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Strategy: Flattish closing amid heightened volatility; FIIs turn sellers

* Market sees elevated volatility; closes in the green: The Nifty continued to reach new highs (18,604) in Oct’21. The index oscillated ~1150 points before closing 54 points (or 0.3%) higher MoM at 17,672. The Nifty is up 26% in CY21YTD.

The increase in volatility was on the back of weak global cues, stretched valuations, and FIIs turning net sellers. FII outflows of USD2.3b were seen after two consecutive months of inflows. DIIs saw inflows for the eighth consecutive month of USD0.6b. In the last 12 months, midcaps have risen 79% (v/s a 52% rise for the Nifty). In the last five years, midcaps have underperformed by 14%. In P/E terms, the Nifty Midcap 100 is trading at a 14% premium to the Nifty.

* Earnings season broadly in line thus far: The 2QFY22 earnings season has thus far been above estimates, benefitting from a) strong growth in the Technology sector, b) steady recovery in loan growth as well as recovery and an upgrade in the asset quality of most private sector banks, c) higher commodity prices and volume growth in the Energy and Metals sectors, and d) the economic unlock driving growth in Consumer and Retail. Nifty profits for the 34 companies that have posted their results have grown 22% YoY (v/s exp. of 13% growth). On the other hand, for the 127 companies in our MOFSL Universe, profit growth stands at 26% YoY (v/s exp. of 19% growth).

* Major economies end higher in Oct’21: In Oct’21, key global markets such as the US (+7%), Indonesia (+5%), the UK (+2%), Russia (+1%), Taiwan (+0.3%), and India (+0.3%) and indices such as MSCI EM (+1%) closed higher in local currency terms. On the other hand, Brazil (-7%), Korea (-3%), Japan (-2%), and China (-1%) ended lower. In the last 12 months, MSCI India (+50%) has outperformed MSCI EM (+15%). In the last 10 years as well, MSCI India has outperformed MSCI EM by 167%. In P/E terms, MSCI India is trading at a 94% premium to MSCI EM, above its historical average of 58%.

* PSU Banks, Automobiles, Media, Utilities, and Private Banks - top performers: Among the sectors, PSU Banks (+14%), Automobiles (+7%), Media (+5%), Utilities (+4%), and Private Banks (+4%) were the top performers in Oct’21. Consumer (-5%), Healthcare (-4%), Real Estate (-3%), Telecom (-3%), and Technology (-2%) were the key laggards. Tata Motors (+45%), ICICI Bank (+14%), SBI (+11%), Titan (+10%), and M&M (+10%) were the top performers. On the other hand, HUVR (-11%), Coal India (-11%), Eicher Motors (-11%), HCL Tech (-11%), and TCS (-10%) led decliners. In this edition, we dive deep into the valuation metrics of the Capital Goods sector.

* Macro and micro tangoing well: The country saw the third consecutive year of normal monsoons, with the southwest monsoon season ending 0.7% short of the long-period average. Macroeconomic trends saw good recovery, with high-frequency indicators (GST collections, e-way bills, PMI readings, and fuel demand) improving month on month. Exports have emerged as a growth engine – India reported more than USD100b worth of exports in 2QFY22, the highest ever in a single quarter. Non-oil, non-gold imports grew 40% YoY to USD88.7b in 2QFY22, indicating strong domestic demand.

The normal monsoon season is likely to further spur rural demand, and with the government balance sheet in good stead, we expect the government to press the fiscal pedal to drive growth in 2HFY22. The Nifty trades at 12-month forward P/E of 21.7x, at a 14% premium to its LPA. P/B at 3.3x is at a 29% premium to its historical average.

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

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