Fears of a slowdown in the global economy due to quantitative tightening (QT) may result in the resurgence of ‘systematic risk’ for equities like the one witnessed in June 2022 which may create opportunities for domestic-centric themes, said brokerage firm ICICI Securities in a report.
"US 10-year bond yield has spiked 140bps since August 2022 to reach nearly 4% level while crude oil has fallen sharply below the US$90/bbl level after forming a peak at around the US$130/bbl level earlier in the year. The above trends signal fear of slowing global growth and aggressive QT expectations from the US Federal Reserve going ahead, thereby, resulting in the resurgence of ‘systematic risk’ for equities like the one witnessed in June 2022," said ICICI Securities.
"Rising systematic risk driven by global factors is likely to ensure Indian stocks also get impacted, thereby, creating opportunities given the behaviour over the recent past," the brokerage firm said.
Systematic risk can be understood as the risk that is inherent to the whole market segment since it impacts the entire economy. It is also called an 'undiversifiable risk' since it cannot be diversified away. Other terms for systematic risk are 'market risk' and 'volatility risk.'
ICICI Securities highlighted that an aggressive QT cycle is a key concern, but slowing cost pressures and the recent spill-overs into financial markets may dampen the aggressiveness.
The brokerage firm is positive about the prospects of India. It highlighted that the recent manufacturing PMI trajectory for India indicated a robust demand environment (Q2FY23 average of 56) while input cost pressures have started to decline sharply.
The manufacturing sector’s share in the Indian economy reached the pre-covid level of nearly 18% of GVA in FY22 and is poised to hit an all-time high in the medium term, it said.
Housing sales appear to be in a cyclical recovery mode in urban catchments like Mumbai while discretionary demand for autos, leisure, entertainment, retail and travel appear quite robust, the brokerage firm added.
"We continue to prefer the themes related to investment rate, discretionary consumption and improving credit growth," said ICICI Securities.
Top picks of ICICI Securities:
Investment rate theme:
L&T, NTPC, Coal India, NHPC, UltraTech, JK Cement, Ashok Leyland, Tata Communication, Greenpanel, Century Plyboard, Indraprastha Gas, Oil India, IOCL, GAIL, Gujarat Fluorochemicals, Brigade Enterprise and Phoenix Mills.
Consumption theme:
Tata Motors, TVS Motor, Maruti Suzuki, Dabur India, Jyothy Labs, Sapphire Foods, Metro Brands and Go Colors.
Financials and credit growth theme:
SBI, IndusInd, ABCL, SBI Life, SBI Card and Angel One.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.
