Stockaxis Monthly Insights

Outlook for March 2021

High Yields not a cause of worry with
High earnings growth

e-mail: research@stockaxis.com | Website: www.stockaxis.com

Daljeet Singh Kohli CIO

Tel: +91 22 6639 3000 Email: daljeet.singh@stockaxis.com

05-03-2021 Stockaxis Monthly Insights--March 2021 1

 Glimpse of February 2021
How was February 2021-month of huge volatility

Month of February started on a weak note with sharp sell-off witnessed in the last week of
January on fears of some kind of Covid tax or some other negative likely to come in Union
Budget. However, with no negatives forthcoming & contrary to the expectation, the Budget
turned out to be far more growth oriented than expected resulting in strong up-move on
markets. The Budget announcements unleased big rally in economy facing sectors/stocks.
(We had suggested these sectors as out-performers in our note “Outlook 2021” dated Dec
25. 2020). During the month the headline indices touched all time high but the volatility
was very high through out the month . While many core sectors showed strong
momentum, the frontline stocks were vulnerable to any negative news especially the news
that could derail FII inflows.

In the middle of the month markets got spooked by Gamestop saga in US & then on the
last day witnessed steep fall of ~ 4% in a single day on rising yields in US & fears of US FED
changing the policy direction.

There is no doubt that entire rally in Indian markets from April 2020 till date is fueled by FII
inflows which in turn was due to very low interest rates & abundant liquidity. In our
previous notes we have mentioned that markets have factored in any increase in interest
rates in US only in CY23. Therefore, any hint of change in interest rates earlier than that
makes markets nervous & any change in this expectation will result in negative reaction.

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 Important consideration for March 2021
How much should markets (Indian) be worried about rising US yields? Not too much in our
view

We believe the tussle between market participants & central banks on when to increase
rates & change policy stance from accommodative / dovish to tight/hawkish will continue in
near term Market participant’s expectations may be justified that elevated PE multiples
across all markets across all sectors is due to low rates & cheap cost of capital for
corporates. Any rise in rates therefore may lead to multiple contraction thereby resulting in
sharp correction in stock prices.

We believe the recent rise in bond yields is driven by a belief among investors that growth
and inflation will shoot higher this year, which could prompt the Fed to pull back on its
support for the economy sooner than previously expected. However, Fed officials have
been clear that they will be patient in removing their policy help which means markets are
far ahead in expecting rising rates soon & recent fall may turn out to be a correction sell in
an uptrend.

We are cognizant of the fact that during the pandemic US FED expanded its balance sheet
by ~4 USD trn which is almost equal to what it has done in last 5 years. Such an excessive
printing of dollars is bound to result in inflation at some point of time & reduce dollar’s
purchasing power. However, in our view, this thesis will play out in longer term , not so
soon, because as of now first & foremost objective of US FED is to revive economic growth.

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 High Yields & strong market performance
can co-exist

Analyzing past trend in Indian markets we can safely conclude that our equity markets
can give high returns even in an environment of rising yields & inflation. During the period
2003-2008 in India, we have witnessed consistently 10- year treasury yields at elevated
levels but in that period our markets gave high double digit returns. The main reason for
markets performance was strong growth in corporate earnings in that period. During that
period globally too there was consistent & successive rate hikes (including FED).

History suggests earnings is a major driver of market performance. We believe current

scenario is also somewhat similar to 2003-2008 period. After a earnings draught of many
years, FY21 is the first year when earnings upgrades have happened consecutively for 2
quarters & markets are factoring about ~30% earnings cagr for Nifty 50 companies. We
are of the opinion that corporates earnings trajectory will be a more critical monitorable
than any other variable. While in short term FII inflows may be impacted as the visibility
increases on earnings growth, their inflow will continue.

Other important factor to note is that this time corporate profitability across sectors &
across all size (large, mid & small) is visible. We believe the risk of concentration of
performance of only top companies is much less, growth is more all- round & well spread
out. In our Jan & Feb monthly notes, we had mentioned that we expect broad base rally
across mid & small cap companies spread-out in many sectors. We believe the same is
now playing out.

