Global brokerage firm Morgan Stanley has said that growth in India is set to surprise on the upside. The brokerage also pointed out that small and mid-cap stocks will beat their larger peers as returns to investors will come from bottom-up stock picking rather than following a top-down approach.

In stock market parlance, a top-down approach is that when an investor looks at the macro-economic picture first and then takes a decision.

Bottom-up investing is done after analysing individual companies.

In a note, equity strategists Ridham Desai and Nayant Parekh and equity analyst Sheela Rathi identified 12 stocks as they came out with their most favoured investment themes for 2021.

The investment bank said that a key factor influencing its equity portfolio strategy is that growth is set to surprise on the upside because of a combination of improving policy traction, global growth, accommodative monetary stance, strong farm output, robust corporate activity and the likely peak of Covid-19 cases.

“While we expect monetary accommodation to remain at the current high levels, we think the RBI is now on a long pause. With inflation likely to remain sticky and interest rates likely to be at current low levels to address growth concerns, real rates may remain in negative territory for most of 2021’’, they added.
Its 12 picks for the current year are Bajaj Auto, Bharat Electronics, Bharti Airtel, Britannia, DLF, ICICI Prudential Life Insurance, IndusInd Bank, Just Dial, Larsen & Toubro, MMFSL, PNB Housing and Tata Steel.

On what this would mean for investor portfolios, the note said that small and mid-caps could beat large caps and portfolio returns will more likely be driven by bottom-up stock-picking than top-down macro.

"We think domestic cyclicals outperform exporters, rate sensitives and consumers outperform, whereas energy underperforms - backed by growth and rates calls. We are overweight consumer discretionary, industrials, financials, utilities and underweight technology and energy’’, the Morgan Stanley note said.

Stocks that included Bharat Electronics, Britannia, ICICI Prudential Life Insurance, IndusInd Bank, Just Dial, Mahindra & Mahindra Financial Services (MMFSL), PNB Housing and Tata Steel entered into its focus list for 2021. However, it has excluded Motherson Sumi, ITC, HDFC, Sun Pharma, Bajaj Finance, Havells, SBI and Interglobe Aviation.