Capital-intensive, cyclical and value stocks likely to continue their outperformance, says ICICI Securities

Brokerage firm ICICI Securities believes capital-intensive, cyclical and value stocks may continue their

outperformance while digital economy stocks may produce strong binary results over the long term.

The brokerage firm highlighted that capital-intensive, cyclical and value stocks have been outperforming since FY21 thereby reversing the trend seen over FY12-FY20.

"Factors such as ‘high capital intensity' (low OPATO – Operating Asset Turnover), ‘low asset valuation’ (or low P/B), ‘high financial leverage/high beta’ and ‘low RoE’ have consistently driven stock price outperformance within the BSE200 universe since FY21," ICICI Securities said.

"This behaviour is a departure from the trends observed from the period FY12 to FY20 wherein expensive and low-volatility stocks outperformed. Size as a factor significantly outperformed during FY21, but there has been no major difference in performance over FY22 and FY23-TD. Overall, the three factors have outperformed post FY20," said the brokerage firm.

ICICI Securities added that the above trend is the longest period of outperformance seen from the aforementioned factors since the peak of India's investment and credit cycle in 2011-12. Also, the outperformance is continuing despite an unprecedented Quantitative Tightening (QT) cycle by the US Fed, hence differs from the shortwave false beta rallies seen over the past decade in terms of sustainability.

"We attribute the paradigm shift in the performance of factors, sectors and styles to the pockets of demand emerging in the economy and corporate profit pool trajectory, which is being led by stocks related to the ‘investment rate’, ‘credit cycle’ and ‘high-end discretionary consumption’," ICICI Securities said.

"The digital economy is entering a structural growth environment and will result in spectacular binary outcomes over the long term for related stocks. Except for the digital economy and discretionary consumption sectors, most other capital-intensive and balance sheet driven stocks are reasonably valued despite the outperformance post FY20," the brokerage firm said.

Top picks of ICICI Securities:

SBI, IndusInd, ABCL, SBI Life, L&T, NTPC, Coal India, NHPC, UltraTech, JK Cement, Ashok Leyland, Balkrishna Industries, Bharti Airtel, Tata Communications, HCL Tech, Indiamart, Greenpanel, Century Plyboard, Indraprastha Gas, GAIL, ONGC, Gujarat Fluorochemicals, Brigade Enterprise, Phoenix Mills, Tata Motors, Dabur India, Nestle, Jyothy Labs, Sapphire Foods, Metro Brands.

Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.