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COVID-19 impact: Invest for long term to know the true potential of the small and midcaps

The complete shutdown of the business has led to high fixed costs, high working capital, and low liquidity, etc. but one has to identify the value buying which results in high-risk reward as compared to the large caps.

April 11, 2020 / 08:11 AM IST

The complete shutdown of the business has led to high fixed costs, high working capital, and low liquidity, etc. but one has to identify the value buying which results in high-risk reward as compared to the large caps, Gaurav Garg, Head of Research at CapitalVia Global Research - Investment Advisor, said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpt:

Q) It was comparatively a better week for Indian markets. But, what is the way forward?

A) On April 9, the Nifty50 closed with an uptick of 363.16 points or 4.15 percent and on a weekly basis, it surged up by about 12 percent.

The benchmark indices ended with a positive note with an expectation of stimulus package from the government. The number of COVID-19 cases in India is low compare to the other nations like US and European countries like Italy, Spain where the number of deaths is in thousands as compared to the hundreds in India.

Although the government has announced various relief measures to save the economy, investors are still expecting a second stimulus package from the government which might be focused on MSMEs which is the worst hit.

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COVID-19 Vaccine

Frequently Asked Questions

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A vaccine works by mimicking a natural infection. A vaccine not only induces immune response to protect people from any future COVID-19 infection, but also helps quickly build herd immunity to put an end to the pandemic. Herd immunity occurs when a sufficient percentage of a population becomes immune to a disease, making the spread of disease from person to person unlikely. The good news is that SARS-CoV-2 virus has been fairly stable, which increases the viability of a vaccine.

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There are broadly four types of vaccine — one, a vaccine based on the whole virus (this could be either inactivated, or an attenuated [weakened] virus vaccine); two, a non-replicating viral vector vaccine that uses a benign virus as vector that carries the antigen of SARS-CoV; three, nucleic-acid vaccines that have genetic material like DNA and RNA of antigens like spike protein given to a person, helping human cells decode genetic material and produce the vaccine; and four, protein subunit vaccine wherein the recombinant proteins of SARS-COV-2 along with an adjuvant (booster) is given as a vaccine.

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Q) What are the factors which investors should watch out for in the coming week, which is again be truncated one?

A) The measures taken by the government are highly appreciated, especially the decision on lockdown of the entire country for 21 days. Many states in India have already expressed their views on expanding the lockdown until April 30.

While the number of cases in India is now getting steeper and lockdown is the only solution to prevent the widespread of the virus. Going forward, any extension of the lockdown, especially in the hotspot areas, with the objective of containing the virus, might be a positive sign to the market.

On a weekly basis Rupee is making a fresh low due to uncertainty over COVID-19 cases and it difficult to identify the bottom.

Although the market remaining under pressure, the decline in India VIX suggests some consolidation is expected around 9,000 levels. Resistance for Nifty is placed at 9,200 and 9500 levels while support is now placed at 9,000 and 8,700 levels.

Q) Small & Midcaps outperform - is it value buying which is leading to outperformance or the liquidity factors which is not enough in some of these names as compared to large caps?

A) Most of the investors are in the dilemma of whether markets have already bottomed out or would bottom out in the next few months. Frankly speaking, no one would have any idea but due to the sharp fall of the market, many investors would find it attractive to invest in small and mid-cap.

Many believe that the small & mid-cap companies may not survive after this pandemic. The complete shutdown of the business has led to high fixed costs, high working capital, and low liquidity, etc. but one has to identify the value buying which results in high-risk reward as compared to the large caps.

Investors would have to invest for the long term to know the true potential of the small and mid-caps.

Q) One thing which we cannot close our eyes to is ‘recession’ is as well as COVID – 19 outbreak. Both the events are interlinked and will have long-lasting damage to the economies across the world including India. What are your views?

A) The global economy is expected to tip into recession in 2020 as the COVID-19 pandemic has affected global production, supply chains, trade, and tourism.

The reduction in international crude oil prices, if sustained, can improve India’s terms of trade, but these gains are not expected to offset the drag from the shutdown and loss of external demand.

However, domestic growth would depend on the speed with which the outbreak is contained, and the pace at which economic activity returns to normalcy.

Q) Which are the companies that are likely to see a V – shaped recovery after the lockdown?

A) It is expected to see a V-shaped recovery in stocks like Bharat Petroleum Corporation Limited, CEAT Limited, Avenue Supermarts Limited, Havells India Limited, ICICI Bank Limited, Jubilant Foodworks Limited, Mahindra & Mahindra Limited as most of these stocks are trading below their 100 DEMA and 200 DEMA.

Technically, the above-mentioned stocks are indicating reversal patterns in their daily charts. Since these stocks are fundamentally sound and are available at attractive valuations, they are likely to grab investors’ attention in the near future.

Q) Any technical trading ideas which investors can look at for the coming week?

A) Volatility is expected to remain high in the upcoming week as well. However, it can be observed that most of the stocks have recovered significantly in the past few trading sessions.

So, investors should be investing in selective stocks considering the volatility in specific sectors as well as financials of the stocks they are going to invest in.

However, ‘Buy at dip’ would be advised by keeping a close watch on the movement of currency and crude oil prices as well as the movement of international markets.

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.
Kshitij Anand is the Editor Markets at Moneycontrol.

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