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Reliance Research - R Model Portfolio - October 2021 - Market Extends Gain as Tailwinds Remain Intact

Posted On: 2021-10-06 20:38:10 (Time Zone: IST)

The benchmark Nifty extended gain for the fifth consecutive month in Sept'21 and recorded historic highs by outperforming its global peers. Notably, consistent improvement in high-frequency key economic indicators in Aug'21, faster ramp-up in vaccination drive with relatively lower number of daily COVID caseload, favourable outcome of the FOMC meeting and least possibility of slowdown in economic activities due to possible third COVID-19 wave supported the rally. However, macro concerns with regard to Evergrande default in China, sharp rise in bond yield in the USA, rise in energy prices and strengthening Dollar index (which appreciated >2% in 1 month) weighed on the sentiments towards the second half of the month. Among the sectoral indices, Auto, FMCG and Realty indices recorded gain to the tune of 5.6%, 2.3% and 32.8%, respectively in Sept'21. Additionally, strong rebound in Reliance Industries (up 11.6% MoM) supported Nifty rebound. Notably, relief measures for telecom sector and PLI scheme for automobile and textile sectors aided respective sectoral outperformance during the month. Further, modest contraction in Aug'21 CPI data, robust tax (direct and indirect) collection and improving fiscal positioning of government emboldened the investors.

RSec Model Portfolio delivered a strong 1.5% absolute return in Sept'21 as against 2.8% and 3.3% return delivered by Nifty and BSE 500, respectively. Therefore, it underperformed Nifty and BSE 500 by 130bps and 180bps, respectively. However, it outperformed the Nifty by 1,290bps/1,080bps in YTD CY21/FY22 YTD, which is heartening. Our latest pick, DLF delivered solid 30% return in Sept'21, followed by 13%/9% return delivered by Titan/Ashok Leyland. Notably, our strategy of getting overweight on sectors considered to be the key beneficiary of capex revival aided RSec Model Portfolio to deliver convincing outperformance in the recent months.

Improvement in Economic Activities & Vaccination Ramp-up Aided Rally

High-frequency key economic indicators such as GST collection, railway freight, energy consumption, import-export volume and property registration etc. witnessed firm recovery in recent months and offered visibility of sustainable earnings recovery in the subsequent quarters. Additionally, faster ramp-up in vaccination drive in the country and least possibility of any slowdown in economic activities due to third COVID wave lifted the investors' sentiments. Notably, India appears to be better placed as of now compared to several developed countries including the USA and several European countries in term of fresh rise in COVID cases, which makes the country less susceptible to any major disruptions compared to other countries.

2QFY22 Earnings, RBI Policy & Festive Demand Hold the Key

Given sharp rise in benchmark indices and premium valuation (>35%), 2QFY22 corporate earnings would be quite important for the market stability. Further, most companies will also resume sharing guidance from this quarter given improved visibility of business outlook, which the investors are keenly watching out for. Further, the RBI's commentary over inflation (given recent rise in energy prices) and growth outlook will also be closely monitored.

Fundamental Remains Intact

With the market witnessing sharp upsurge and Nifty trading at a premium of >35% to the historical average, we expect the premium valuation to sustain, as the fundamentals remain intact and recovery in corporate earnings looks sustainable in the subsequent quarters. In our view, the country is still in the beginning of revival in capex cycle, which will continue to aid corporate earnings. However, sharp rise in crude prices, weakness in INR and concerns over quantitative easing by the global central bankers would remain as near-to-medium-term concerns for the market.

We are keeping the components of RSec Model Portfolio unchanged for the current month.

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