The upcoming general elections sees Credit Suisse optimistic on Indian cyclicals and believes that there are factors that support for an upward movement in HCL Technologies, Wipro, Tata Motors, Reliance, Sesa Sterlite and Cairn Energy
Credit Suisse is overweight on India, with the general election acting as a catalyst according to their latest research report. It stated: “Our overweight call on India is based on the general election acting as a catalyst for a potential inflection point on return on equity (ROE).” It feels that the three consecutive upward revisions in EPS provide support to their bullish call. Credit Suisse prefers cyclicals over defensives. Their top stock picks are HCL Technology, Wipro, Tata Motors, Reliance Industries, Sesa Sterlite and Cairn Energy.
It is bullish on cyclicals, given that the relative valuation gap between cyclicals and defensive is large enough to pick the former. The report stated: “We continue to favour cyclicals over defensives, particularly in India. The cyclicals defensive price-to-book gap in India at -4.2X is the biggest in the region.” The chart below shows the relative valuation gap.
Moreover, it feels that global factors, especially the United States economy will tip the scales in favour of cyclicals over defensives. The report said, “While Indian cyclicals have outperformed defensives by 22% since the lows on 30 April2 013, we believe valuations, EPS revisions and recent rises in US bond yields suggest further cyclicals outperformance.” The chart below shows the potential market bottoming associated with three consecutive “upwards” revisions in EPS.
According to Credit Suisse, it uses the MCSI’s broader definition of cyclicals which includes technology, energy, materials, consumer cyclicals and industrials; defensives include consumer staples, utilities and telecom.
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