Capital-intensive, cyclical and value stocks to continue their outperformance
- Capital-intensive, cyclical and value stocks have outperformed since FY21, according to a report by ICICI Securities.
- Driving the relative outperformance of these stocks in the BSE 200 universe were factors like high capital intensity, high financial leverage and low return on equity.
- Stocks with either of these three factors have seen a reversal of fortunes in FY21, the year which was marred by the Covid-19 pandemic.
AdvertisementCapital-intensive, cyclical and value stocks have outperformed since FY21, according to a report by ICICI Securities. Driving the relative outperformance of these stocks in the BSE 200 universe were factors like high capital intensity, high financial leverage and low return on equity.
According to the analysis by ICICI Securities, stocks with either of these three factors have seen a reversal of fortunes in FY21, the year which was marred by the Covid-19 pandemic. These stocks reversed the trend observed between FY12 to FY20, when stocks which were either expensive or less volatile had outperformed others in the market.
“The above trend is the longest period of outperformance seen from the aforementioned factors since the peak of the investment and credit cycle in India in 2011-12,” said the ICICI Securities report, adding that this is not a false beta rally since these three kinds of stocks have continued to outperform despite the aggressive quantitative tightening cycle and interest rate hikes by the US Fed.
Capital-intensive stocks are those companies which require heavy capital investments in order to produce goods. UltraTech Cement, JK Cement and other cement companies are some examples of capital-intensive stocks.
Cyclical stocks are those companies whose prices are influenced by the macroeconomic changes in the overall economy of the country. Some examples of industries include the banking, financial services and insurance (BFSI), and auto industry.
‘Risk factors changing favourably’
According to the analysts at ICICI Direct, the stocks and sectors in its report have outperformed despite risk factors like high leverage and relatively low return on equity due to a favourable change in risk factors.
“We attribute the paradigm shift in factor performance to the robust demand outlook in sectors such as construction, manufacturing, electricity, telecom, commodities, etc which are related to the investment cycle,” the report said.
The report further adds that the structural growth in the digital economy – a change in commerce from the usual brick and mortar model to an internet-driven one – to act as the driver of “spectacular binary outcomes” over the longer term.
Here are some of the top picks of the research firm:
Source: NSE, price as at 12:30 p.m., November 21, 2022
“Extremely expensive low-volatility stocks with sub-par growth prospects unlikely to outperform,” the report said, adding this is a defensive strategy that worked well during the investment downcycle since FY11.
Capital expenditure revival on the cards, say RBI and analysts
Earlier, a report by the Reserve Bank of India said that India Inc. is on the verge of a revival of the capital expenditure cycle.
“Going forward, improved private corporate balance sheet, rising capacity utilisation level, robust demand sentiments, higher capital spending and various policy initiatives by the government are expected to revive the capex cycle,” said a report by the Reserve Bank of India.
According to analysts at Morgan Stanley, this could trigger another ratings upgrade for the banking sector which has been amongst the outperformers since FY21. The research firm added that Indian banks are in a transition phase right now.
“The first leg is usually driven by expectations around better asset quality. The second, more sustained leg is usually driven by loan growth acceleration that sets an earnings upgrade cycle, and we believe catalysts for this are falling into place,” the report said.
However, in the medium term, banks face headwinds in terms of increasing competition for capturing deposits, which could soften their loan growth.
“Whilst this was no doubt a bumper quarter, we flag impending headwinds in terms of softer loan growth, and catch-up on deposit mobilisation and deposit pricing,” said a report by HDFC Securities.
While the capex revival spells boon for banks as well as investors over the longer term, returns will be determined by how well banks can deal with the problem of tightening liquidity.
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