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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Market Strategy: Time for some selective risk-taking:
Credit Suisse, stocks to BUY NOW
CLICK on company name Below for details
Reliance Industries:
Axis Bank:
Crompton Greaves:
CLICK on company name Above for details
■ High risk aversion in the market: We ascribed risk weights to gearing,
governance, rate sensitivity, and earnings and stock price volatility, and
discovered that risk aversion is the highest it has been in a decade except in
the two months post the ‘Lehman moment’. Given that such a catastrophe is
not a certainty, further de-risking for the market may be unlikely. This does
not rule out further declines for the market. However, notwithstanding the
recent bounce, taking risks selectively could yield healthy returns.
■ Macroeconomic uncertainties continue: We continue to believe that the
period of uncertainty is ahead of us and not behind us. The problems of
sovereign debt in Europe, potential recessions in the US/EU, a possible hard
landing in China, and continuing high inflation and slowing growth in India
are yet unsolved. It is unwise therefore to aggressively add risk to the
portfolio or to drastically change portfolio weights. Yet, sharp price
movements provide opportunities to both buy and sell stocks.
■ Buy “risky but cheap”, trim sector outperformers: We focus on relative
valuations, especially within sectors. We screened for stocks that have
borne the brunt of risk aversion despite healthy fundamentals (JSPL, RIL,
Axis Bank, Crompton Greaves): the risk-reward in these stocks is now
attractive despite the moves last week. Conversely, there are stocks that
have significantly outperformed their sectors despite weak trends in
consensus estimates (Tata Steel, Kotak Mahindra, Power Grid, Petronet
LNG, HUL and ACC).
Time to take some risk
Risk-adjusted valuations have rarely been lower
Intuitively, it is obvious that since Nov-10 the market has swung sharply away from riskier
stocks and sectors. The market usually swings to extremes, and sometimes the so called
“low risk” stocks become over-priced, and risk premium goes up irrationally. This provides
opportunities to sell over-priced ‘low risk’ stocks (i.e., cut valuation risk) and buy stocks of
riskier companies (i.e., add fundamental risk).
To make the analysis less subjective, we derived a Risk-adjusted Relative Valuation
(RRV) for the Nifty. Each of the stocks in the Nifty 50 was assigned a risk weight
comprising of five parameters: 1) Gearing (high gearing = high risk); 2) Earnings volatility
(high volatility = high risk); 3) Stock price volatility (high volatility = high risk); and 4)
Corporate governance (poor governance = high risk) and 5) Sector rate sensitivity (higher
rate sensitivity of sector = high risk). For each stock the measure of market perception of
risk was the P/B premium/discount over the ten-year average P/B.
Figure 8 shows how the Risk-adjusted relative valuation for the Nifty has moved. In the
last eight years the RRV has only been out of the ±1.5 standard deviation range 12% of
the time. The current read is at the lower bound of this range – it has only been lower in
the October 2008 to May 2009 period.
Reduces material downside for the Nifty
The last time the RRV was at this level (the week before the May 2009 election) the Nifty
was 32% lower, indicating that the current “quality” of the Nifty, despite being at higher
absolute levels, is much superior (Figure 9). From such levels in the run up to the ‘Lehman
moment’ to the subsequent trough, the Nifty had fallen 28% (Figure 10). On this measure,
the Nifty may trough at 3,550 if a Lehman-type bust does happen.
Risk aversion at ‘Lehman moment’ levels
In order to separate ‘de-rating’ and ‘de-risking’ of the market, we derived a risk index which
is independent of market valuation levels. We filtered out the de-rating component, we
found that risk aversion is currently at levels similar to that of the ‘Lehman moment’.
Buy ‘risky but cheap’; trim sector outperformers
Figure 8 suggests that short of a ‘Lehman moment’ of 2011, risk appetite does not have
much room to fall on a valuation basis. While it seems to be consensus now that the
developed world economies are likely to see sustained slow growth in the coming years, it
is by no means certain that a series of bank failures are imminent. Investors would be well
advised to reduce holdings of low risk but expensive stocks and add riskier but cheap
ones.
