Since mid-February as the Street bet on the rising probability of the BJP-led NDA coming to power, stocks from the banking, capital goods, metals, realty and cement sectors have led market gains. In the period when the Sensex scaled multiple record highs on the back of an 18% rise, 10 of the 11 Sensex constituents that outdid the benchmark with more than 20% gains belonged to these cyclical sectors. Experts also recommend taking a constructive view on the cyclical space.
According to Edelweiss Securities, a stable NDA government with Narendra Modi as the PM will be a clear positive for investors and business confidence. Among sectors, our bias is towards cyclicals, namely banks, autos and industrials, as these are inexpensive and will be the first to witness cyclical recovery, Edelweiss said in a strategy report.
The banking sector has predominantly steered the market. PSBs have benefited the most given that the top three have on average rallied 43% in the period. As a result, these stocks managed to reduce the discount to their historical valuation in terms of trailing price to book value.
While in early February, PNB, SBI and BoB were each trading at about a third to half of their respective historical average book value, as of Tuesday this discount has come down to 7% to 20%. In the last two months, brokerages like Goldman Sachs, Espirito Santo Securities and Barclays capital have raised their outlook on the sector citing likely decline in stressed assets and improvement in India's macro conditions going ahead.
Kotak Institutional Equities suggests investors play themes that benefit from economic recovery and fiscal consolidation.
Amongst the bluechips, metal producers Hindalco and Jindal Steel & Power continue to trade about 25% below average PE multiples. Citi recently turned bullish on the sector and upgraded Hindalco and Sesa Sterlite.
Capital good majors, L&T and BHEL are also amongst the top gainers in the recent rally. While L&T has converged with its five-year average valuations, BHEL continues to trade at a huge discount of about 54% to its past valuation due to a striking slowdown in its order book.