Investment style shifting from quality to growth: Morgan Stanley

Strategies focused on picking companies which fall and rise in greater magnitude than the index, has not picked winners

 

The Indian stock market seems to be favouring growth companies over companies with ‘quality’ characteristics such as low debt and high cash flow.

A Morgan Stanley India Strategy report entitled ‘Market Groping For Growth’ suggested that there is a preference for companies who are showing growth in earnings per share(EPS).

“EPS growth is now a winning style even as revenue growth has ceased to be losing investment criterion – the market now likes expanding margins and growth,” said the report dated May 3 and authored by analysts Ridham Desai, Sheela Rathi and Utkarsh Khandelwal.

Meanwhile the report noted that even as the market’s love for “quality” is waning,  the market is still not chasing beta. In fact, strategies focused on picking these companies which fall and rise in greater magnitude than the index, has not picked winners.

The market also seems to be factoring in lower cost of funds.

“The other change is that high debt is not losing money – underscoring expectations that a decline in interest rates will benefit high financial gearing. At the same high capex to depreciation is no longer a losing style. These are subtle and early shifts from a pro-defensive to a pro-cyclical bias,” said the report.

However, the shift remains ‘hesitant’ with companies having high return on equity and large ‘mega cap’ companies tending to do well. The brokerage expects picking reasonably price growth stocks to be a winning strategy for 2013.