Given that the markets are deeply oversold, April 2020 could reasonably be better and consolidate at or around current levels, Umesh Mehta, Head of Research, Samco Securities, tells Moneycontrol’s Kshitij Anand.
Q. Another volatile week for Indian markets – with 8,055 as a base. What is causing the panic in the markets – is institutional selling causing all the panic in the markets? Why are the other factors which are contributing to this bloodbath on D-Street?
A. Institutional selling is not a big worry at the moment as Foreign Institutional Investors (FII)/Foreign Portfolio Investors (FPI) selling is actually cooling off now. However, the big worry is uncertainty and the estimated time our economy would take to recover, in addition to how long this lockdown type situation prevails in combating the pandemic situation.
In addition to the above, another big worry is of the United States economy which is still not under complete lockdown and the number of infected cases is multiplying.
If in the future the US decides on a complete lockdown in order to contain the virus, then the global economic repercussions may be catastrophic as the US is the world’s largest consumer and a trickle-down effect on other economies would be first-hand.
Q. What are your views on the month of April – will we be able to see some green on the screen? Earnings will be delayed but what are the other data points which investors should watch out for?
A. The only data point investors and traders are currently tracking is the chart of rising coronavirus (COVID-19) cases in India and not the charts related to the stock market.
Given that the markets are deeply oversold, April 2020 could reasonably be better and consolidate at or around current levels.
Q. What is your take on the auto sales numbers – do you think the pain is likely to continue in the sectors, and it is best to stay away?
A. The current situation is considered under abnormal periods and it is expected that the worst is largely priced in. Maruti Suzuki saw a decline of 47 percent while TVS Motor’s sales more than halved in March 2020 which indeed is abnormal.
Once the lockdown is over, how soon the demand picks up is a bigger worry. Hence, it is expected that the government soon come up with the most awaited scrappage policy which would act as a trigger for the automobile sector.
And, this at the current juncture, makes the sector a high-risk, and high-reward bet.
Q. There is one advise which is echoed on D-Street is that one should stay with cash-rich companies. Do you agree with the statement, if yes, how will it help in dodging the COVID-19 bullet?
A. Investors should stay away from consensus views. At this point in time, cash-rich, debt-free companies are largely available in the FMCG sector and they are still trading at record high valuations making them a very crowded trade.
Instead, the ones with risk appetite should bet on financials, automobile, cement, paints sector wherein the demand only maybe temporarily postponed as compared to severe demand destruction for the long haul.
Q. What should be the trading strategy of the coming week?
A. The Nifty50 has retraced 61 percent from lows of 7,500 to highs of 9,050. Therefore, 8,000-8,200 levels should act as a support zone for a bounce-back rally which can take Nifty50 to 8,800-9,000 levels. It is advisable for traders to keep a stop loss below 8,000.
Q. India’s Mcap-to-GDP ratio has now slipped below FY09 levels or below the 2008 financial crisis – do you think a bottom is near? It is at its lowest since FY06. It will be difficult to say that we are near the bottom but what is a good multi-bagger opportunity for the next five years if someone invests now?
A. India Inc saw a robust investment momentum from private equity in 2018 for the second consecutive year with a total investment of $26.3 billion (BAIN & Company: India Private Equity Report 2019).
Hence, the true market-cap to GDP ratio is slightly blurred as the PE inflows are not considered in the market-cap.
Nonetheless, this ratio acts as one of the indicators to channelise investors to remain invested at current levels. One may note that these indicators do not assist in the short term timing of the market and investors should not just jump and buy solely on the fact that the ratio is so attractive.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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