India’s record rally in equities will continue into next year, with banks and other stocks taking over as drivers of the country’s largest company, Reliance Industries Ltd., some fund managers say.
Confidence has accounted for nearly a fifth of the 75 percent rise in the S&P BSE Sensex since its March low, according to data compiled by Bloomberg. That’s about twice the contribution Apple Inc. has made to earnings in the S&P 500 Index over the same period. Some market watchers say Reliance’s earnings may have peaked for now, prompting the search for new leaders.
Prospects for a global recovery amid progress with Covid-19 vaccines have prompted investors to shift focus from defensive growth stocks to cheaper economically sensitive stocks. That may be particularly good news for financial stocks that have lagged in the rally that has pushed Sensex to an all-time high and pushed the total value of the Indian market to more than $ 2.3 trillion.
“Banking and finance stocks could have the most scope to take market leadership,” said Mahesh Patil, co-chief investment officer at Aditya Birla Sun Life AMC Ltd. in Mumbai, which had assets under management of around $ 31 billion at end of September. He also said that metals stocks should perform well because China’s economy is growing again.
Reliance’s performance has been fueled by billions of dollars of investment in its businesses by companies like Facebook Inc. and Alphabet Inc.’s Google, which should help accelerate the Indian conglomerate’s transition from energy to services. digital. Its shares rose to a record high in September, pushing its earnings-based valuation to roughly double the five-year average, though Reliance has fallen 15 percent since then.
“It’s hard to get excited about the energy outlook right now, or to price digital services significantly above where the implied value already is,” said Piyush Sharma, who manages the Minerva India Underserved portfolio for Right Horizons. “We believe market leadership could shift away from companies like Reliance over the next year.”
Sachin Shah, a fund manager at Emkay Investment Managers Ltd. in Mumbai, echoes that thinking, expecting to see “a much broader rebound in the coming quarters.” Shah notes that the pandemic has been a catalyst for companies in various industries to cut costs, which should make their actions more attractive.
Banks, in particular, could benefit from the search for new investment ideas. Still grappling with the fallout from a shadow banking crisis when the pandemic hit, finance was among the biggest losers in the selloff earlier this year, and have underperformed in the rally that followed. That may change as the market turns its attention to cheaper stocks.
Shadow banks show signs of recovery as India’s economy recovers
Right Horizons’ Sharma sees value and earnings as the top drivers for India investors in 2021, with the best opportunities in both being outside the larger stock indicators.
The S&P BSE SmallCap Index is up about 28% this year, while the S&P BSE MidCap Index has gained 17%, both outpacing Sensex’s 10% advance, after two years of underperforming. Smaller measures can have a higher profit margin, and both are still trading below their early 2018 highs.
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