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Several challenges to the current beta rally
Beta rally since mid-Feb’19:
Against the NIFTY50 performance of +7.7% since mid-February to date, the NIFTY High Beta 50 index is up 18.8% while at the same time the NIFTY100 Quality30 index (Quality Index) is up 3.3%, thus confirming that the current rally is driven by high beta. Other indicators include the outperformance of indices such as CPSE, Commodities, Energy, Infrastructure and Banks.
* High beta underperforming since FY10…
Since FY10, NIFTY High Beta 50 index has underperformed significantly (CAGR: -4.1%), while the quality index has outperformed (CAGR: 11.5%) the NIFTY50 (CAGR: 9.2%). Factor performance since FY10 is in contrast with the previous bull-run (FY04 to FY08), where Beta outperformed on a durable basis (Q1-7.3x), along with factors such as low asset turn, high financial leverage, low P/B, low RoE and low market capitalisation.
…however, short spurts of beta rally (3-5 months’ duration) have frequently cropped up:
Beta rallies have invariably coincided with sharp inflow from FPIs along with optimism around improvement in most fundamental factors such as: improved GDP growth, upward earnings revision, strong INR, lower crude prices, declining interest rates and optimism around policy making or political stability. Past instances of short beta rallies post FY10 have been driven by; (a) optimism on political certainty and earnings upgrade (Apr-Aug’14); (b) sharp correction in crude prices (Dec-Mar’15); (c) sharp decline in interest rates (Apr-Oct’16); (d) optimism post UP election results and pre GST period (Dec’16-Apr’17) and (e) bank recap and improving growth outlook (Oct-Dec’17).
* Durability of beta rally in question:
Current beta rally is driven by expectations of the US FED continuing with a dovish stance benefitting EM flows and currencies (INR appreciated by 3.5% since mid-Feb’19) along with expectations of further rate cuts by the RBI and a favourable outcome from the 2019 general elections. On the flip side, the current beta rally is challenged by downward revision in forward earnings and GDP growth (Global and Indian economy). Other challenges include firm crude prices, elevated India bond yields and fiscal slippage for two years in a row. Current account deficit, although currently elevated, is expected to soften going ahead as Jan’19 printed lowering trade deficit on lower crude import costs. We believe a durable beta rally as was seen in the FY04-FY08 period is not around the corner as private capex cycle will take time to pick up as articulated in our earlier note (H1FY19 abridged balance sheet analysis). We expect the current paradigm of factor performance will continue and low-risk, asset-light business models with robust sustainable earnings growth will continue to outperform (Refer our report on Factor analysis)
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