Unloved, Undervalued Sectors May Drive India’s Next Bull Run: MS

(Bloomberg) -- The next bull market for India stocks is likely to mark a change in sector leadership, with consumer discretionary and health-care taking the baton from financials and consumer staples, according to Morgan Stanley India Co.

A rise in per capita income may increase consumers' share of spending on health and other non-food goods and services, which should make these industries grow faster than the economy, the broker said. That should also help stocks in these sectors reverse the underperformance they have suffered in recent years, said analysts Ridham Desai and Sheela Rathi.

“Both sectors are significantly under-owned, unloved, and undervalued,” the analysts wrote in a note to clients. “Fundamentally, the outlook for both is improving in the coming months.”

The S&P BSE Sensex and NSE Nifty 50 Index notched their biggest monthly gains since 2009 in April, and have rebounded by nearly 30% from lows touched a month earlier. Yet they remain about 20% below the record highs they set in January due to the impact of the coronavirus and a nationwide lockdown.

Among the 19 sector sub-indexes compiled by BSE Ltd., a gauge of health-care stocks has advanced 14% this year as drugmakers have moved into the spotlight amid the pandemic. The group had declined in three out of the last four years. A measure of consumer discretionary shares is down 21% this year, on track for a third-straight annual drop.

Financials have been the India investor favorite for seven years, but they have been underperforming so far in 2020, down 30%, which is a “telltale sign” of a reversal in sector leadership, the analysts said. Consumer staples stocks have also been in favor but have become pricey and their profit margins are peaking, according to the broker.

Morgan Stanley has lowered its view on India consumer staples to underweight and financials to neutral. It recommends overweight positions in consumer discretionary and health-care. It has added Sun Pharmaceutical Industries Ltd., Apollo Hospitals Enterprise Ltd. and Lupin Ltd. to its focus list, while Godrej Consumer Products Ltd., Housing Development Finance Corp. and Multi Commodity Exchange of India Ltd. have been removed.