According to Emkay Global's latest strategy note, the US Federal Reserve's newly minted dovishness has added another leg of rally to the bullish market, and while the impact of lower rates on earnings will be muted, the fresh development is likely to play out with higher foreign portfolio investor (FPI) flows driving the re-rating in stocks. According to preliminary data from the NSE, FPIs were net buyers of domestic shares worth Rs 3,570.07 crore on Thursday. According to NSDL data, December has seen inflows of Rs 39,260 crore, the most for any month since July.

Domestic stocks will also benefit from post-election policy stability and ongoing strength in the capex and manufacturing cycles, according to Emkay Global. It anticipates continuing gains in equities and believes technical corrections should be used to increase exposure. "The best beneficiaries of falling rates are mid-size lenders (IndusInd Bank) and IT (Infosys), while our other top picks are Hero MotoCorp, Piramal Enterprises, and Zomato (new addition)," the India-based brokerage added.

According to Emkay, the US Fed's dovish views foreshadow three rate decreases in CY24 and have dramatically shifted market sentiment. It anticipates that the RBI will follow suit with consecutive rate cuts. According to the domestic brokerage, the impact would be more noticeable at the short end because long bonds have not tracked policy rates on their way up.

According to Emkay, FPI flows will be high in the second half of 2023. "We see the momentum increasing as risk on trades returns." Given its size and development profile, India will remain one of the most appealing emerging markets, especially given the challenges of investing in China," it said.

According to Emkay Global, the first leg of rate-cut cycles has had mixed consequences for stocks over the last 15 years. A favorable reaction has a strike rate of 3/4, which is largely caught in the run-up to the cut. Another twist in this cycle is that we are entering the rate-cutting period on the heels of good growth. According to the report, sectoral performance around the rate cycle's peaks is likewise uneven.

"Re-rating is an obvious trigger, but it is difficult to find candidates when we apply additional filters such as earnings visibility, growth sustainability, and historical relative valuations." We narrow it down to mid-cap financials, IT, and real estate as the best bets. Aside from the immediate impact of the rate cycle, we like SMIDs and manufacturing and are cautious about consumption, with the exception of automobiles. Our top picks are IndusInd, Piramal Enterprises, and Hero MotoCorp.

"We add  Infosys because we see little near-term earnings risk and valuations are reasonable in comparison to history, and Zomato because we see continued business momentum and a relatively strong play on consumption," the report added.