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01-01-1970 12:00 AM | Source: ICICI Securities
Taper tantrum missing as markets advance on growthinflation dynamics - ICICI Securities
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Taper tantrum missing as markets advance on growthinflation dynamics; consensus price targets indicate potential upside largely in cyclicals

* No surprises on US Fed policy outlook averts taper tantrum: Hints of starting QE tapering soon by the US Federal Reserve coupled with the Evergrande crisis in China had little impact on global capital markets. In fact, the US yield spike in Feb’21 had a much larger impact on global emerging markets like India as the ferocity of yield spike came as a surprise and spooked markets back then.

* We believe market resilience reflects strong investor sentiment driven by expectations of a strong cyclical economic recovery as the third wave impact of covid appears underwhelming, while vaccination rate for India has surprised positively. Latest data indicates stable consumer prices. However, further rise in commodity prices in Sep’21 continues to be a risk to the inflation trajectory.

* On the policy front, government continues to be pro-growth with incremental announcements (telecom reform, bad bank and PLI auto), while reaping the benefits of reforms undertaken in the past such as Digital India, GST, RERA etc. As capital markets go beyond liquidity support from central banks, investor focus is shifting towards growth revisions, which has a huge underpinning on how the investment cycle pans out.

* Valuation comfort still left in some pockets which are expected to drive economic recovery: Consensus fundamental price targets are indicating that upside potential, despite peak valuations of headline index levels, still exist in stocks within cyclicals and capital intensive defensive space – commodities, financials, utilities, healthcare, auto, media, industrials (selectively materials) and telecom.

* Top picks with I-Sec target price upsides >15%: HDFC Ltd, SBI, Axis Bank, ONGC, NTPC, Hindalco, Coal India, GAIL India, JSPL, JK Cement, Tata Motors, M&M, Zomato, Infoedge, Sun Pharma, Hindustan Aeronautics, Tata Comm., Phoenix Mills, CESC

* Sector-wise proportion of stocks with upsides based on consensus price target along with avg. upside (Universe of NSE100 constituents plus stocks in F&O) – shows >10% upside in cyclical sectors, while <=10% is largely defensives.

 

Key developments over the recent past

* Inflation dipped and IIP picked up – Aug’21 CPI eased to 5.3%; IIP growth for Jul’21 at 11.5%. Within CPI, food inflation fell to 4-month low of 3.8%, oilseeds inflation continued to rise while fuel inflation increased to series-high of 12.9%.

* US inflation was less than forecast in August while retail sales climbed 0.7% MoM, supporting the view that pandemic-related price pressures could be transitory.

* However, rising commodity prices despite hints of taper in September indicate risks to the inflation trajectory.

* Rising investor activism observed over the recent past in India is positive for transparency and has shown signs of value unlocking for listed India Inc.

* Rising M&A action indicates rising risk appetite and positive long-term outlook.

* Government disinvestment process shows progress with Air India receiving financial bids and appointment of bankers for LIC IPO.

* Significant improvement in tax buoyancy in FY22 so far is positive for capex cycle: Direct tax collections as of Sep'21 robust at Rs5.7tn compared to Rs4.49tn in the corresponding period of the pre-pandemic normalised year of FY20 (+27%)

* China data continues to be weak with retail sales at 2.5%, industrial output at 5.3%, chip shortage, Evergrande crisis, regulatory crackdown on Chinese tech stocks and tighter restrictions for Macau casinos.

 

* Recent policy measures have the potential to further augment financial resources for corporate sector thereby helping investments and financing for capital intensive sectors such as telecom, banks and auto: As indicated in our recent note (link), ‘internal financial resource’ generation for the listed space in India Inc., expressed in terms of ‘OCF/capex’, hit the highest level of 2.2x seen in the past two decades helped by improving profitability of the corporate sector. Policy actions over the past few weeks will further augment that picture with capital intensive sectors like telecom getting support from the government in terms of freeing up cashflow in the medium term and auto PLI scheme (link) largely focusing on new energy vehicles. Further, ‘bad bank’ measures will free up capital and allow banks to focus more towards lending rather than NPA resolutions.

 

* Other key factors driving capex cycle remain positive: (a) Counter-cyclical capex spending by the government (center + state) continues and is getting augmented by strong tax buoyancy. US government’s US$1trn capex plan can further boost global capex cycle going ahead; (b) resilient commodity prices and strong demand in the developed world continue to improve capex outlook; (c) low real interest rates and significant surplus liquidity continue to be conducive; and (d) capex demand in digital and new age economy remains strong.

 

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