India’s economic normalisation makes a case for rejigging your stock portfolio; here’s what to do

After nearly six months since India initiated its strict nation-wide lockdown, economic activity is coming back to pre-covid levels. The number of coronavirus cases is down from its peak, hopes of a vaccine are stronger, and indicators like car sales and GST collections are pointing at a recovery. According to global brokerage and research firm CLSA, this makes a case for rejigging your stock portfolio and moving away from information technology and healthcare stocks towards banks, cement, and Larsen & Toubro as it says that economic normalisation could favour domestic plays.

Cipla, Dr Reddy’s, Reliance Industries Ltd, Divi’s Labs, Lupin, and Infosys are some of the top Nifty outperformers. Among underperformers are financials and PSU names such as IndusInd Bank, SBI, Bajaj Finserv, Axis Bank, Coal India, ONGC, GAIL, among others. Sectors like healthcare and IT stocks are now 34-37% above pre-Covid-19 levels, but others like banks, metals, power, oil & gas and capital goods are 16-27% below this mark. “While the Auto, IT and Healthcare Indices are at 10-year high valuations by a margin, banking, metals and oil & gas are way below 10- year average valuations,” CLSA said. 

As the economy gets back on track with manufacturing speeding up, cement and construction companies along with financials are best placed to ride this wave of normalisation. In our opinion, financials along with L&T and cement could be gainers as investors reposition portfolios for the normalisation of the economy in 2021,” CLSA said. The brokerage prefers ICICI Bank, SBI and HDFC Bank among banking names and Ultratech in the cement sector. Among defensives, analysts at CLSA prefer Bharti Airtel and utilities like NTPC, Power Grid, and IGL.

Apart from the normalisation of the economy, another factor that plays a role in CLSA’s view for rejigging investors portfolio is historic data. “Empirical data from the past 10 years shows a tendency of 60% of the performance leaders of the first nine months becoming underperformers in the last quarter of the calendar year and laggards becoming outperformers,” CLSA noted. It said that over the last five years, a median of 60% of top 10 outperforming large-cap stocks of the first nine months of the year have ended up underperforming the benchmark in the October-December quarter. On the other hand, 60% of the top 10 underperforming stocks between January to September have outperformed the benchmark in the October-December quarter.