Although rising volatility could hit cyclicals/high-beta stocks, analysts at ICICI Securities believe a fast de-escalation between Russia and Ukraine could also see these stocks recover the fastest, hence creating an opportunity for investors.
Domestic markets have faced the repercussions of growing geopolitical tensions recently. Sensex and Nifty have dived while volatility has spiked to touch 30 levels. Although rising volatility could hit cyclicals/high-beta stocks, analysts at ICICI Securities believe a fast de-escalation between Russia and Ukraine could also see these stocks recover the fastest, hence creating an opportunity for investors. “Consistent with past market behaviour, cyclicals / high-beta stocks are likely to bear the brunt of the rise in ‘systematic risk’ (VIX rising to 30) due to the geopolitical crisis arising from Russia-Ukraine conflict,” the brokerage firm said in a note.
Faster recovery if crisis recedes
Analysts noted that the rolling 1-year returns of high-beta index dips as the ‘systematic risk’ spikes. Analysts however, added that from a demand perspective, domestic cyclicals connected to the investment cycle, credit cycle and pent-up spending, such as industrials, banks, financial services, auto, discretionary consumption, and real estate, are largely unrelated to the current geopolitical crisis.
Domestic macroeconomic situation is improving, standing testament to the claim made by analysts. GST collection has been well above Rs 1 lakh crore mark, PMI Manufacturing at 54.9, exports growth at 22%, and new covid cases dipped to a 7-day average of 10,000. “Hence, if the crisis recedes quickly, cyclical stocks, which have corrected largely due to the rise in ‘systematic risk’, could see the fastest recovery,” they added.
Top picks
Talking stock-specific, analysts said that SBI, Axis Bank, HDFC, UltraTech, Larsen & Toubro, Hindalco, Coal India, Gujarat Fluorochemicals, Ashok Leyland, APL Apollo, Jindal Stainless, Phoenix Mills, Sapphire Foods, and Greenpanel are the top cyclical bets in the space. On the other hand, non-cyclicals bets include; NTPC, Bharti Airtel, Tata Communications, Infosys, Alkem Lab., Dr Reddys Lab, and Dabur.
Safe from risks
While cyclicals are seen to be at a risk, analysts highlighted that cyclicals linked to commodities are expectations during the current market environment. “…global cyclicals within commodities have been exceptions to the systematic risk given the idiosyncratic situation where the current geopolitical risk is resulting in higher commodity prices thereby benefitting those stocks,” ICICI Securities added. Among BSE and NSE sectoral indices the metal index is up 6% since February 2 while others such as Auto, Bank, PSU Bank, Pharma, and others are deep in red.
Further, the note added that the defensive sectors such as IT, FMCG, and healthcare along with industrials such as telecom and utilities will likely not see any major drawdown in an environment of rising systematic risk.