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Portfolio Strategy<br />
We continue to back growth at a reasonable price. We believe the way to construct<br />
portfolios is to buy stocks of companies with the highest delta in return on capital. We<br />
expect market performance to broaden and hence also like mid-caps where the forward<br />
growth is not reflecting share price performance.<br />
Recap of our biggest sector views:<br />
Consumer Discretionary (+500bp): Strong consumer loan growth and rising real<br />
incomes drives our view.<br />
Financials (+500bp): Credit costs may have peaked driven by the bankruptcy<br />
process and a recovery in economic growth. Recapitalization should also help the<br />
Corporate banks. Loan growth prospects are improving as the economy gathers<br />
pace. Non-banks face growth slow down.<br />
Industrials (+400bp): Private capex is likely turning, and public capex remains<br />
strong.<br />
Technology (-600bp): Business momentum has been strong, but stocks have rerated<br />
and recent outperformance probably prices in INR depreciation.<br />
Consumer Staples (-300bp): Margins seemed to have peaked and relative earnings<br />
growth may falter over the coming months more due to a recovery in earnings in<br />
the broad market likely causing relative multiples for the sector to come under<br />
pressure.<br />
Healthcare (-200bp): The sector remains challenged by regulatory burdens.<br />
Utilities (-200bp): We prefer cyclical exposures.<br />
Materials (-100bp): Funding source for our overweights.<br />
Index Target: On our December 2019 target of 42,000, the BSE Sensex would trade at a<br />
forward P/E of 16.5x, and at a trailing P/E of 20x, slightly higher than the 25-year trailing<br />
average of 19x.<br />
Base case (50% probability) – BSE Sensex: 42,000: All outcomes are moderate.<br />
Growth accelerates slowly. We expect Sensex earnings growth of 21% YoY in F2019<br />
and 24% YoY in F2020.<br />
Bull case (30% probability) – BSE Sensex: 47,000: Better-than-expected outcomes,<br />
most notably on policy and global factors. The market starts believing in a strong<br />
election result (one party has a clear majority). Earnings growth accelerates to 29%<br />
in F2019 and 26% in F2020.<br />
Bear case (20% probability) – BSE Sensex: 33,000: Global conditions deteriorate and<br />
the market starts pricing in a poor election outcome (a hung parliament). Sensex<br />
earnings grow 16% in F2019 and 22% in F2020.<br />
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