Brokerage firm ICICI Securities believes that cyclical stocks that have corrected largely due to rising “systematic” risk may experience the fastest recovery if the crisis abates quickly. From a demand perspective, domestic cyclicals relate to the investment cycle, credit cycle, and pent-up spending.

This includes the industrials, banking, financial services, automotive, consumer discretionary and real estate sectors which are largely unrelated to the current geopolitical crisis.

In common parlance, systematic risk is the part of risk that is caused by factors beyond the control of a specific company. It is also known as market risk. “Systematic risk” drives high-beta stocks lower, creating cyclical opportunities,” ICICI Securities said in a report.

Lately, the benchmark NSE Nifty index fell more than 4% to 16,793 on Feb 28, 2022 from 17,532 on Oct 1, 2021. Market watchers believe that sustained outflows from foreign institutional investors, concerns over the numbers inflation, hopes for a faster reduction, new variant of Covid-19 and now the conflict between Russia and Ukraine has dampened sentiment.

Among cyclical stocks, ICICI Securities preferred at least 14 cyclical stocks, including State Bank of India (SBI), Axis Bank, HDFC, UltraTech Cement, Larsen & Toubro, Hindalco, Coal India, Gujarat Fluorochemicals, Ashok Leyland, APL Apollo, Jindal Stainless, Phoenix Mills, Sapphire Foods and Greenpanel.

Meanwhile, the latest macroeconomic data indicates that the economic recovery is continuing as Covid-19 cases fall sharply. Reported high-frequency indicators for January and February also pointed to an economic recovery, with new Covid cases falling sharply to a 7-day average of around 10,000.

The latest data showed that the Goods and Services Tax (GST) revenue in February was 26% above pre-pandemic levels at Rs 1,33,026 crore. India’s manufacturing sector also saw an expansion in output and new orders in February according to the IHS Markit Purchasing Managers’ Index (PMI) which came in at 54.9 for the month, from 54 in January. A reading of 50 on the PMI indicates no change in activity levels.

“If the geopolitical crisis moves away from the extreme global crisis seen recently and turns into a localized conflict alongside the negotiations, then we don’t see any major earnings revisions. On the other hand, if the geopolitical situation continues to deteriorate, the prolonged period of high commodity prices is likely to further increase the input cost pressures felt in recent quarters across all sectors and could eventually impact aggregate demand (consumption),” ICICI Securities said, adding an earnings outlook for most sectors that rely heavily on commodities as commodities will be affected.

The brokerage also favors NTPC, Bharti Airtel, Tata Communications, Infosys, Alkem Laboratories, Dr Reddy’s and Dabur among non-cyclical players.

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