Jefferies Tweaks Model Portfolio On Lockdown Risks Amid Second Covid-19 Wave

Jefferies tweaked its model portfolio as a spike in coronavirus cases in India increases the possibility of local lockdowns such as in Maharashtra, likely delaying the expected recovery.

The key worry is that the restrictions might spread to other states and national level sops such as moratorium might be missing this time. “Our long-term view of a housing-driven economic recovery remains, but, tactically, we lower banks to underweight and make IT services overweight and staples neutral,” Mahesh Nandurkar, equity analyst at the research firm, said in a note.

India reported more than 1 lakh new coronavirus infections on Monday, the largest ever since the onset of the pandemic in March last year. The second Covid wave, Jefferies said, is proving much sharper, with the climb from 20,000 to 80,000 cases a day (on a seven-day moving average basis) taking just three weeks now versus nine weeks in 2020. “Over the past week, case additions have spiked by 32% in Maharashtra and 48% in India,” Jefferies said. “With the positivity rate also rising over last week by 2.4 percentage points to 7.7%, the case addition pace is likely headed much higher.”

Although the Covid fatality pace is 46% lower, Maharashtra (15% of GDP) has initiated significantly restrictive lockdown measures, including the Section 144 across the state, and shutting crowded places, private offices, restaurants and cinema halls. “The government has announced these restrictions until April 30, and although the impact on economic activity will not be as high as in 2020, we expect activity levels to take a significant hit across sectors like infrastructure, real estate, discretionary and durables,” the research firm said.

Jefferies, however, doesn’t see the central government to impose a national-level lockdown.

Jefferies Model Portfolio Tweaks

Jefferies has cut banking to underweight from overweight. While it removed IndusInd Bank Ltd. from its model portfolio, it cut exposure to State Bank of India, according to the report.

The research firm has also removed Kajaria Ceramics Ltd. “We increase weight in IT (evenly between Infosys Ltd., HCL Technologies Ltd. and Tata Consultancy Services Ltd.) and make it an overweight.” According to Jefferies, Indian IT stocks are likely to outperform the market. A strong deal pipeline and recent large deal wins provide strong growth prospects and improved growth visibility, it said.

The research firm expects a 9-12% annualised growth rate for U.S. dollar revenue and 7-16% EPS CAGR for technology firms over FY21-23.

Jefferies has also turned ‘neutral’ on consumer staples against its ‘underweight’ rating earlier. It rates Hindustan Unilever Ltd. ‘neutral’ and added Marico Ltd. and Colgate Palmolive Ltd. to its model portfolio.