Though financial stocks have been investors' favourite in the past seven years, Morgan Stanley expects consumer discretionary and healthcare to drive the next bull market.
Financials and consumer staples, the sectors with excesses from the previous bull market, will trail the recovery, Morgan Stanley said in a note. “…and the ones which were unloved, underowned, and undervalued may emerge as sector leaders,” it said, also listing energy among potential winners of the future.
Before the new coronavirus outbreak turned into a pandemic, India's equity benchmarks scaled new peaks as investors piled into heavyweights led by financials. But then the stocks tumbled tracking the worst global selloff in more than a decade as the restrictions to contain the virus stalled business. While Indian equities have recovered some of the losses but the benchmarks are still not out of the bear market.
Morgan Stanley said given that financials have about 25 percent of the Nifty 50 market capitalisation and the disruption caused by Covid-19, the breadth of performance could narrow to top two or three names such as Bajaj Finance Ltd., HDFC Bank Ltd., and ICICI Bank Ltd. These stocks are among its focus list.
It's now neutral on financials and underweight on consumer staples. It has added Sun Pharmaceutical Industries Ltd., Apollo Hospitals Ltd., and Lupin Ltd. and removed Godrej Consumer Products Ltd., HDFC Ltd., and MCX Ltd. to the list.
Morgan Stanley expects the outlook for consumer discretionary and healthcare sectors to improve in the coming months. These are underweight, have lost share in the Nifty's market cap, are reporting profitability well below history, and trade below historical average relative valuations, it said.
Still, according to the brokerage, India's long-term fundamental stories for discretionary and consumption are strong, and these sectors “could be the new leaders given the starting point of valuations, ownership, and performance”.
And as per capita incomes rise in Asia's third-largest economy, the report said the share of expenditure is likely to shift from food to non-food consumption and health, which will grow faster than the economy.
Still, given how much financials have underperformed in the recent weeks, they could still beat healthcare if there is a considerable policy response, it said.
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