Credit Suisse bets on industrial stocks in 2019 despite poor market show

Brokerage says sector has underperformed the market the past three years, even though it has been posting good earnings growth; metals, energy, private banks are other hot sectors

Credit Suisse is betting on industrial stocks for 2019. The sector has underperformed the market in the past three years, despite posting good earnings growth, says the brokerage. Industrial stocks are those fortunes are tied to construction and manufacturing.

“Industrials have underperformed the market by 48 per cent this decade. Over the past three years, they have continued to underperform despite good earnings growth. The P/E multiples for the industrials sector have been unchanged even though the broader market sharply re-rated. Given that this is still an early stage of the investment cycle and current levels of investment should be sustainable for longer, relative valuation multiples should expand as the market gains confidence in the sustenance of the recovery in gross fixed capital formation,” says Credit Suisse.

Besides industrials, the brokerage is overweight on metals, energy and private banks, while is underweight on the consumer goods and non-banking financial company (NBFC) space.

Larsen and Toubro (L&T), BHEL, State Bank of India (SBI) and ICICI Bank are Credit Suisse’s top picks currently. UltraTech Cement and Hindustan Unilever are its least preferred stocks.

“Within the Indian market, our preference remains for the less expensive industrials stocks which are showing good earnings momentum; we fear the consumption-focused stocks are too expensive, and there is a risk of earnings cuts,” said Neelkanth Mishra, India Equity Strategist at Credit Suisse.

At a broader level, the brokerage expects the Indian markets to witness headwinds on account of weak global growth and tighter monetary conditions.

“Monetary conditions are expected to tighten. Only significant market volatility may change the trajectory. We don’t expect much outflow, but meaningful inflows are unlikely,” it says.

Credit Suisse doesn’t see much of an impact of foreign institutional investor (FII) flows on the domestic market.

FIIs now account for less than a third of trading volumes, down from half three year ago, the brokerage points out.

“This is partly because over the past three years there has barely been any FII equity buying. It stays close to less than one per cent of market cap.”

Nevertheless, tighter monetary conditions will lead to de-rating of global stocks. India’s price-to-earnings (P/E) multiple is higher than the global P/E, which if comes off Indian markets, too could be de-rated, it says.

“Global P/E multiples have been elevated, but have now begun to come down. If so, given that India’s P/E premium to global equities is still close to its seven-year high, having bounced sharply from lows, Indian valuations could also come off,” says Credit Suisse.