We overall assume FY21 expected earnings will be impacted by the lockdown in first/second quarter and earnings recovery may be visible only from the second half of FY21.
Long-term investors can have exposure of up to 20-25 percent in few promising quality mid & small cap stocks and balance 75-80 percent in leading quality frontline largecaps. We advise investors to focus on companies that would manage and navigate the COVID downturn and emerge stronger going forward," Prashanth Tapse, AVP Research at Mehta Equities said in an interview to Moneycontrol's Sunil Shankar Matkar.
Q: The market picked up in last one month. Do you expect the rally to continue?
Liquidity continued to drive Indian equities in tandem with global markets. The global rally was supported and fuelled by the anticipation of more stimulus measures such as that announced by ECB helping revival economy. Domestic Banking/NBFC stocks have been gaining momentum for the past two weeks as we see banks are currently more confident on the borrowers' cash flows as lockdown has been relaxed and white-collar job losses have been limited.
Nevertheless, the immediate outlook is uncertain and volatile with economy opening up slowly and businesses seeing traction with people moving out but social distancing norms and a slower demand pickup is faced with difficult headwinds. After analysing at Q4 results and managements commentary confirms that the economy is moving slower than anticipated. But it seems like more businesses are dealing with the coronavirus and markets are learning to live with it.
We expect volatility is coming ahead. The COVID-19 infections are seen rising dramatically. That's quite obvious as investors have to wrestle with rising daily rates of new US and India's coronavirus cases. Extension of lockdowns quite likely. Amidst this backdrop, fiscal deficit situation could skyrocket further on backdrop of pandemic. Digging deeper, revival of demand is going to be the biggest problem. Economic activities may not pick up in a scenario where consumer demand is low.
Long story short, Dalal Street's recovery meets virus roadblock. Nifty will be out of woods only above 10,601.
Now, let's take a look at other key catalysts for this week which will keep markets busy:>> S&P Global Rating in a report has said that "India's economy is in deep trouble. Difficulties in containing the virus, an anaemic policy response, and underlying vulnerabilities, especially across the financial sector, are leading us to expect growth to fall by 5 percent this fiscal year before rebounding in 2021."
>> There could be volatility amidst India-China border stand-off.
>> Focus will be also on United States-China trade talks.
>> The street will also closely eye arrival of monsoon. Timely arrival of monsoon is critical for agricultural production.
>> Commanding attention would be June Auto sales which will trickle in this week on 1st of July 2020.
>> The data on fiscal deficit and infrastructure output for May will be released on June 30. Current account numbers for March quarter of FY20 will also be announced on same day.
Technically, from a chartist standpoint, some serious consolidation on cards as the technical landscape remains quite positive after the benchmark gained from recent lows, indicating the worst is gone — at least with intraweek perspective. So, technically, the most watched hurdles on Nifty at 10,601 mark. Intraweek supports for Nifty is at 9,845 and then major supports at 9,383 mark.
Q: Where should investors put money right now? Does the rally in midcap and smallcap indicate that we are on recovery path now?
Looking at the current economic re-opening scenario, we believe right asset allocation helped investors to stay calm during coronavirus meltdown and in uncertain times like the current one, where the volatility increases, and the swings would be big. So one should keep in mind that volatility is going to remain for some more time as we are not yet out of the corona woods.
We are advising traders/investors to focus on phase-wise investing strategy, as it is very difficult to gauge when markets will stand at bottom or top levels but given the favourable risk-reward situation investors need to take a long-term vision and keep on accumulating high quality stocks at every such declines. The threat of earnings downgrades, lower GDP numbers, lower GST and IIP data will be a big hangover on the market in the coming few months which will keep the equity market under pressure and these pressures can open up opportunities to accumulate quality stocks in portfolio.
We overall assume FY21 expected earnings will be impacted by the lockdown in first/second quarter and earnings recovery may be visible only from the second half of FY21. However, we believe that markets would focus on the long-term sustainable earnings of quality companies and not on the 1-2-quarter disruption due to COVID.
Mid & smallcaps shined a lot in last 2 weeks mainly driven by liquidity, but we remain cautious on mid & smallcap space as fundamentals are weak and valuations seem expensive as on date. However, long term investors should not get carried away by such instant short term outperformance and can have exposure upto 20-25 percent in few promising quality mid & small cap stocks and balance 75-80 percent in leading quality frontline largecaps. We advise investors to focus on companies which would manage and navigate the COVID downturn and emerge stronger going forward.
Q: Do you think the rally will continue in pharma stocks?Wwhat are your top bets?
Medicine is the need of the hours to fight the world against COVID-19 and Pharma as a sector has done very well since lows of March - Nifty Pharma Index is up more than 55 percent from March 2020 lows versus Nifty returns of more than 35 percent from lows making the sector a white knight for investors.
Current environment is more favourable for the Pharma sector which was ignored and undervalued sector with 4 years of underperformance since 2015. We have been bullish on pharma space since the virus kicked in to this world and we continue to remain optimistic on the Pharma space despite the recent run-up but the rally from here would be very selective, nevertheless any correction going forward shall be a good opportunity to go long on frontline counters like Aurobindo, Sun Pharma, Biocon, Lupin and Cipla. We also like Granules India and Sequent Scientific.
Q: Technology sector traded almost in line with benchmark indices, rising 35 percent from March lows while declined only 2 percent in 1HCY20 against double digit fall in benchmark indices. So what is driving the rally in technology?
Technology is a sector which turned well in the pandemic scenario as the whole world is running on technology platform. Industry data says spends on digital transformation will increase, offset by lesser spend on running operations and the cost saved, which will be invested back into digital transformation of business going forward. Reacting to the development, most IT stocks traded in the green.
Point to note that majority of the company did not face significant cancellations or pricing pressure.
Work from Home (WFH) transition was smooth and had very little revenue impact. Industry leader Accenture's stronger-than-expected results/commentary sets an encouraging tone for the impending earnings season for Indian IT. Hence, we continue to remain optimistic on Infosys & TCS with decent upside in line with index performance.
Even globally high-flying technology companies outshined the market during the pandemic keeping index higher.
While the risk comes in as US President Donald Trump had issued a proclamation to suspend issuing of H-1B visas and other foreign work visas for the rest of the year. The proclamation that comes into effect on June 24, is expected to impact a large number of Indian IT professionals and several American and Indian companies who were issued H-1B visas by the US government for the fiscal year 2021 beginning October 1. As a result, IT stocks remained under pressure.
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