Nifty’s outperformance solid but reaching peak, says Jefferies; goes defensive, adds ITC to portfolio

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September 23, 2021 2:29 PM

Nifty 50 could be reaching its peak now after the domestic benchmark index outperformed emerging markets by 19-33ppts on 3/6/12 month basis.

Nifty, ITCNifty hit a low of 7,511 in March 2020 amid the global sell-off aided by the coronavirus pandemic. (Image: REUTERS)

Nifty 50 could be reaching its peak now after the domestic benchmark index outperformed emerging markets by 19-33ppts on 3/6/12 month basis, said global brokerage and research firm Jefferies. “ From such levels, Nifty performance has been weak historically,” the brokerage firm said in a report. Expecting the Nifty to underperform after having reached its peak, Jefferies has made adjustments to its model portfolio, turning defensive and adding FMCG major ITC to the portfolio and trimming weight in two other stocks. Nifty has more than doubled from its March 2020 lows with massive retail participation and record foreign fund inflows in 2020.

Nifty hit a low of 7,511 in March 2020 amid the global sell-off aided by the coronavirus pandemic. Earlier this month, Nifty scaled 17,792, translating to a 136% rally from March 2020 lows. During this rally, the index has outperformed emerging markets benchmarks 19ppt/22ppt/33ppt on a 90 day/180 day/365-day basis. “Our long term daily rolling analysis suggests that such periods of O-PF are unlikely to significantly extend beyond the current levels,” Jefferies said. Analysts added that such periods of outperformance, are usually followed by Indian stock markets underperforming by 11ppt, 6ppt and 7ppt on average in the following 90, 180 and 365 days respectively. 

What’s worrying Jefferies?

Although analysts at Jefferies have reiterated their positive views on India’s economic activity, valuations of domestic stocks remain a worry for them, leaving no room for upside. “Our favoured (Bond yield – Earnings yield) indicator highlights that the risk-reward is unfavourable,” they said. Further, Jefferies’ analysts said that equity supply could be ~1.5x the 1HFY22 level in the second half of the fiscal, which could cap the near-term upside, particularly if FPI flows were not to substantially pick up. Domestic markets have seen a large number of companies planning to or having already listed on the stock exchanges since the pandemic began. Meanwhile, on the other hand, foreign investors have pumped in only $1.5 billion in the last six months, after strong inflows in the last financial year.

Lastly, the swift economic recovery is also seen as something that could hamper stock markets’ upward march. “… brisk economic recovery in India might prompt the RBI to slow down the liquidity support impacting equity market sentiments,” Jefferies said. So far the RBI has remained committed to facilitating a strong economic recovery, however, things could change going forward. 

ITC added to portfolio 

Cigarettes to hotels conglomerate ITC has seen a strong upomove recently. The stock has zoomed 17.5% in the last one month. Taking a defensive approach now, Jefferies has added ITC to its model portfolio. The brokerage firm had also increase ITC’s target price to Rs 300 apiece. Paving the way for ITC, the brokerage firm has trimmed weight in Tata Steel and State Bank of India

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