Trades and Themes for 2011
*OverWeight (OW): Energy, Industrials, Materials, Telecom, Utilities
*Underweight (UW): Consumer Discretionary, Consumer Staples, Financials, Healthcare, Technology
*Global risk appetite: China, Europe, & US growth
*Growth indicators & corporate fundamentals
Buy capex proxies: demand and supply side supportive of capex trough: We expect a disciplined capex cycle in 2011 and believe that capex-related sectors, such as industrials, property and materials (most of these have underperformed in 2010 and are not favorites with the consensus), to do a lot better. Key stocks are DLF, ACC and Larsen and Toubro. Consequently, the Consumer Sector, which seems to be pricing in a lot of the prospective growth, could underperform.
From cash flow generators to asset gatherers: 2010 was all about cash flow generators. Stocks of companies with long duration cash flows distinctly underperformed. This is all about a hesitant bull market that we are in. High beta, low ROE and low free cash flow have underperformed in 2010. We think that, as the bull market matures, it may shift its attention to longer duration cash flow companies. Again, a peaking 10-year bond yield may help. Our favorite stocks are Jaiprakash Associates, Reliance Infrastructure, Adani Power, and IRB.
Market is at fair value: Buy Undervalued, Under-owned and Unloved stocks (3Us): Our residual income for the Sensex implies an equity risk premium of 6% – around our top-down assumption – which means long-term valuations are at a fair level (relative to our view). At the sector and stock level, we are focused on the 3Us. Key sectors that pass the test are Materials and Utilities. The Consumer sector fails the test, as do Financials.