HUL, ITC, HDFC, L&T among 10 preferred picks of Jefferies: 3 key reason for their defensive stance on the markets

Stock Market Today: Benchmark indices Nifty-50 and S&P BSE Sensex may have rebounded more than 1% during intraday trades on Tuesday, the steep fall in the indices on Monday has led to rising concerns. The impact of global cues had led to sharp fall of more than 3% in the benchmark Nifty 50 Index and Sensex on Monday after a strong rally earlier that had driven indices to peak. The global slowdown concerns following the US Payroll data and other economic indicators has led to caution.

Jefferies has maintained its defensive stand post correction also. Analysts at Jefferies India Pvt ltd said that there is higher risk of US downturn now and they are factoring in a 132bps interest rate cut by Deember'24. ( 100bps make 1%).

The consequent Dollar weakening however should augur well for Indian stocks on a relative basis. But on an absolute basis, analysts at Jefferies say that the risk is on the downside given one of the longest streaks of bull run, unsustainably high domestic retail flows & potential capital gains tax hikes in the future.

Capital Gains Tax and other curbs may limit retail flows

High domestic equity inflows are unsustainable as per Jefferies. Up to this point in 2024, domestic equities inflows have been a startling $7.5 billion per month. These would be more than three times YoY and almost twice the previous peak. However with household savings at roughly 20–25%, there is a considerable chance of a slowdown in domestic flow.

The recent Government's action to raise capital gains taxes on equity and initiation of discussion to limit F&O retail market activity is another concern raised by Jefferies that may put pressure on retail sentiments. Jefferies believes that the short Term capital gains taxes, are likely to creep higher in the subsequent budgets.

Investor meetings feedback . Jefferies meetings with 40 Singapore based Foreign Portfolio Investors last week suggest generally cautious mood and India largely a neutral to Underweight position.

The budget's proposed changes in capital gains taxes were a key point of debate with FPIs as per Jefferies suggesting that India's taxation on FPI's equity investment is a clear disincentive for performance and hence the inflows. Taxation on foreign investors stands in contrast to other countries which do not levy taxes on foreigner

Political situation and eventual policy fallout was also a discussion point as per Jefferies, as several state Governments have gone populist keeping in mind the upcoming budgets in the important states of Maharashtra, Haryana etc

Decade's second longest market rally leaves valuations stretched. Analysis of the market rallies and corrections (more than 10% draw down) over the last 10 years shows that, the current market rally started in March'23 is the second longest streak lasting 491 days so far.

Analysts at Jefferies said that post the recent correction, Nifty still trades at 20.2 times one year forward price to earnings, still above the +1 standard deviation levels. The Mid and Small cap indices valuations are now much above ( plus 56ppt and +17ppt) their respective average Nifty premiums.

They Prefer large cap laggards.

Jefferies analysis of large Emerging Market funds with India exposure shows that the funds are now at an absolute under weight position on India, largely an outcome of not being able to keep pace with India's widening benchmark with outperformance coming from the new stock additions. Valuations have also played a part.

Given the Underweight positioning of FPIs on India and relative valuations among sectors, Jefferies believes that large-cap market laggard stocks could outperform. In their model portfolio, they are overweight on-

staples as Hindustan Unilever Ltd, ITC Ltd

large cap banks as ICICI Bank, HDFC Bank , Axis Bank, IndusInd Bank and Cholamandalam Investment and Finance Company Ltd

Two wheelers as Eicher Motors, TVS Motor Company and

Larsen and Toubro Ltd on the theme.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions