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Long-term Remains Constructive Despite Short-term Challenges.

Axis Top Picks basket declined by 3% during in Nov’21 but still managed to beat market as the benchmark NIFTY 50 declined by 5%. Our Top Picks basket has delivered 113% return since its inception in May’20, significantly outpacing 83% returns registered by NIFTY 50 over the same period. Nov’21 was a tough month for equity markets as the global challenges of persistent inflation, faster than expected tapering of bond purchase program by the federal reserve and new covid variant impacted the equity markets negatively. While the Large Caps have outperformed the broader market by a reasonable margin during the last four monthsbut they underperformed during the month.

Except for the IT sector, all other sectoral indices experienced negative returns during the month. The Banking and Metals sectors stood as the most impacted sectors, witnessing 9% and 7% de-growth during the month. All Marketcap-weighted indices, too, delivered negative returns during the month. Market volatility, which had been rising for the past three months, spiked by 25% on 26th November led by global factors. The spike was indeed significant though volatility continues to remain closer to the long-term average. And while volatility signals remain unclear at this point, the current levels of volatility combined with higher valuations are not constructive for the market. We believe Dec’21 to be a crucial month as volatility should start reducing from mid-December onwards, thereby improving the overall outlook. Fundamental factors for the market continue to remain strong with Q2FY22 earnings resulting in an overall upgrade of 2% in consensus earnings. In conclusion, while its imperative to closely monitor global developments and the advent of the new Covid-19 variant, there are still significant opportunities for long-term investors as fundamental factors continue to remain strong. We maintain our Top Picks unchanged at the current juncture.

Based on the above themes, we recommend the following stocks:

ICICI Bank, HCL Technologies, Bajaj Auto, Tech Mahindra, Maruti Suzuki India, State Bank of India, Bharti Airtel, Federal Bank, Dalmia Bharat, Varun Beverages, Navin Fluorine International, Ashok Leyland, Krishna Institute of Medical Sciences, Equitas Small Finance Bank, Mold-Tek Packaging, Amber Enterprises India.

Our Key themes

Global developments pose short-term challenges: Nov’21 witnessed significant global and macroeconomic challenges. It is no secret that the central banks, especially the Federal Reserve, disproportionately impacted the equity markets as significantly increased money supply post the onset of the pandemic got eventually channelled into equity markets and various asset classes.

However, the economic reopening led to persistent inflation across the globe, with developed markets experiencing notably steep core inflation. In response, the Fed tapering was expected and the recent news flow indicates that the tapering will be much faster. Moreover, the new Covid-19 variant has accentuated the challenges and its rapid spread (evading vaccination antibodies) may potentially derail the global economic recovery to the large extent. On a positive note, both these factors are expected to be short-term concerns and will likely abate with time. Fundamental factors would sustain in the long run.

Earnings scenario remains constructive: During Q2FY22 earnings season, 36 out of the 50 companies beat or met consensus expectations. Post Q2 earnings, we (as well as consensus) further upgraded our estimates by 2% despite businesses witnessing significant margin pressure during the quarter. Encouragingly, margin pressure is expected to ease out from Q3FY22 onwards owing to price hikes and softening of commodity prices which have already reduced from the heady levels of Q2. This will aid in margin improvement moving forward, leading to earnings visibility.

Momentum, Value, and Quality: Top performing styles, Growth continues to lag; Large Caps catch up in the near term: Momentum theme has seen good traction in the recent months followed by Value and Quality themes. Growth has continued to lag which presents a very curious case. Value, over a slightly longer time horizon, continues to be a robust theme while we believe Quality theme may outperform from the current levels considering a notable market correction and significantly increased volatility in the last three months. While Large caps have outperformed Small and Mid-Caps in the last 3 months, value seems to be emerging in the Small and Mid-Cap stocks, providing attractive investment opportunities.

Maintain NIFTY50 target of 20200 for Dec’22: Considering the strong earnings trajectory, we maintain our Dec’22 NIFTY50 target of 20200, valuing it at 22x FY24E earnings.

Top Picks

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