“We classify our implementation ideas for next year under three broad categories,” Goldman Sachs said in the research note. The categories include structural themes such as large cap digital economy stocks, recovery plays including defensives and cylicals, and targeted alpha ideas which include upstream, downstream along with renewables.
Goldman Sachs mentions two plays under structural themes. The first is the Digital Dozen play which includes 12 large and liquid structurally high growth tech stocks in the Asian region. “These digital economy stocks exhibit strong future growth prospects and superior profitability drivers. While these stocks trade at higher valuations relative to the region, we think the lower for longer rate environment will continue to support multiples for these long duration stocks,” they added. Under this category, out of the 12 stocks that Goldman Sachs has picked, there is only one India listed firm — Reliance Industries Ltd.
The second play under the structural theme is China specific. Here Goldman Sachs has picked stocks aligned with China’s long-term “Dual Circulation” strategy.
Here, the research note says global cyclicals vs defensives is a theme that Goldman Sachs is playing. Along with that, stocks where a strong earnings recovery is being eyed are also being picked. “At the micro level, as we expect earnings to recover strongly next year and into 2022, we think stocks where earnings recovery is relatively underpriced could potentially perform well next year,” the note said. Under this theme, Goldman Sachs has picked three Indian stocks — State Bank of India, Adani Ports & SEZ, and ACC.
Further, another theme where investors can take targeted cyclical exposure focusing on sectors that could benefit from the ongoing global economic recovery and also gain from the expected catalyst of a vaccine has also been advised. Here, stocks such as ICICI Bank, State Bank of India, BPCL, Bandhan Bank, Motherson Sumi Systems, and HPCL have been highlighted.
Targeted alpha ideas
Under this theme, the first play that Goldman Sachs discusses is the margin divergence between upstream and downstream sectors. “ We think the margins for upstream industries will benefit more from rising commodity prices and inflation than the consumer-facing downstream industries,” they said. Here, ONGC, has been named as a ‘Buy’ rated stock. Indian Oil is one of the ‘Sell’ or ‘Neutral’ rated stocks under this play. With renewable energy likely to be in focus under Joe Biden’s presidency, Goldman Sachs believes that renewables will likely gain more investor attention and engagement in the coming year. Adani Green Energy is the only one India listed stock under this theme.