Jefferies Adds Cash To Model Portfolio, Picks Defensives

Jefferies introduced ‘cash' in its model portfolio as it bets on defensives amid volatility in the market.

“The Nifty has corrected by 6.5% since the recent peak and retesting previous lows of around 15,500 is likely. The key question is which stocks would be defensive in this potential market fall as the trends keep changing,” the research house said in an Oct. 3 report.

FMCG and pharma would be good defensives, whereas realty, non-bank financial companies, metals and industrials could be more vulnerable, it said. IT services would also be vulnerable as concerns could emerge on revenue growth outlook. Select PSUs such as NTPC Ltd., Power Grid Corp. should serve well as defensive.

“But the undisputed defensive is obviously cash. We raise 3.0 percentage points of cash in the model portfolio by reducing weight on financials (LIC Housing Finance removed).”

Global Deterioration May Catch Up

The Nifty, Jefferies said, is currently seeing its fourth correction since October 2021 peak. Yet, the Indian markets have been quite resilient against global headwinds, with the Nifty being down just 2.7% year-to-date.

The broader index is 40% above pre-Covid peak and valuations at 18.4 times price-to-earnings are 5-15% above the pre-Covid/ long term average, it said.

“While earnings could see some support in the September quarter from an early festive season, deterioration in global macro and valuations concerns could catch-up with the Indian markets.”

Sector Rotation

Several outperformers in a rally since the October 2021 market peak, Jefferies said, have tended to underperform in subsequent corrections and vice versa.

Automobiles, industrials, realty and material stocks outperformed in the previous market rally between June and September, and could be vulnerable, Jefferies said.

NBFCs could “incrementally face challenges as the funding cost pressures (wholesale rates) potentially undermine their position vis-a-vis banks”.

Domestic Flows

Jefferies said domestic flows tend to slow down when trailing 12-month market returns turn negative. “We are currently at that stage and would be interesting to watch out for the flows trend.”

Also, property markets starting to give double-digit returns after being dead over 2013-2020 period indicate the possibility of some diversion of flows, Jefferies said.