Jefferies expects the outperformance in value stocks that began in mid-October to continue on account of economic revival, newsflow around a potential Covid-19 vaccine and a stable-to-weak U.S. dollar.

“Despite the upmove in value stocks, we note that 33 of the Nifty 100 stocks are still trading below their last 10-year averages,” Mahesh Nandurkar of Jefferies said in a note. “The PSU index is deep value and despite the recent outperformance, trades at a 22% discount to its 10-year average and a 64% discount to the Nifty,” he said.

The research firm also remains constructive on India’s equity market, though cautioning that a near-term pullback can’t be ruled out.

Indian equities have staged a one-way rebound from the worst selloff in more than a decade triggered by the coronavirus pandemic, and are only a short distance away from being the most expensive they have ever been.

But Jefferies, citing its bond yield-earnings metric, said the valuations are justified. “At 22.3 times its 12-month forward, we believe that the valuations can be justified,” the note said. “Low yields are here to stay and we continue to expect strong earnings momentum during FY22 and FY23.”

Jefferies has picked ITC Ltd., IndusInd Bank, ACC Ltd., Sobha Ltd. and Tata Steel Ltd. as its preferred value picks. Within the PSU segment, the research firm has picked State Bank of India, NTPC Ltd., Container Corporation of India Ltd, Hindustan Petroleum Corp. and Bharat Electronics Ltd.

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