Global banks caving is sending shockwaves across markets. This is likely to keep global markets on the boil with large spillovers on Indian equities in 2023, a recent report by brokerage house Nuvama predicted.
As per the brokerage, historically, during a global crisis, largecaps/cash-cows like FMCG, IT, and pharma outperform whereas cyclicals like financials, industrials, and metals underperform mainly due to the balance of payments shock, which impinges domestic liquidity and depreciates rupee. Defence is the best offence amid this banking crisis, it suggested investors.
With liquidity surplus now vanished and large outperformance in 2022 the brokerage has further lowered its exposure in banks, financial services and insurance (BFSI), and is underweight on other cyclicals like industrials, energy, metals, and durables. Meanwhile, it increased its overweight stance in Cement, pharma and IT as EPS downgrade risks are relatively lower. However, quick and large Fed reversal could limit dislocations, it warned.
Global Banking fallout
Nuvama noted that the fallout of SVB and Credit Suisse, while idiosyncratic (as of now), raises the spectre of the potential banking crisis. The current one is different from past crises like the global financial crisis or the European debt crisis. Today, the crisis is more a function of excessive tightening due to high rates rather than bad debt, it highlighted but the core banking and private sector balance sheets in the western world are strong, thus limiting the scope of the crisis, indicated the brokerage.
However, it warned that the growth backdrop is much more adverse.
"The monetary backdrop in the run-up is much more adverse with the yield curve in deep inversion and global broad money supply growth being much weaker compared to the past. Hence, to that extent, a larger easing is warranted. Also, the Global PMI, housing markets, money supply are far worse today versus previous fallouts. Unlike in the past, US fiscal firepower and China’s monetary muscle are much and impaired. Hence, if the current crisis is left unchecked, could result in larger economic fallout," cautioned the brokerage.
Indian Markets
Nuvama pointed out that Nifty typically enters a bear market phase during a global crisis with midcaps underperforming even more significantly. But amid the current crisis, it is still distant from entering the bear market.
In the current crisis, the Nifty has lost around 7 percent whereas the Nifty Midcap index is down 9 percent. In comparison, during the GFC, the Nifty shed 59 percent while the midcap index tanked 69 percent. Similarly, during the European debt crisis, Nifty lost 28 percent and Nifty Midap declined 33 percent. Even during the COVID crisis, the Nifty fell crashed 38 percent and the midcap index witnessed a 40 percent fall.
Portfolio allocation
With regard to portfolio allocation, Nuvama noted that it has grown even more cautious.
In 2022, the outperformance was largely due to domestic cyclicals like financials and industrials, while global-oriented ones like IT performed in line with global peers.
This outperformance of domestic cyclicals is a historical anomaly, highlighted the brokerage. Generally, during a crisis, even the domestic-oriented sectors tend to perform in line with global peers, it informed.
The brokerage has turned underweight on BFSI at the beginning of this year and is now turning further cautious on the same and lowering weights as it believes there is more downside on margins, growth and credit costs.
It has also been UW industrials for some time as Industrials are likely to be the most adversely hit in the current macro-environment. Also, lower government tax revenues could weigh on industrial companies’ working capital cycles as well. Historically, they have underperformed during the global slowdown. This time around, both recovery and downturn have been more delayed, it stated.
However, it raised weight in IT despite high exposure to global banks. The IT sector has been feeling the heat of global recession risks for more than a year now. However, it noted that IT tends to outperform during global crises owing to the fact that it gets support from rupee depreciation and its cash-rich business model as compared to domestic cyclicals, which are impacted by tightening liquidity.
"Post COVID, there has been a de-link between revenues and margins. Margins have led the post-COVID IT earnings. Here, we think there are tailwinds from cross-currency as INR is now underperforming global peers and also lower attrition as IT companies retrench the work-force. Hence, while USD revenues could disappoint, earnings miss could be limited," it said
Apart from IT, Nuvama also raised weights in cement which it believes is more like a consumer rather than a commodity in India and benefits from falling input prices and also in pharma which it thinks should be a great defensive in the current environment.
Here's a look at its top picks:
