Cyclical stocks may rally more, check shares that may gain over 15%; US Fed taper talk fails to spook markets

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September 28, 2021 4:14 PM

Comments of tapering by the US Federal Reserve have not elicited the expected reaction from stock markets across the globe, which continue to remain near their record highs.

The resilience of stock markets is believed to be helped by a strong cyclical economic recovery, stable consumer prices, and government’s policy support among other factors. (Image: REUTERS)

Comments of tapering by the US Federal Reserve have not elicited the expected reaction from stock markets across the globe, which continue to remain near their record highs, said analysts at ICICI Securities. Analysts said that the US yield spike in February 2021 had a much larger impact on global emerging markets. The ferocity of yield spike came as a surprise, spooking markets back then. “We believe market resilience reflects strong investor sentiment driven by expectations of a strong cyclical economic recovery as the third wave impact of covid appears underwhelming,” ICICI Securities added. The brokerage firm believes there still is potential for upside in cyclical sectors.

Valuations high, bet on cyclicals 

Analysts said that consensus fundamental price targets are indicating that upside potential, despite peak valuations of benchmark indices, still exist in stocks within the cyclicals and capital intensive defensive space. These include commodities, financials, utilities, healthcare, auto, media, industrials (selectively materials) and telecom.

Under ICICI Securities’ coverage, stocks that could surge more than 15% from current levels include HDFC Ltd, SBI, Axis Bank, ONGC, NTPC, Hindalco, Coal India, GAIL India, JSPL, JK Cement, Tata Motors, M&M, Zomato, Infoedge, Sun Pharma, Hindustan Aeronautics, Tata Comm., Phoenix Mills, CESC

Markets remain resilient

The brokerage firm argues that stock markets have remained strong despite the US Federal Reserve’s talk of QE tapering soon. This resilience, they believe, is helped by a strong cyclical economic recovery, stable consumer prices, and government’s policy support among other factors. “On the policy front, the government continues to be pro-growth with incremental announcements (telecom reform, bad bank and PLI auto), while reaping the benefits of reforms undertaken in the past such as Digital India, GST, RERA etc,” ICICI Direct said. 

Economic recovery strong

-ICICI Securities highlighted that the August CPI eased to 5.3% while the IIP growth for July came in at 11.5%. “Within CPI, food inflation fell to 4-month low of 3.8%, oilseeds inflation continued to rise while fuel inflation increased to series-high of 12.9%,” they added.
-US inflation was less than forecast in August while retail sales climbed 0.7% on-month basis, supporting the view that pandemic-related price pressures could be transitory.
-Further, rising Merger and acquisition action indicates rising risk appetite and positive long-term outlook.
-The government’s disinvestment plans have also picked up pace with Air India receiving financial bids and appointing bankers for LIC’s IPO.
– Improving economic activity has also improved direct tax collections for the government.

Policy measures supporting growth

“Recent policy measures have the potential to further augment financial resources for corporate sector thereby helping investments and financing for capital intensive sectors such as telecom, banks and auto,” said ICICI Direct. The government has taken steps to support capital intensive sectors like telecom getting support from the government in terms of freeing up cash flow in the medium term and the auto PLI scheme largely focusing on new energy vehicles. Further, the setting up of a bad bank will free up capital, allowing banks to focus on lending.

Among other factors supporting the strength include the counter-cyclical capex spending by the government, aided by tax buoyancy. ICICI Securities added that resilient commodity prices and strong demand in the developed world continue to improve capex outlook while low real interest rates and significant surplus liquidity continue to be conducive.

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