In the last 40 days, the Nifty50 has jumped over 15 per cent as the benchmark index has been on a continuous surge since June 17, 2022. During this period, the index has gained over 2250 points.
In this regard, the global brokerage firm Jefferies not being convinced of the sustainability of the recent market rally, The global brokerage firm said that the recent rally in the Nifty has taken the bond yield gap to an uncomfortable level of 2ppt+ and pace of EPS downgrades has increased a tad.
While the brokerage makes a model portfolio rejig by removing or reducing Gail, Gland Pharma, and Tech Mahindra from its list and introduces Zomato, Thermax, LIC Housing, and Indian Hotels.
US Fed Rate Hike: The US Fed has hiked its benchmark rates by 225 bps so far, but the tone on further hikes doesn’t appear that hawkish, implying that the Fed might go slower. The US inflation expectations remain under the psychological mark of 2.5%.
Bond Yields and Dollar: At the same time, the US 10- year yields have also corrected by 70bps from the recent peak to 2.8%, bringing down the risk-free rate globally, including in India. The Dollar index is also down 2% from its peak, implying favourable sentiment toward emerging markets.
FII Flow: The improving global sentiment is reflected in FPI flows into India, which is +US$2.4bn since reversing in mid-July. For this near-Goldilocks situation (no US recession and economy holding up well but yet a dovish Fed) in the US to sustain, will require a lot of fine balancing act.
Yield Gap: The recent Nifty rally has taken the yield gap to uncomfortable levels as India’s 10-year G-sec rate has fallen from the recent peak of 7.62% in June 2022 down to 7.35%. However, the market 12M forward PE has gone up to 19.3x, driving the Bond yield-earnings yield gap up to 2.2ppts which is 113bps higher than average.
Trade Deficit: India’s trade deficit at a record US $31bn in July and US$100bn FYTD is a strain on FX reserves, which are now down US$70bn (11%) from the peak. There is no immediate alarm given ~9 months of imports cover; though we expect a CAD of ~3.5% of GDP and BoP at -US$60bn in FY23 with oil at US$110/bbl.
Earnings revisions: The earnings have started trending downwards with Nifty EPS estimates for FY23/24 cut 2.2%/1.7% over the results season. Jefferies analysts have revised earnings down for 48% of the 106 coverage stocks for which results have come out, so far.
Model portfolio changes ADD: Jefferies’ neutral stance on IT services got disturbed due to the strong rally in Tech Mahindra and restore that by cutting some weight in it, and raise weights on domestics like Infra and capital goods such as Thermax as well as in consumer discretionary like Zomato.
Model portfolio changes Reduce: Within the brokerage’s preferred defensive are consumer staples, wherein it removes Colgate on persistent volume weakness, and redistribute weight. Similarly, it also removes GAIL post 1Q update as analyst downgrade on volume loss.
Value Pick: Within financials, Jefferies adjusts stock weights and adds LIC Housing – a value pick with a turnaround.