Given that our views on the sectors are largely unchanged, we limited the search for
best/worst to within sectors. We ran two screens on our coverage:
(1) P/B versus average P/B over the last five years: This was calculated for each sector
and stock. We then ranked the stocks within sectors. The stocks that have borne the
brunt of risk aversion (our measure of risk perception is current P/B versus the fiveyear
average) would feature on this list.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Market Strategy: Time for some selective risk-taking:
Credit Suisse, stocks to BUY NOW
CLICK on company name Below for details
Reliance Industries:
Axis Bank:
CLICK on company name Above for details
■ High risk aversion in the market: We ascribed risk weights to gearing,
governance, rate sensitivity, and earnings and stock price volatility, and
discovered that risk aversion is the highest it has been in a decade except in
the two months post the ‘Lehman moment’. Given that such a catastrophe is
not a certainty, further de-risking for the market may be unlikely. This does
not rule out further declines for the market. However, notwithstanding the
recent bounce, taking risks selectively could yield healthy returns.
■ Macroeconomic uncertainties continue: We continue to believe that the
period of uncertainty is ahead of us and not behind us. The problems of
sovereign debt in Europe, potential recessions in the US/EU, a possible hard
landing in China, and continuing high inflation and slowing growth in India
are yet unsolved. It is unwise therefore to aggressively add risk to the
portfolio or to drastically change portfolio weights. Yet, sharp price
movements provide opportunities to both buy and sell stocks.
■ Buy “risky but cheap”, trim sector outperformers: We focus on relative
valuations, especially within sectors. We screened for stocks that have
borne the brunt of risk aversion despite healthy fundamentals (JSPL, RIL,
Axis Bank, Crompton Greaves): the risk-reward in these stocks is now
attractive despite the moves last week. Conversely, there are stocks that
have significantly outperformed their sectors despite weak trends in
consensus estimates (Tata Steel, Kotak Mahindra, Power Grid, Petronet
LNG, HUL and ACC).
Time to take some risk
Risk-adjusted valuations have rarely been lower
Intuitively, it is obvious that since Nov-10 the market has swung sharply away from riskier
stocks and sectors. The market usually swings to extremes, and sometimes the so called
“low risk” stocks become over-priced, and risk premium goes up irrationally. This provides
opportunities to sell over-priced ‘low risk’ stocks (i.e., cut valuation risk) and buy stocks of
riskier companies (i.e., add fundamental risk).
To make the analysis less subjective, we derived a Risk-adjusted Relative Valuation
(RRV) for the Nifty. Each of the stocks in the Nifty 50 was assigned a risk weight
comprising of five parameters: 1) Gearing (high gearing = high risk); 2) Earnings volatility
(high volatility = high risk); 3) Stock price volatility (high volatility = high risk); and 4)
Corporate governance (poor governance = high risk) and 5) Sector rate sensitivity (higher
rate sensitivity of sector = high risk). For each stock the measure of market perception of
risk was the P/B premium/discount over the ten-year average P/B.
Figure 8 shows how the Risk-adjusted relative valuation for the Nifty has moved. In the
last eight years the RRV has only been out of the ±1.5 standard deviation range 12% of
the time. The current read is at the lower bound of this range – it has only been lower in
the October 2008 to May 2009 period.
Reduces material downside for the Nifty
The last time the RRV was at this level (the week before the May 2009 election) the Nifty
was 32% lower, indicating that the current “quality” of the Nifty, despite being at higher
absolute levels, is much superior (Figure 9). From such levels in the run up to the ‘Lehman
moment’ to the subsequent trough, the Nifty had fallen 28% (Figure 10). On this measure,
the Nifty may trough at 3,550 if a Lehman-type bust does happen.
Risk aversion at ‘Lehman moment’ levels
In order to separate ‘de-rating’ and ‘de-risking’ of the market, we derived a risk index which
is independent of market valuation levels. We filtered out the de-rating component, we
found that risk aversion is currently at levels similar to that of the ‘Lehman moment’.
Buy ‘risky but cheap’; trim sector outperformers
Figure 8 suggests that short of a ‘Lehman moment’ of 2011, risk appetite does not have
much room to fall on a valuation basis. While it seems to be consensus now that the
developed world economies are likely to see sustained slow growth in the coming years, it
is by no means certain that a series of bank failures are imminent. Investors would be well
advised to reduce holdings of low risk but expensive stocks and add riskier but cheap
ones.
Given that our views on the sectors are largely unchanged, we limited the search for
best/worst to within sectors. We ran two screens on our coverage:
(1) P/B versus average P/B over the last five years: This was calculated for each sector
and stock. We then ranked the stocks within sectors. The stocks that have borne the
brunt of risk aversion (our measure of risk perception is current P/B versus the fiveyear
average) would feature on this list.
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