Morgan Stanley discusses their most favoured investment themes for 2021 and identifies the high conviction sector and stock calls around these themes by collaborating with their bottom-up views. Morgan Stanley thinks growth is set to surprise on the upside due to a combination of improving policy traction, global growth, accommodative monetary stance, strong farm output, robust corporate activity and the likely peak of Covid-19 cases.
Accelerating growth means that the concentration of both market cap and profits may have peaked and return correlations across stocks with the equity market have risen to levels from where they tend to mean revert. While we expect monetary accommodation to remain at the current high levels, given inflation and the amount of monetary action already behind us, we think the RBI is now in a long pause, i.e., the downward rate cycle is over. With inflation likely to remain sticky due to supply side issues and interest rates likely to be at current low levels to address growth concerns, real rates may remain in negative territory for most of 2021.
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Small and mid-caps could beat large caps and portfolio returns will more likely be driven by bottom-up stock-picking than top-down macro due to peaking concentration and intra stock correlations. Peaking correlations also imply that sector positions should narrow. We think domestic cyclicals outperform exporters, rate sensitive and consumers outperform, whereas energy underperforms – backed by growth and rates calls. Morgan Stanley is overweight Consumer Discretionary, Industrials, Financials, Utilities and underweight Technology and Energy.
Focus list and sector model portfolio changes:
Bharat Electronics, Britannia, ICICI Pru Life, Indusind, Just Dial, MMFS, PNB Housing and Tata Steel make an entry into the Focus List at the expense of Motherson Sumi, ITC, HDFC, Sun Pharma, Bajaj Finance, Havells, SBI and Interglobe Aviation.
Morgan Stanley thinks that India appears to be at an inflection point of growth, rates, concentration and correlations. Portfolios need to shift to these emerging trends. With COVID-19 infections appearing to have peaked, government policy action beating expectations and Indian companies picking up activity through the pandemic, Morgan Stanley expects growth to surprise on the upside. A bounty crop, likely recovery in exports following global growth trends, strong monetary stimulus are also helping skew growth risks to the upside.