We have to be theme oriented, basically investing in sectors and stocks for which the outlook is stable in this situation.
This week, the Indian market became sceptical about benefits from the Rs 20 lakh crore package announced by the government. And the global market, which was doing well considering the re-opening of the economy and news about vaccine developments, started to underperform.
The domestic stimulus will help India manage nutrition, minimum income and jobs - especially for the sections below the pyramid, and liquidity of financial market, but it will not bring growth to the corporate world.
In between the week, we tried to catch-up with the rest of the world after factoring the merits and demerits of the fiscal and monetary measures. Then we had a surprise press conference by the Reserve Bank of India (RBI) announcing to cut interest rate by 40 bps and extend moratorium for another three months to August.
Usually, such a meeting has a positive reaction for the market. This time the difference is that, the market is unconvinced and contemplating about the likely factor foresighted by the financial regulator which may impact the market in the future.
The banking system was learning to stabilise after being infused with Rs 8 lakh crore monetary and additional measures announced by the government for equity, debt and guarantees, just in the last two months. The statement may provide a feeble view about the financial market since it has no provision for growth and inflation.
It is also the first time we are hearing words like 'unknown future' and 'uncertainty' in the governor's speech and RBI statement, which will not provide any ease to the market. The extension of the moratorium also states that the risk of the economy is still high and may not come back to normality soon. It will impact the profitability, cashflow and willingness of people to repay leading to a cascading cycle.
Having said all, this is a positive development which will help to recover the economy faster and better in the long cycle when the economy comes out of the clutch of COVID-19.
I will like to share with you an important query we got from a retail investor this week on considering auto sector for investment since prices seem attractive. Well, we feel that auto sector is a contra opportunity given high possibility to gain in the future as demand comes back.
Today, the prices are cheap and the market has a negative view on the sector and the performance is likely to be negative in the short to medium-term till economy and volumes improve. We have to be careful and stock specific. Look at companies having stable financials with ability to manage such a fall in demand without deteriorating its financial strength. One can have it as a small portion of their portfolio and increase it in a staggered manner, for example, Maruti Suzuki, Escorts and Hero MotoCorp.
We have to be theme oriented, basically investing in sectors and stocks for which the outlook is stable in this situation. The areas to be followed are FMCG, Pharma, Telecom, Agri input-output business and chemicals which should have highest portion in the equity portfolio. Private banks and IT are also attractive today for long-term gains with staggered investing.
The author is Head of Research at Geojit Financial Services.
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