Dalal Street Investments

Low Risk, High Return India Strategy

April 13, 2010

Morgan Stanley has charted a Low Risk, High Return Strategy for the Indian Equities which are likely to return positively in 2010. However, the rate of return is likely to slow over the 2009 levels. In that context, stock picking is likely to be the key to portfolio returns.

The influence of macro in determining the behavior of stocks best measured by the correlation of returns from individual stocks (market effect) with the market has been declining since its peak in May 2009.

With an upward biased market, one of the seemingly obvious ways to add portfolio performance would be to buy high beta stocks [High Risk Reward]. The low beta portfolio has, on a cumulative basis, outperformed the high beta portfolio. Fundamentally this is because high beta stocks are implicitly stocks with a high hurdle rate and hence need a bigger cash flow surprise to perform whereas low beta portfolios have the opposite situation. Technically speaking, for a given beta, correlation with market returns could still be high (and hence relative volatility is lower) and hence it is not necessary for a low beta stock to underperform in a rising market.
At market inflexion points, these portfolios tend to have extreme performance, i.e., when the market is turning from bearish to bullish the high beta portfolio outperforms low beta significantly and vice versa. However, in trending markets, the low beta portfolio does better most of the time.

With this background, the Portfolio of Stocks to be Bought w.r.t Low Beta in Rising Markets as suggested by Morgan Stanley are – Grasim, BHEL, HDFC, NTPC, Axis Bank, HDFC Bank, Reliance Industries, Bank of Baroda and ACC.

High Beta Stocks Stocks to AVOID as suggested by Morgan are – TCS, Bharti Airtel, Tech Mahindra, Sesa Goa, Ashok Leyland, Mahindra & Mahindra, TVS Motors and Canara Bank.


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