Largecaps vs Midcaps or IT vs Banks: Confused where to invest? Jefferies names stocks to buy, sectors to avoid

Global investment bank Jefferies has increased its exposure to large-cap stocks in its India model portfolio, citing relatively attractive valuations and expectations of a shallower rate hike cycle despite rising bond yields.

Jefferies said Indian equities have corrected from their August peak, bringing valuations below their long-term averages. The brokerage expects large-cap stocks to offer relatively better risk-reward as the earnings growth gap with midcaps narrows.

The brokerage has increased its weight in Kotak Mahindra Bank and Reliance Industries, while adding Welspun Corp to its model portfolio. It has also trimmed exposure to rate-sensitive segments such as non-banking financial companies (NBFCs), real estate and consumer discretionary.

Financials have the highest sector allocation in the Jefferies India model portfolio at 34.2 per cent, compared with 30.4 per cent in the MSCI India index.

Among financial stocks, HDFC Bank has an 8.6 per cent weight in the portfolio against 6.4 per cent in the benchmark. State Bank of India has a 5.8 per cent allocation compared with 1.4 per cent in the index, while Axis Bank has a 3.7 per cent weight against 2.3 per cent.

Kotak Mahindra Bank has been added to the portfolio with a 2 per cent weight, slightly higher than its 1.8 per cent weight in MSCI India.

Other financial stocks in the portfolio include Bajaj Finance with a 3.8 per cent allocation, AU Small Finance Bank at 3.6 per cent, Manappuram Finance at 2.5 per cent, Star Health Insurance at 2.1 per cent and Groww at 2 per cent.

Jefferies said Kotak Mahindra Bank could benefit from the removal of the leadership overhang and potential growth acceleration from current levels of more than 15 per cent. The stock is trading at around 1.8 times FY27 estimated price-to-adjusted book value, which the brokerage said is about 50 per cent below its 10-year average.

Jefferies has also increased its weight in Reliance Industries, citing attractive valuations and the possibility of upgrades if gross refining margins improve.

Reliance Industries accounts for a 7.5 per cent allocation in the model portfolio. The energy sector has a 7.5 per cent weight in the portfolio, compared with 7.2 per cent in the MSCI India index.

Jefferies said Reliance is trading at around 8.4 times one-year forward enterprise value to EBITDA, about 23 per cent below its 10-year average.

The brokerage has also added Welspun Corp to its model portfolio. It expects the company to benefit from a multi-year upcycle in oil and gas infrastructure spending in the US and Middle East, supported by local manufacturing.

Jefferies expects Welspun Corp to deliver more than 30 per cent EBITDA and earnings per share compound annual growth over FY26-FY29.

Jefferies has an overweight stance on several other sectors, including telecom, metals, power and utilities, and real estate.

Telecom has a 5.5 per cent portfolio weight against 5.1 per cent in MSCI India, with the allocation represented by Bharti Airtel.

Metals have a 4.1 per cent weight in the model portfolio compared with 2.2 per cent in the benchmark. The portfolio includes Hindustan Zinc and JSW Steel.

Power and utilities account for 6.7 per cent of the portfolio against 4.3 per cent in MSCI India. JSW Energy has a 2.8 per cent allocation, followed by Adani Energy at 2 per cent and Premier Energies at 1.9 per cent.

Real estate has a 2.6 per cent portfolio weight against 1.4 per cent in the benchmark. Lodha Developers and Godrej Properties account for 1.6 per cent and 1 per cent, respectively.

Consumer staples and consumer discretionary have been kept underweight in the Jefferies model portfolio.

Consumer staples have a 2.5 per cent portfolio allocation compared with 5.2 per cent in MSCI India. Consumer discretionary has a 9.9 per cent weight against 14.8 per cent in the benchmark.

Jefferies has also trimmed its exposure to rate-sensitive segments, including NBFCs, real estate and consumer discretionary.

The brokerage has retained a neutral stance on IT, healthcare and industrials. IT has a 6.7 per cent portfolio weight, in line with the MSCI India allocation. Infosys accounts for 2.5 per cent and Coforge 2.6 per cent.

Jefferies said global bond yields have risen, with the US 10-year Treasury yield moving above 5 per cent and Japanese 10-year yields crossing 3 per cent. UK and German government bond yields have also moved higher.

India's 10-year government bond yield has risen around 50 basis points over the past two months. Jefferies said the India-US 10-year yield differential is now close to a 20-year low, although the inflation differential between the two countries has also narrowed.

The brokerage expects India's current rate hike cycle to be milder than the 250-basis-point tightening seen in 2022. It expects a cumulative 50-75 basis points of rate hikes in the current cycle.

Jefferies said MSCI India's one-year forward price-to-earnings multiple has fallen to 18.4 times, around 7 per cent below its 10-year average, following the market correction since August.

Against this backdrop, the brokerage said large-cap stocks are becoming more attractive relative to midcaps. It has therefore increased exposure to large caps while reducing weight in some rate-sensitive areas of the market.