Model Portfolio of ten stocks to buy by Morgan Stanley
Morgan Stanley has issued a research report in which it has recommended a buy of ten stocks from the large-cap and mid-cap space. The buy recommendations are classified theme-wise.
|M&A||Banks. property, infrastructure, materials and telecoms||Indusind Bank|
|Capex||Companies that have done capex over the past 5 years||Reliance Industries and Jubilant Foods|
|Unloved and under-owned stocks||Valuations and momentum||HCL Tech|
|Correlations||Technology is currently negatively correlated with the index – a free hedge against the market||Infosys|
|Growth at a reasonable price||Bharat Financial, Glenmark Pharma, M&M and Bajaj Auto|
The reason for recommending a buy of the said ten stocks is explained by Morgan Stanley in the report issued by it. The report reads as follows:
Equities appear to defy rationality but remain far from irrational. We debate some key questions circling us.
Why are you bullish?
The growth cycle is turning (okay, here is a warning – we said this last year too and got wrong footed by demonetization). This could be the beginning of a new growth cycle. If you are ready to humor us then we would take this further by saying that earnings could compound at 20% over the coming five years (in the 2003 to 2008 cycle, index earnings compounded c40%). As usual growth cycles are accompanied by an expansion in multiples and at least under this scenario the Nifty Likely triples in five years.
Are valuations rich?
That depends on what one is comparing them with. Relative to US equities this is about as attractive as Indian stocks have been in a while. India, own P/B is at historical average. Versus EM, India Looks rich but then ROE is gapping higher. The Sensex is still in buy zone versus Local bonds but mid-cap valuations look stretched. Valuations are useful to make a market call only at extremes which is not the case at the moment.
Is the consensus already bullish?
The consensus view is difficult to measure. Let us define it by what the market is pricing in rather than what one class of investors like say what FPIs are doing or what any competition is forecasting. Figuring what the market is pricing is not easy but we use multiple models to judge market expectations (Exhibit 8- Exhibit 13). The conclusion is that while the market has started to believe in a growth turnaround it is far from pricing in a multi-year growth cycle.
What are you worried about?
It has to be our sentiment signals – they are pointing to a tactical correction in the market. Our proprietary sentiment indicator, breadth indicator and flows are looking heady. On top of it realized volatility is at multi-decade Lows and correlations across stocks have plummetted to a Low, both suggesting a big macro trade is in the offing. Return correlations with global equities remain high. If a global correction ensues, the index could easily give up 5-7%.
Why are you so constructive on domestic flows? Click here: The Domestic Liquidity “DREAM” Run
How does one participate in this market where bottom up opportunities appear scanty? It is only a problem if one remains anchored to past winners. We are pursuing five themes to look for winners (Exhibit 1).
Why could you be wrong?
The warning sign on my dashboard is that I go right just about a little more than you correctly call the toss of a coin. The reasons why I could be wrong include: a) a sharp rise in commodity prices; b) steep negative near-term growth impact from GST implementation; and on global risk-off.