a year and is now merely 250-odd points away from its all-time high.

With visible signs of moderation in inflation, markets seem to have moved past fears of interest rate hikes and investors are now anticipating strong foreign inflows into domestic equities, analysts said, who now expect the market momentum to pick up pace.

Mayur Shah, fund manager for PMS at Anand Rathi Advisors, for instance, expects the frontline indices to hit new record highs in the next two-three months and suggests investors shift away from classic defensive plays like fast moving consumer goods (FMCG) and pharmaceuticals and instead park their money in the financial sector (banks, NBFCs etc.) to generate a good return on their investment.

“With inflation in global markets now cooling off, we expect the interest rate hike cycle to peak out in the next 2-3 months. While domestic macro fundamentals remain strong, investors are expecting a shift from debt to equity at a global level. India too will get its fair share of foreign equity and corporate margin woes will also be largely mitigated by the March quarter”, said Mayur Shah, PMS Fund Manager, Anand Rathi Advisors.  

From the defensive category, the BSE FMCG index has gained 16 per cent since July while the BSE Healthcare index underperformed with a 9 per cent rise. Meanwhile, banks and capital goods saw a much sharper run-up, data show. The BSE Bankex and BSE Capital goods indices have so far rallied 26 per cent and 28 per cent, respectively, since July as against a 17 per cent gain in the S&P BSE Sensex.

AK Prabhakar, head of research at IDBI Capital, too, suggests that it is imperative for investors to now restructure their portfolio in order to maximise gains.

“Lowering exposure to defensives and raising bets to other domestic economy-facing sectors such as quick service restaurants (QSR), hotels, etc. will be a good strategy. We are not gung-ho on pharma and FMCG amid raw material inflation and rural demand-related stress,” he said.

As per data from NielsenIQ, the September quarter saw a sharper drop of 3.6 per cent in rural sales volume of FMCG companies compared to a 2.4 per cent decline in the June quarter (Q1). Hence, the overall sales volumes fell 0.9 per cent as against a 0.7 per cent drop in Q1.

On the other hand, analysts at Kotak Institutional Equities do not expect any recovery in gross and earnings before interest, tax, depreciation, and amortization (EBITDA) margins for pharma companies in 2022-23 (FY23) after the sharp declines in the previous year due to steep increase in raw material prices. The recovery, they said in a recent note, will be over FY24-25 aided by a higher share of sales of high-margin new products and stable input prices.

That said, the sectors that are set to take the lead in the next rally will be banks and capital good players, according to analysts.

“Banks and financials are coming out of a consolidation phase of four years and have done really well in the last 6 months. Capital good firms including engineering, infrastructure, and even cement are likely to perform well amid softening fuel prices. We are also bullish on firms in the green energy space engaged in solar, wind, and hydrogen fuel cells,” said Shah of Anand Rathi Advisors.  

That apart, Prabhakar of IDBI Capital suggests adding bets from the attractively priced defense sector, select auto players and auto ancillaries, and companies within the consumption theme.