We believe that sector allocation and stock selection will be the key to generate alpha going forward.
Despite the fact that the COVID-19 virus is likely to stay with us for some period of time, we believe that the economy should normalise by the end of FY21, Vaibhav Agrawal, SVP at Angel Broking said in an interview to Moneycontrol's Sunil Shankar Matkar.
Q: The market has rallied 38 percent from March lows, and 18 percent in the last one month. Do you think it is gradually making itself ready for a significant rally ahead?
Markets have staged a smart recovery since April with Nifty rallying almost 38 percent from its lows of 7,511 on the March 24th. This has been on the back of liquidity driven global risk on rally as the US Federal Reserve pumped in record $3 trillion into the economy through its quantitative easing program since March.
Market sentiment was also helped by the Rs 21-lakh-crore stimulus package by the government which along with significant relaxations of restrictions from June has resulted in increase in economic activities. The recovery is expected to further accelerate in July if more restrictions are eased by the Government in the second phase of the unlocking.
While the COVID-19 crisis has had an adverse impact on the urban economy the rural economy has been doing well given a good rabi season and limited impact of the COVID-19 crisis. Further a good monsoon will be a shot in the arm for agriculture and the rural economy. We believe that strong rural growth coupled with opening up of the economy will lead to a gradual economic recovery from here on.
Though India has managed to contain the virus so far by enforcing one of the strictest lockdown globally there has been an increase of new cases which is coinciding with the opening up of the economy which is a key risk to the current rally.
Q: The rally we have seen was not only restricted to largecaps - even midcaps and smallcaps participated. Does it mean that the worst is behind now or is it just a catch-up with largecaps?
Midcaps have been in a correction since January 2018 after hitting an all-time high of 21,840. The Nifty Midcap 100 index is still trading around 30 percent below its all-time highs of January 2018 as compared to the Nifty which is around 7 percent below its January 2018 levels.
The Midcap index is also trading at a discount of 15-17 percent to the Nifty as compared to a premium of over 20 percent at its peak in January 2018. Given that the economy is on a mend, we are seeing increased investor interest in midcaps especially high quality beaten down names where valuations have become attractive.
However, we would recommend investors to be selective and stick only to quality names in the midcap space as of now.
Q: What should be one's strategy now given the market rallied 38 percent from March lows and is still 20 percent away from its record high, and why?
We have been seeing a more broad-based rally post announcement of Unlock 1.0 by the government with beaten down sectors like Auto, banking, construction, consumer goods, etc. also participating in the rally. We expect the trend to continue for now given global risk on environment and improvement in underlying economy.
While proactive action by Governments and central banks globally has prevented the situation from deteriorating significantly, it is unlikely that the recovery will be a V shaped one and it may take some time for the global economy to recover to its pre-COVID levels. Therefore while we remain positive on the markets from a longer term perspective we feel that investors should be judicious in their stock selection from here on post the rally and should focus on companies with high quality business franchises which have strong revenue visibility going forward.
Q: Which sectors should one start adding to their portfolio and which ones to ignore completely now, especially after COVID crisis?
We believe that sector allocation and stock selection will be the key to generate alpha going forward. While we continue to maintain our positive stance on sectors like agrochemicals, chemicals, FMCG, pharma and telecom, we have also turned positive on select consumer discretionary like auto, especially two wheelers and tractors given strong demand in rural India. One can also selectively look at some of the very high quality franchises in the BFSI space given beaten down valuations though one should steer clear of the weaker names.
Sectors like aviation, travel, hotels, retail and real estate are likely to be adversely impacted for a longer period, given the nature of their business. While stocks in these sectors have corrected significantly and may offer value to long term investors near to medium term outlook may not be very positive for them and therefore we are avoiding these sectors as of now. Even if one were to buy into these sectors we will recommend sticking to market leaders with strong balance sheet who will be able to survive even if demand is adversely impacted for a prolonged period of time.
Q: Fitch Ratings recently stated that the government could be thinking of another fiscal package to further support the economy. Do you think so, and what could be those actual measures should the government consider to revive the economy faster and support sectors?
There is a need for the Government to come out with another round of fiscal stimulus given that cash spending by the Government is the need of the hour. While the stimulus package announced so far by the Government may seem large at Rs 21 lakh crore, actual fiscal spending was significantly lower at Rs 2 lakh crore or around 1.0 percent of GDP. Given significant job losses, especially in the informal sector, the Government will have to resort to additional fiscal spending either in the form of cash transfers or increased outlays for social schemes like MGNREGA in order to make up for the income shortfall. However given the lack of fiscal space additional stimulus may not be very large and could be similar in size to the previous one at around 1 percent of GDP.
Q: Do you really expect the economy to turn stronger in FY22 given the current scenario, why?
Despite the fact that the COVID-19 virus is likely to stay with us for some period of time we believe that the economy should normalize by the end of FY21. Therefore growth is expected to be much stronger in FY22 driven by lower interest rates, pent up demand and low base effect of FY21. Fitch ratings in its latest outlook expect the Indian economy to grow by 9.5 percent in FY22 after contracting by 5 percent in FY2021.
Q: Banking & financials segment, which is the backbone of economy, has witnessed strong rally so far. So do you think that the bull run has begun despite the high risk of virus infections. And will this segment be at forefront in market recovery, why?
The Banking and NBFC sector has been amongst the worst performing sector since the beginning of the COVID-19 crisis as markets are expecting an increase in NPAs over the next 6-12 months. The banking sector has significantly underperformed the Nifty since the beginning of the crisis and had corrected by around 50 percent from peak to trough. Even on the way up the Bank Nifty has rallied by around 34 percent as compared to Nifty's 38 percent rally. The sector was just coming out of a prolonged NPA cycle and the COVID-19 outbreak will further delay the recovery cycle for the sector. We expect an increase in NPAs over the next 2-3 quarters which will push out recovery for the sector by another 2-3 quarters.
Therefore while the banking sector could outperform the Nifty in the near term given beaten down valuations, it will be vulnerable to any risk off environment. Therefore one needs to be very selective in the BFSI space and we would recommend sticking to larger banks and financial institutions with high quality franchises and strong balance sheets as they are expected to come out of the crisis stronger while weaker lenders are expected to fall behind.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.