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 Markets can give good returns even in high
yield environment

High Yields & strong market performance can co-exist

India 10-Year Bond Nifty Performance

Year Yield Inflation Rate (%) (%)
2003 6.13 3.86% -14.11%
2004 5.15 3.82% 80.02%
2005 6.68 4.40% 11.87%
2006 7.55 6.70% 64.56%
2007 8.02 6.20% 10.03%
2008 7.94 9.09% 30.30%
Source: Investing.com Source: Statista Source: NseIndia

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 Outlook for March 2021-brace for huge
volatility

What we expect in March 2021-Huge volatility

After scaling all time highs all the major indices are now witnessing immense volatility led
by spike in US bond yields & expectation of reversal in dovish policies of USFED much
ahead of earlier estimates

 Expectation of high growth in US economy earlier than estimated leading to fears of

inflation going up compelling FED to take corrective action

 Higher bond yields make equities unattractive especially for risk averse large
institutional players

 Sudden spike in input costs post unlock partly due to unpreparedness on part of many
corporates (shortages of chips/semi conductors ,disturbances in supply chains,
shortages of containers etc) & partly due to demand coming back

 Unprecedented increase in commodity prices (copper already above 2008 peak)

 Dollar index inching above 90 mark. Higher Dollar Index is negative for emerging
markets like India

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 Portfolio Strategy For March 2021

What is our portfolio strategy for the month of March 2021

 We believe huge volatility in the ensuing month will give us opportunity to add our
preferred stocks at bargain or better prices.

 Since we are assuming current decline in markets as correction sell we would like to
use volatility in our favor because once the correction sell is over, original uptrend will
rebegin

 In line with our earlier expectation, we are witnessing wide scale sector rotation.
Defensives like Pharma/healthcare or IT have taken a back seat in the last one month.
Post the budget the rally in economy facing sectors like Banks, Metals, Capital Goods,
infrastructure, cement, real estate has accelerated even more

 We are witnessing widescale rally in mid & small caps. Many sectors which hitherto
were non performing since last many years like power, oil/gas, soft commodities like
sugar, tea, coffee etc have started showing early signs of revival/growth. We will play
some of these in our portfolios

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 Themes to play in March 2021

1. Economic facing sectors like Capital goods, cement, infrastructure etc.

 Union Budget 2022 has laid out clear roadmap of macro-economic growth. All sub
segments of Infra are likely to get impetus. We are witnessing increased ordering
activity across all sectors. Management commentary from the corporates in the sector
have echoed the same view.

 Real estate has seen immense growth in residential segment partly aided by
incentives given on stamp duty & registration expenses by some states. Even
Commercial real estate has shown an uptick which is a surprise because in pandemic
times most participants were expecting work from home culture will result in demand
destruction for commercial real estate.

 On back of strong real estate demand & infra push cement companies are witnessing
very high growth. Most of the cement companies have been able to take successive
price hikes in last few months. This imply good demand in the sector.

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 Themes to play in March 2021 contd…

2. Sectors that have not performed in last many years have started
showing signs of growth

 In our previous note we have been writing that we expect defensive sectors should
take a back seat & “value investing” should take precedence. Many sectors that have
not performed since last many years (in some case even 10-12 years) have started
showing early signs of revival.

 Sectors like power (both generation-NTPC, transmission/distribution-Siemens, ABB) ,

oil & gas (ONGC, Oil marketing companies, gas companies), soft commodities (sugar,
tea, coffee), textiles (yarn, spinners, garment makers) , & paper have started showing
early signs of revival. Consequently stocks in these sectors have started showing
strength.

