Investors should be selective in the mid and smallcap space and go for companies that have a prudent management, strong corporate governance, lower debt to equity ratio and a sound balance sheet, Ajit Mishra, VP Research at Religare Broking, tells Moneycontrol's Sunil Shankar Matkar in an interview. Edited excerpts:
Q: With a rally of more than 12 percent in two consecutive weeks, do you think the optimism over the re-opening of the economy has been discounted by the market or it is yet to be priced in?
Markets have gained substantially in the last two weeks, taking note of the firm global markets and foreign flows. We can certainly see the optimism around the gradual unlocking of the economic activities in India and abroad. Besides, better-than-expected earnings from select heavyweights and forecast of a normal monsoon by IMD, too, have lifted sentiments.
We feel all the positives have been priced in now and markets may see some profit-taking. The Nifty has a strong hurdle around the 10,350-10,550 zone.
Q: The rally also seems to have been backed by FIIs, which bought nearly Rs 14,000 crore in the first week of June. Do you think the FII flow will continue?
The recent flows were mainly due to their participation in corporate action in two biggies--Reliance Industries' rights issue and stake sale in Kotak Mahindra Bank by Uday Kotak. Besides, liquidity measures taken by central banks worldwide and early signs of recovery in select sectors have also improved sentiment towards risky assets, which, in turn, induced foreign flows.
We believe the continuity of the flows will depend upon several factors like the COVID-19 situation, global cues and earnings, so, let's not jump the gun and wait for further clarity.
Q: Banking & financials led the two-week rally, with the Bank Nifty jumping more than 22 percent. Does it mean that all negatives related to NPA pressure have gone away after easing of lockdown restrictions?
India has also begun the process of reopening the economy and that has eased some of the concerns about the banking sector. While this has lifted sentiments, we believe it is too early to comment that the negatives related to NPA pressure have gone away. It would take two to three quarters to assess the kind of stress that the lockdown has caused in the banking sector.
Q: Midcap and smallcaps have been equal partners of benchmark indices in the rally. Does it mean that one should start looking at midcaps and smallcaps?
Along with frontliners, the broader markets, too, have gained traction of late, in anticipation of a gradual revival of the economy. Besides, the financial performance of several midcaps and smallcaps is showing signs of improvement. However, we would still recommend investors to be selective in this space as downside risk cannot be ruled out.
We would advise being selective and suggest preferring companies having prudent management, strong corporate governance, lower debt to equity ratio and sound balance sheet.
Q: What are the key things to watch out for in the coming week?
Since we are mirroring the world markets, global events such as the outcome of the US Fed meeting and any news on the US-China trade tussle will keep markets on the edge. On the domestic front, inflation data and on-going result season will be keenly watched.
Q: What are your top five picks that can be added to a portfolio?
We recommend investing in Britannia Industries, Bharti Airtel, Tech Mahindra, M&M and Dabur India.
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