Top brokerages shift focus to cyclicals

Credit Suisse, Morgan Stanley, UBS Securities India, Prabhudas Lilladher and ICICI Securities recommend investors shift focus to cyclical stocks and also outline their stock preferences

Investors seem to be taking more aggressive bets in the cyclical and policy-reform oriented sectors post the poll outcome.

One proof of this is the way how classic defensive plays like fast moving consumer goods (FMCG), healthcare / pharma and information technology stocks (IT) stocks panned out in trade on Monday vis-a-vis stocks from the capital goods, metal and banking sectors.

S&P BSE FMCG index (down 3.1%), S&P BSE IT index (down 5%) and S&P BSE Healthcare index (down 3.3%) remained under-performers, while S&P BSE Capital Goods index (up 5.7%), S&P BSE Metal index (up 5.6%) and S&P BSE Oil and gas index (up 4.1%) were among the top gainers.

The movement in the IT stocks, however, could partly be attributed to the rupee, which hit 11-month high against dollar today. In intra-day deals, it traded at 58.44 levels to a dollar, down 0.6% over its last close. A firm rupee adversely affects operating profit margins of IT firms as the sector derives a lion's share of revenue from exports.

Top recommendations

As regards markets, analysts at Morgan Stanley believe that the September 2013 low may have been the low of the bear market that started in January 2008 and suggest that investors should use dips to rotate portfolios into cyclicals.

"We are adding more cyclicality to our recommended lists. Our favoured sectors are private banks; energy, materials, consumer disc and technology, and we are avoiding consumer staples, (State-owned enterprises) SOE banks and industrials. We highlight five stocks for investors - Axis Bank, ONGC, Maruti Suzuki, Tata Power and Tata Steel by combining macro and bottom-up analyst view," they said in a note.

As a stock strategy, Neelkanth Mishra and Ravi Shankar of Credit Suisse maintain a buy on Reliance Industries (RIL), NTPC, Axis Bank, Maruti Suzuki, Bank of Baroda (BoB), Bharat Petroleum (BPCL), Shriram Transport. They recommend selling BHEL, Tata Steel and Bank of India (BoI).

Ravi Sundar Muthukrishnan Ravi Sundar Muthukrishnan, senior vice president and co-head (research) at ICICI Securities expects the equity markets to extend their momentum going ahead.

Gautam Chhaochharia, head of India research, UBS Securities India also thinks that sector rotation toward domestic cyclicals should be a strategy investors should continue to pursue, as positioning also remains supportive.

"Our top Buys are Adani Ports, Bharti Airtel, BHEL, GAIL, ICICI Bank, LIC Housing Finance, ONGC, Power Grid, SBI and TCS. Our top Sells are Adani Power, Asian Paints, Hero MotoCorp, IDFC, Infosys, Jubilant Food and United Spirits," he says.

"Factors (high beta, average fundamentals and value) that lead the rally since early February will continue to do so. Cyclicals will outperform defensives. Our best picks are: RIL, ONGC, L&T, Axis Bank, Punjab National Bank (PNB), IDFC, Coal India, UltraTech Cement, Tata Motors, Maruti Suzuki, Power Grid and Oberoi Realty," he suggests.

As a sectoral preference, R Sreesankar, head - institutional equities, Prabhudas Lilladher continues also remains overweight in financials, automobiles, capital goods and materials.