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According to the Bulls & Bears report by Motilal Oswal Financial Services (MOFSL), midcaps have outperformed largecaps over the last 12 months. In the last 12 months, midcaps have risen 50% (v/s a 31% rise for the Nifty), while in the last five years, they have underperformed by 7%. The Nifty Midcap100 P/E now trades at a 14% premium to the Nifty. The Nifty closed higher for the fifth straight month in Sep'21. DIIs recorded the highest inflows since Mar’20 at USD3.6b, while FIIs saw outflows for the second consecutive month at USD0.8b.

Real GDP/GVA grew 8.4%/8.5% YoY in 2QFY22 (v/s our forecast of 8.2%/7.8% and Bloomberg consensus of 8.3%/7.6%). While fiscal consumption grew 8.7% YoY in 2Q as against a decline of 4.8% YoY in 1Q, private consumption spending grew 8.6% YoY in 2Q (lower-than-expected) v/s 19.3% YoY in 1QFY22. Total consumption expenditure contributed 5.6% to real GDP growth. Nominal GDP grew 17.5% YoY in 2QFY22 as against a contraction of 4.4% YoY in 2QFY21.

Strategy: OMICRON drives a pullback

Elevated volatility, the market consolidates in Nov’21: The Nifty ended its six-month winning streak in Nov’21, ending ~4%, or 688 points, lower at 16,983. Nov’21 was characterized by elevated volatility, with the benchmark oscillating in a wide range (~1,400 points) and pulling back ~8% from record highs of Oct’21. Much of the market anxiety can be attributed to global factors (Fed’s taper announcement, rising bond yields, higher crude oil prices, and strengthening of the US Dollar Index). A big fundraise in the primary market also put some pressure on the secondary market. Sentiments were battered across global equity markets on 26th Nov’21 with the detection of a new COVID-19 variant – Omicron – in South Africa. Nov’21 saw the highest inflows by DIIs since Mar’20 at USD3.6b. FIIs saw outflows for the second consecutive month at USD0.8b.

Macro rebounds – Real GDP grew 8.4% YoY in 2QFY22; expect 5-5.5% YoY growth in 2HFY22E: Real GDP/GVA grew 8.4%/8.5% YoY in 2QFY22 (v/s our forecast of 8.2%/7.8% and Bloomberg consensus of 8.3%/7.6%). While fiscal consumption grew 8.7% YoY in 2Q as against a decline of 4.8% YoY in 1Q, private consumption spending grew 8.6% YoY in 2Q (lower-than-expected) v/s 19.3% YoY in 1QFY22. Total consumption expenditure contributed 5.6% to real GDP growth. Nominal GDP grew 17.5% YoY in 2QFY22 as against a contraction of 4.4% YoY in 2QFY21.

2QFY22 results review – Cyclicals drive earnings beat: Corporate earnings for 2QFY22 came in above our expectations, led by commodities. The MOFSL universe reported a sales/EBITDA/PBT/PAT growth of 31%/21%/38%/38% YoY (est. 25%/20%/32%/27%). Sales/EBITDA growth for Nifty constituents were in line at 31%/21% (est. 25%/20%), while PBT/PAT growth came in at 40%/36% (est. 31%/25%).

Major global markets end lower in Nov’21: Barring Taiwan (+3% MoM) and China (+0.5%), Nov’21 saw key global markets such as Russia (-6%), Korea (-4%), MSCI EM (-4%), India (-4%), Japan (-4%), the UK (-2%), Brazil (-2%), Indonesia (-1%), and the US (-1%) end lower in local currency terms. In the last 12 months, MSCI India (+35%) has outperformed MSCI EM (+1%). In the last 10 years as well, it has outperformed MSCI EM by 187%. In P/E terms, MSCI India is trading at a 93% premium to MSCI EM, above its historical average of 59%.

Telecom, Utilities, Technology, and Capital Goods were the only gainers: Among sectors, Telecom (+7%), Utilities (+4%), Technology (+2%), and Capital Goods (+1%) were the only gainers in Nov’21. Private Banks (-10%), PSU Banks (-9%), Finance (-7%), Metals (-7%), and Autos (-6%), were the top laggards. Power Grid (+12%), Cipla (+7%), Bharti Airtel (+6%), Tech Mahindra (+4%), and TCS (+4%) were the top performers. IndusInd Bank (-22%), Tata Steel (-19%), Bajaj Auto (-13%), Axis Bank (-11%), and BPCL (-11%) led the laggards pack.

Volatility to continue; defensives may see greater acceptance: COVID-19 cases continue to remain under control so far, despite the festive season. The decline in active cases has led to an increase in economic activity and mobility. While the new variant – Omicron – adds to the uncertainty, we expect further clarity to emerge in the next few weeks as additional data comes out. This will mar sentiment in Travel, Tourism, Hospitality, and Retail, which has seen significant outperformance in the last few months on the back of opening up of economy, a good festive season, and a broad-based demand recovery. Even sectors/stocks exposed to markets with rising COVID-19 cases/greater prevalence of the Omicron variant may underperform. We expect sector rotation in the market to continue and defensives like Pharma, IT, and Consumer to make a comeback till sentiments improve. Equity valuations, after the pullback, at 23.3x/19.4x FY22E/FY23E Nifty EPS are relatively reasonable now.

Top ideas: Largecaps: ICICI Bank, SBI, Infosys, UltraTech Cement, Bharti Airtel, Titan, Divi’s Labs., Hindalco, SBI Life, and Jubilant FoodWorks Midcaps: SAIL, Zensar Tech., APL Apollo Tubes, TCI, Ramco Cements, Indian Hotels, Orient Electric, ABFRL, Chola. Finance, and Endurance Tech.

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