Almost every asset class feels like a falling knife right now: Gaurav Garg 

After a second straight week of gains, the Nifty formed a spinning top candlestick pattern which shows indecisiveness in the near-term.

The trend looks bullish, but Nifty may face hurdles at 10,550. In the near-term geopolitical issues and an increasing number of cases may be the key factors that might impact the investors’ sentiments and may lead the direction of the Nifty.

Q) Small & Midcap stocks outperformed benchmarks in June series and so far in the month as well. What is driving the rally in the broader market when most of the macro indicators remain muted?
A) Small and midcap stocks have always been an attractive investment option for investors. After a deep downfall in the first three months of the financial year 2020, most of these stocks have shown correction of almost 20-30% and even outperformed benchmarks.

The reason is the attractive valuations and strong fundamentals which attracted net inflows in these stocks. In June 2020, more than 50 percent of the small and midcap stocks outperformed the benchmarks.
Sectors such as pharmaceuticals, chemical, ago-based industries, IT, cement, etc. are growing in terms of market share even when the market growth is soaring.

The major focus of large investors is on the long-term earning power of these companies which is expected to see broader recovery in the next 2-3 quarters.

Thus, when the economy would turn its pace, and growth rate increases, mid and small companies would benefit the most.

Q) The first 6 months which will get over next week produced three stocks in the BSE 500 index that rose over 100%. The list includes names like Adani Green, Suzlon Energy, and GMM Pfadler. What is driving the rally in those names? Or it is just a liquidity wave or there is something fundamental.
A) Here is our take on the following stocks:

Adani Green:

This stock has appreciated 209 percent in the past three months. The firm had bagged “the world’s largest solar tender” from the union government to construct an 8-GigaWatt (GW) photovoltaic power plant and set up a 2 GW solar cell and module manufacturing capacity in five years.

This would entail an investment of Rs 45,000 crore at a time when companies in almost all sectors are looking to cut down capital expenditure.

The company is now the largest renewable power generator in the country with 15 GW of renewable capacity under various stages of development. All these factors led to an increase in the share price of the stock in recent times.

Suzlon Energy:

The shareholders have approved the resolutions proposed by the company, thus paving the way for debt restructuring. The resolution plan for Suzlon may be implemented by June 30 as lenders and promoters have been able to resolve differences in the deal structure.

Under the approved resolution plan, a large portion of the company’s Rs 12,785-crore debt was to be converted into sustainable and unsustainable debt, which was to be repaid over 20 years.

Suzlon Energy agreed to repay the sustainable debt of Rs 3,600 crore in the first 10 years. The remaining portion of the debt was proposed to be paid over 20 years, by converting it into optionally convertible debentures (OCDs) and CCPS.

The promoters of the company, led by Tulsi Tanti, had agreed to infuse Rs 375 crore into the company as equity. This step taken by the shareholders led to an increase in the stock price.

GMM Pfaudler:

GMM Pfaudler share price has surged 137 percent to Rs 4629 in 2020 so far. However, from January 1 to March 23 period, this stock was up just 7 percent. It is a leading supplier of process equipment to the pharmaceutical and chemical industry segments.

The company’s order book continues to remain healthy on the back of strong demand from the chemical and pharmaceutical sectors. Hence, the surge in its stock prices was the result of its strong fundamentals.

Q) More than 70% of the stocks in BSE500 gave negative returns in the last 6 months. 18 out of 376 stocks fell more than 50% that include names like IndusInd Bank, Future Retail, Repco Home, Lemon Tree, and Raymond. Are they opportunities in a bear market or one should avoid catching the falling knife?

A) There is economic dislocation because of the lockdowns and the markets are reacting in advance to that flowing through to corporate balance sheets.

Right now, almost every asset class that one can think of feels like a falling knife and it may not be advisable to try to catch one.

But at the same time, the equity market, in particular, is trading at lower than long-term average valuations in most markets. While the broader markets have fallen so much, some stocks within these markets have declined more.

When a bear strikes, you can see share prices falling hard and market values getting lower. Mentally, this may trigger your sense to “buy low,” which is generally a smart thing to do.

But emotionally, it’s hard to hold on to assets that are losing value for weeks or months at a time. There are selective opportunities in these markets.

Therefore it would be palatable only to long-term investors However, given the uncertain times, markets are likely to remain volatile in the near term.

Q) Your take on markets in the first six months? Opportunities for new investors but pain for the ones who are already invested? And what should be the strategy now to tackle the second half?

A) Since the beginning of 2020, the whole world has seen a major downturn in almost all the activities due to the disruptions caused by the Covid-19 pandemic. Indian markets, too, had reflected a huge downturn due to the crisis.

Though in the first three months the economy as a whole had seen the sharpest monthly fall ever including around 38-40% fall in both Nifty and Sensex, the next three months proved to be a relief.

In spite of various challenges faced during this period being it a lockdown or China-India disturbances, Nifty and Sensex had shown a recovery of almost 40% from the lows seen in March.

It is still not clear as up to how long will the economy take to revive back to the normal conditions. But next two to three quarters are expected to be more crucial for the investors. A broader recovery is expected as unlocking activities would revive demand.

The investors who lost money in the crisis have started to recover their losses and the next six-month period would also give good opportunities to the new investors as well. It is expected that markets are likely to continue positive rally until quarterly results are announced.

However, post the quarterly announcements markets are expected to correct up to some extent which will then give a good opportunity for investors to buy from the low levels.

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