Credit Suisse is cutting metal stocks from overweight (OW) to underweight (UW) in its latest India market strategy.
"We book profits on metals, reversing positions added in December-20 and earlier, as P/B relative to market is near a 10-year high. It can go higher and stay elevated in a super-cycle, but we believe the current surge in apparent demand is due to an extreme inventory cycle and not a structural increase. Slower steel capacity increases due to ESG regulations are not sufficient to justify holding on, particularly given the Tata profit surge is iron-ore driven, and should correct," Credit Suisse said.
Further, with the aluminum-to-steel price ratio near a two-decade low, an inversion is likely: We remove Tata Steel from our 30-stock portfolio and add Hindalco, it said.
Credit Suisse has added beneficiaries of normalisation of input cost trends and re-jigged IT stock positions.
The strategy report said an extreme supply-chain bull-whip is likely driving chemicals too: inputs to adhesives, paints, cement, etc. As costs fall, firms with pricing power should benefit.
It has added Asian Paints and UltraTech as cement should benefit from lower costs of globally priced inputs (prices are local); sector P/B is at 11% premium to market, well below average; near-term concerns on adverse seasonality and weak discretionary demand from lowincome households are offset by firm-specific factors (e.g., steady share gains).
"We stay underweight on IT, but cut HCL Technologies (poor EPS revisions) and add to TCS (low relative P/E to INFY)", Credit Suisse said.
"We stay Overweight on banks (private banks plus SBI), as we believe they are the best plays on our expectation of better-than-consensus expectation of medium-term growth. This also supports our heavy overweight on industrials (also has low relative P/B)", Credit Suisse said.
"We cut to Market Weight on Staples: we exit Nestle, add a smaller weight to Marico (growth in new businesses). Our continued Underweight on NBFCs is due to BFIN (cut further; now zero-weight on the stock) and Insurance. We are Underweight on pharma (overweight on Dr Reddy's and Aurobinndo), telecom , utilities, autos (mainly 2W) and energy", it added.
It said India has caught up on the April 2021 underperformance in May, with relative P/E now middle-of-past-ranges. Going forward, broader market performance is likely to be in line with global trends till evidence of medium term acceleration starts showing.