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 Themes to play in March 2021 contd…

3. Cyclicals especially metals to be in focus

 With fears receding on Covid, governments across the world are giving full attention to
economic recovery & growth. We expect large scale incentives by way of policy (not
necessarily any fiscal stimulus) like ease of doing business, increase competitive
advantage of domestic companies etc. PLI schemes for sectors like Pharma,
Electronics, Laptops maybe examples of such policy initiatives.

 A closer look at the earnings upgrade for next 2 years indicates that the bulk (almost
50%) of the upgrades have come from earnings upgrade for the Metals sector for FY21.
Most of the metals as commodity are trading at near all time highs (copper has already
crossed 2008 peak). Steel, Aluminium, Zinc are also in witnessing similar trajectory.
Stocks which have these commodities as underlying are likely to be outperformer in
near term

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 Themes to play in March 2021 contd…

4. Banks/Financials including NBFCs to be in focus

 Other major sector contributing to earnings upgrades for next 2 years is Banks &
Financials. The earnings contribution of the BFSI sector is ~ 38% in FY23.

 Non banking finance companies catering to niche segments are also witnessing good
growth. Rural lending focused, Commercial vehicle or auto financiers have shown
strong numbers in latest quarters showing revival in their user segments.

 Even specialized NBFC like REC/PFC are likely to show good growth in next one year

 The other important factor to note is the sector has shown much lower stress in asset
quality as compared to earlier expectation during the time of pandemic

 Many PSU Banks have given extra ordinary returns in last few months on hopes of
privatization & undervaluation. Union Budget announcements on formation of BAD
BANK & intention to privatize some PSU banks has also aided this superior
performance.

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 Themes to play in March 2021 contd…

5. Mid & small cap space is back in reckoning after a gap of 3 years

 Since Jan 2018 Mid/Small cap end of markets have been significantly under performing
. With hopes of recovery, strong savings on employee costs, power & financing, we
expect mid/small companies to deliver strong financial performance over the next few
years. Thus there is a scope for sharp re-rating in this segment especially for those
companies which have strong corporate governance, high quality business, capability
of gaining market share both from peers as well as unorganized sector

 The above is manifested in YTD Nifty midcap index performance which has returned
about twice the returns generated by headline Nifty

6. Public sector undertakings (PSU) likely to outperform due to favorable

policy changes & Union Budget 2022 thrust on monetization some of these
to meet its fiscal responsibilities

 Many PSUs have outperformed mainly due to changes in policies which are favorable
to them, example-negative list in Defense procurement, policy of not being in certain
non core business like Shipping etc, Similarly in the budget the government has
emphasized on large scale asset monetization. Hence many PSU stocks may continue
to see some favorable action from investors

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 Our preferred Sectors/stocks

1. Metals (Steel, Aluminum, Zinc, Copper)

 Most of the commodities are trading at or near all time highs
 Under invested sector as it was not performing since last many years
 Companies in the sector have used high metal realizations for de-leveraging.
Company Balance sheets are now in much better shape
 All over the world most governments are focusing on economic revival which
means demand for various commodities is likely to remain elevated

Stocks we like: Tata steel, JSW steel, Hindalco

2. Financials (Banks, NBFCs, intermediaries)

 Strong commentary by large banks, sounded confident of gaining market share
 RBI’s support on liquidity provided adequate headroom to grow
 Stress amongst borrowers turned out to be much lesser than earlier anticipated
 Most large banks maintain adequate buffer in provisions in case asset quality
stress deepens

Stocks we like: Chola Invst & Finance, HDFC Bank, Baja Finance, ICICI General
insurance, CDSL

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 Our preferred Sectors/stocks contd…

3. Cement
 Strong demand on back of pick up in real estate & infra projects
 Companies have taken successive price hikes leading to all time high
profitability
 Cycle turning favorable. Many investors still under invested in the sector

Stocks we like: Shree Cement, ACC, Ambuja, Ultratech, DalmiaBharat,

Disclaimer: Stocks mentioned above are for illustration purpose only. These are not
recommendation to buy. Any call to buy is given separately through regular means of
communications.

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