scorecardresearchJefferies advises raising cash in model portfolio amid valuation discomfort

Jefferies advises raising cash in model portfolio amid valuation discomfort and fiscal pressures; adds Bharti Airtel

Updated: 26 Sep 2023, 09:01 AM IST

Jefferies suggests investors raise cash in model portfolio due to valuation discomfort, fiscal pressures, and rising oil prices.

Jefferies advises raising cash in model portfolio amid valuation discomfort and fiscal pressures; adds Bharti Airtel

Jefferies advises raising cash in model portfolio amid valuation discomfort and fiscal pressures; adds Bharti Airtel

Global brokerage house Jefferies, in a recent strategy note, advised investors to raise cash in their model portfolio. It noted that while political continuity in 2024 is likely, fiscal pressures are building up with oil prices rising; potential reallocation towards social spending might drive incremental pressure on PSU disinvestments.

The brokerage has further reduced its model portfolio beta for tactical reasons keeping in mind yields & CPI data. It also recommended investors to trim weight on the property, mid-cap industrial, and staples and increase more cash. Meanwhile, it has also added/increased weight for Bharti Airtel, Kajaria Ceramics, and JSW Energy to its model portfolio.

"Rich valuations, oil/fiscal worries, and near-term state elections could raise market volatility. Tactically we reduce portfolio beta somewhat and trim weight on mid-cap industrial and property overweights and shift weight to laggards and cash. We also bring Consumer staples to underweight, shifting weight to Bharti. We would buy the dips as the medium term appears bright with the ongoing capex cycle recovery," advised the brokerage.

Additions/Increase to its Model Portfolio

Bharti Airtel: The telecom major offers strong 16-17 percent India revenue/EBITDA CAGR over FY24-26E, driven by improving subscriber mix, market share gains, and potential tariff hike next year, said the brokerage.

JSW Energy: As per Jefferies, strong electricity demand in India makes JSW Energy a beneficiary of higher merchant power prices in the near term. Also, it sees double-digit visible growth in capacity driving an over 30 percent EPS CAGR in FY24E-26E.

Kajaria Ceramics: The tile manufacturer is seen as a robust play on Indian housing revival and home-furnishing, noted the brokerage. It estimates FY23-26e sales/PAT CAGR at 15 percent/32 percent driven by healthy volume growth and margin benefit from the usage of alternative biofuel. The stock has been a laggard in the recent rally seen in housing/capex stocks, it added.

Why add cash?

According to the brokerage, a combination of high valuations, oil prices, and higher global yields makes it cautious about the equity market outlook in the near term. State elections towards the end of Q4CY23 might also induce some volatility though it doesn't have a meaningful impact on national elections.

Jefferies Model Portfolio

Key Risks

Valuation discomfort: The brokerage further stated that Nifty above 20K with 1-yr forward PE of 19.3x and 12 percent above the 10-yr average; our preferred yield-gap parameter (10-yr bond yields less 1/Nifty PE), at 200bps is +58bps since March lows and +69 bps above average, pointing towards valuation discomfort. Globally, the 'higher (rates) for longer' theme has gained traction from strong US economic data which has led to a 10-yr US yield at a decade high of 4.35 percent, coupled with a strong USD, it explained.

No fiscal headroom, pressure on PSU disinvestment likely: Another key rise, as per the brokerage, is that the heavy election calendar will likely exert pressure on govt to boost social spending with schemes to boost annual transfers to farmers, expanding health insurance, interest subsidy on home loans, etc possible. State freebies have already started in a big way.

"The fiscal performance is weak YTD with tax collections 3 percent YoY (Apr-Jul'23); vs. budgeted 10 percent for FY24. A slowing nominal GDP (+8 percent in 1Q) and rising oil prices / potential populist pressures will restrict tax revenue surprise. Meanwhile, expenditures in an election year will be tough to cut, partly as upfronting of spending (+23 percent YTD vs. +8 percent budgeted) reduces the headroom," it noted. Sharp PSU rally though raises chances of govt. divestment in the near term, added Jefferies.

Rising oil prices a worry: With Brent Crude Oil price at $90/bbl+, the headroom for a fuel price cut around Diwali (Q4CY23 festive season) is gone, it pointed out. Reverse may happen though with Diesel prices already implying losses for PSU Oil cos. Rising oil prices have adverse implications for the INR as well with every US$10/bbl swing implying a 0.4 ppt change in the CAD, it stated.

"Our meeting with the RBI signals some comfort with their CPI forecast; partly as veggie/ food inflation is declining. Interestingly, data lags in housing (10 percent of CPI basket) have made the core-CPI understated, and as such a one-time reset higher is possible. RBI sounds quite positive on growth though with private capex upcycle potentially driving upsides," informed the brokerage.

However, the G20 was a key positive

The brokerage noted that Delhi's hosting of the G20 summit is seen as a significant victory for India /Modi as signaled by the outcome statement balancing the Ukraine-Russia issue with economic issues. Foreign press articles (e.g. Financial Times, Washington Post) are positive, and a further boost to positive India sentiment (FPIs + $17bn YTD), it said.

Jefferies further believes that up-fronting the national elections to Dec'23 (currently April 2024 schedule) is unlikely, partly on the weather (winter in Hill states) and partly as Ram Temple opening in January 2024 will be awaited.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.


We explain rebalancing of portfolio here.
First Published: 26 Sep 2023, 09:01 AM IST