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DAILY VOICE | Third Covid wave biggest test for Indian market, says Amit Shah of BNP Paribas

We do not think the domestic economy-related stocks will materially outperform as the second lockdown was very methodical with select sectors like travel, tourism, restaurants, and consumers were severely impacted, says Shah.

July 01, 2021 / 09:02 AM IST

Amit Shah, Head of India Equity Research, BNP Paribas, does not see any material concerns for the market barring the third wave of coronavirus if it turns out to be as severe as the second wave.

Shah has over 15 years of experience in covering markets as well as Thailand and Malaysian Oil & Gas companies. He took over as head of India research in March 2020. Prior to joining BNP Paribas, he worked at Thomas Weisel Partners covering US Oil & Gas.

In an interview with Moneycontrol's Kshitij Anand, Shah said that financials as a whole should lead the next leg of rally, and he is bullish on private sector banks, select NBFCs and insurance companies. Edited excerpts:

Q) The first six months of 2021 were exciting at least from a stock market's point of view where a rising tide of liquidity took all boats higher. Do you think we will see a repeat of 1H2021 in the second half as well?

A) We do not see any material concerns for the market barring the third Covid wave if it mimics the severity of the second wave. Indian corporates have reduced debt at a record pace and balance sheets look much better than they were before the pandemic.


1QFY22 results should see some weakness due to the impact of lockdowns due to the second wave, however, the markets should likely discount the weakness as long as the management outlook for the rest of FY22 and for FY23 remains strong.

Q) Retail investors emerged as a big theme and supported Indian markets in the first six months of 2021 when FIIs turned net sellers. MF investing as well as investment in direct equities have all picked up. Do you think we have just scratched the surface with respect to the financialisation of household savings?

A) Rising retail investor participation has been a consistent theme since the beginning of the pandemic and drove the early recovery in the market in 2020.

Retail investors continue to be invested in Indian equities and since 2021, we have seen higher inflows into mutual funds, after local mutual funds being net sellers for a large part of 2020.

As per recent data from NSE, retail investors (including HNI) now form almost 45% of the trading turnover. We believe as life comes back to normal and the economy recovers, we might see retail investors book profits so as to deploy the gains towards discretionary purchases - travel and tourism among others.

But, we tend to agree that, broadly, the retail investor is here to stay as investment awareness has increased in recent years.

We can expect retail investments to become incrementally meaningful as a percentage of total investments in the market.

Q) Which sectors are likely to lead the next leg of rally on D-Street?

A) We believe financials as a whole should lead the next leg of the rally. We continue to like private sector banks, select NBFCs, and insurance companies. Financials have underperformed the broader market since the market recovery in 2020.

With loan growth remaining strong and asset quality concerns easing, we believe financials as space should garner investor interest.

We also like the Autos space but we could see some margin pressure in the near term on account of higher commodity costs. IT should be another consistent performer, especially as global IT spends continue to increase.

Q) What is your views on the domestic economy-related stocks as the economy is on the revival path amid unlock announced by various state governments?

A) We believe reopening plays will continue to be the flavor of choice in the near term. However, we do not think the domestic economy-related stocks will materially out-perform as the second lockdown was very methodical with select sectors like travel, tourism, restaurants, and consumer retail being the worst impacted.

These sectors should see a strong recovery and hence can be late cycle beneficiaries.

Q) Do you think there is further room for rerating in small & midcaps?

A) While both the small and midcap indices are trading above the 10-year mean of their respective 1-year forward PE multiples (based on Bloomberg consensus estimates), we believe quality mid-caps with solid business models will continue to perform well.

Also, as long as domestic flows continue, we believe mid and small-cap indices will continue to perform well. The Nifty Mid cap index trades at 23.5x twelve-month forward earnings vs the ten year historical average of 19.5x.

Similarly, the smallcap index trades at 25.4x compared to its historical average of 18.1x. While this hints at over-bought levels, as long as earnings estimate upgrades continue and the economic growth outlook is supportive, prudent selection of small and mid-cap stocks should offer some more upside.

Also, low FD rates, lack of spending avenues, and a dormant real estate market have ensured that money continues to flow into equities as an asset class.

Q) What should be the strategy of investors for the next six months – go overweight on largecaps, and underweight on Midcap and smallcaps?

A) Over the next six months, we prefer large caps and quality mid and smallcap stocks. We believe sector rotation will be the theme and within that, it will remain a stock pickers’ market as the broader market should remain rangebound.

If inflation continues to remain above the RBI’s comfort zone and if there are any talks of rate hikes, large caps will outperform small and midcaps, in our view.

Q) Most analysts are complaining about Nifty valuations which are above long-term averages. What are your views?

A) Nifty, on a twelve-month forward basis, trades at 21.3x vs its ten-year historical average of 18.05x (based on Bloomberg consensus estimates).

So the markets do look expensive but when viewed in terms of the global liquidity rush as well as the potential for strong earnings growth, especially in FY23, we think the current optimism seems justified.

Near term, as mentioned earlier, performance could be range-bound as the market looks for cues both from global factors like the Fed talk of tapering and inflation concerns in India as well as globally.

Given we see some emerging markets like Mexico raising rates and active discussions on rate hikes in other countries, India remains one of the few emerging markets wherein there are continued talks of an accommodative monetary policy.

Disclaimer: The views and investment tips expressed by investment experts on are his own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.
Kshitij Anand is the Editor Markets at Moneycontrol.

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