H1 2020 review: Healthcare, telecom outperform, banks lose the most; what's in store?

Most sectoral indices have suffered losses in the year so far, barring BSE Healthcare, which surged 21 percent, and BSE Telecom, which jumped 17 percent.

Among the sectoral losers, banks, realty and metal lost most, falling 34 percent, 31 percent and 31 percent, respectively. BSE FMCG lost the least, just 1 percent.

Uncertainty looms but hope prevails

As long as the issue of COVID-19 does not come under control, the cloud of uncertainty will continue to loom.

"At the end of the result season and after a number of management commentaries, the crux is that everyone is trying to be hopeful but the cloud of uncertainty still looms. Most industries are still dangling on the hopes of a revival in demand and the lockdown opening completely with free movement of trade, travel, labour and no bottlenecks in supply chains," said Nirali Shah, Senior Research Analyst, Samco Securities.

Markets are facing massive divergence as the macroeconomic situation is completely different from the movement of indices.

Investors are looking for avenues to invest and are inadvertently inching towards the already strong performing large-caps. But analysts are of the view that prices will soon align with the economy and markets will correct.

"It is better to be patient and invest selectively only in companies that have high cash, robust books with minimal to zero debt, high return ratios, strong management and a smooth working capital cycle. Allocate capital in various asset classes to remain diversified," advises Shah.

However, Vinod Nair, Head of Research at Geojit Financial Services believes in terms of business, the second half of the year will be much better.

"If the virus threat reduces, the economy will be opened completely improving the business outlook. Otherwise too, the economy will be gradually opened leading to quarter on quarter rise in business. During the last 6 months, some sectors have not experienced losses given the stability in its type of business, while in the stock market they have outperformed," Nair said.

How are sectors likely to perform

Shah of Samco Securities believes that telecom is comparatively well-placed given that there are mere 3 players and it seems that for now the ARPUs have bottomed out, while pharma will be event-driven.

"There is a lot of potential to capture given the rising need for broadband and data amidst social distancing and other restrictions," Shah said.

"Pharma is expected to be extremely event-driven as any news related to a vaccine or cure will spike up sales. Volatility will be extremely high in the pharma space."

Auto and metals are likely to see some recovery.

"Autos and metals have experienced a lot of pain in the past few years and are expected to witness recovery in growth on a year-on-year basis. Also, as the manufacturing cycle begins both these sectors will experience a pick-up in demand," Shah said.

As far as private banks are concerned, despite the moratorium, they could witness less pain than their public counterparts as they have sufficient liquidity and several banks are in the process of raising excess capital to safeguard their books, Shah said.

This can cushion the pain to a sizeable extent, however, NPA deterioration is still expected.

NBFCs will undergo a re-rating as the pain from the MSME and SME segment will be huge while realty is expected to remain slow as the need for savings will overpower the need for big purchases, Shah said.

Rusmik Oza, Executive Vice President and Head of Fundamental Research at Kotak Securities believes telecom could still continue to outperform because of improved business outlook on the back of rising tariffs.

On the other hand, he sees limited upside in pharma, IT and FMCG as the recent run-up has led their valuations to go closer to the higher end.

From the still beaten down sectors like oil & gas, capital goods, consumer durables and realty, Oza expects oil & gas to outperform meaningfully in the medium-term.

"Capital goods sector will take some time to recovery as orders could be delayed to the second half of this fiscal year. After a quick jump due to pent up demand we expect the consumer durable demand to get impacted due to delay in discretionary spending," Oza said.

"Realty will also take some time to recover because of social distancing and very high ticket spending," Oza added.

Nair of Geojit Financial Services believes pharma, chemicals, FMCG and export-oriented business may emerge as the outperformers while infrastructure, capital goods, consumer durables and auto will be the underperformers.

Jyoti Roy, DVP Equity Strategist, Angel Broking has a positive stance on sectors like agrochemicals, chemicals, FMCG, pharma and telecom.

Roy said select consumer discretionary like auto, especially two-wheelers and tractors, given strong demand in rural India, are also looking attractive.

The analyst expects that sectors like aviation, travel, hotels, retail and real estate are likely to underperform the markets going forward given that they will be adversely impacted for a longer period, given the nature of their business.

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