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BNP Paribas’s model portfolio is overweight on IT, autos and pharmaceuticals

BNP Paribas, in a recent note to clients, recommends exposure to ICICI Bank, LIC Housing Finance, Sun Pharma, M&M and Wipro, while it has dropped IDFC from its model portfolio. Strangely, the portfolio recommends greater weight for sectors it recommends as underweight and suggests Reduce for stocks which are listed as Buy!

BNP Paribas Securities Asia (BNP Paribas) has recommended adding ICICI Bank, LIC Housing Finance, Sun Pharma, Mahindra & Mahindra (M&M) and Wipro to the portfolio, in a recent strategy note. At the same time, it has dropped IDFC and reduced its exposure to Tata Motors, HDFC and NTPC. However, the investment bank seems to be unsure about the direction of India’s economy as well as the market, and has therefore taken a somewhat neutral stand—like many others. The report says, “Indian equities are at the crossroads. On one side there are potential catalysts for further upward movement. On the other, post significant outperformance, India appears fully valued relative to its own history and slightly overvalued relative to peers in India.”
 

In the light of Reserve Bank of India’s (RBI) decision to cut repo rates by 25 basis points (bps), BNP Paribas believes that RBI will cut the rate by 75 bps more by calendar year end. The report said, “Potential catalysts for an upward move are well understood. India could be the only large Asian country to have benign monetary policy in 2013. With weak growth and inflation trending down, RBI has some room to cut rates—we expect RBI to cut the repo rate by 75 bps in 2013.”
 

Indeed, this is a bold call given that inflation is still a concern because supply side concerns continue to persist due to inaction from the government. Unless the government removes supply side bottlenecks, reducing interest rates further will be fraught with risks.
 

BNP Paribas is bullish and overweight on IT, utilities, engineering & construction, pharmaceuticals. It believes that a crucial catalyst would be government reform measures, especially in the power sector. It is also bullish on IT, oil & gas and telecom. The report said, “Despite some recent earnings disappointments, the overall earnings environment appears stable. We believe we may be going through the last leg of earnings downgrades in some sectors (auto, infra, PSU banks), while some other sectors (IT, oil & gas and telecom) could see earnings upgrades. Implementation of proposed reform measures (e.g. coal pooling in the power sector, Cabinet Committee on Investments) could turn out to be significant catalysts.
 

Surprising Labels
 

While BNP Paribas strategists are entitled to their views, the model portfolio is a model of confusion:

  1. It is ‘overweight’ on automobile sector and has attached a 9% weightage while at the same time it has put a 9% weightage on energy in which it is ‘underweight’! Similarly, it is ‘overweight’ on utilities even though the segment constitutes 4% of the portfolio!
     
  2. Its maximum exposure is the banking segment of which it has 28% exposure but is neutral on the sector. This is possibly a defensive strategy, but still confusing nevertheless.
     
  3. When it comes to individual stock picking, it suggests ‘reduced’ exposure to HDFC and NTPC, believing these companies are “fully valued”. However, both stocks have ‘Buy’ ratings!
     
  4. Another confusing aspect is if you look at their IT portfolio. It is ‘overweight’ on the sector, yet two stocks namely TCS and Infosys have ‘hold’ ratings. This would suggest that investors should pile up on Wipro only, which would mean exposure to the IT sector will hinge on a single company!

It is also surprising to see it play the sentiment game with Hindustan Unilever while at the same time believing its fundamentals are intact (despite earnings disappointment). The report says, “Even though HUL’s volume growth in the recent results disappointed and higher royalty payments to the parent were not welcome by the market, our analyst believes the recent de-rating has opened up a buying opportunity.” The stock forms 3% of the BNP Paribas “model portfolio”.
 

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