Most corporates don't believe that recovery is likely before the second half of FY21, and that is what they are betting on. Hence, investors need to be cautious at this point of time given the pullback we have seen in last few weeks, said Nilesh Shah, Founder and Chief Executive Officer of Envision Capital in an interview to CNBC-TV18.
The market has rallied 12 percent in the last couple of weeks on the optimism that economies globally are reopening which could minimise the impact of lockdown seen on earnings and economic growth. In addition, FIIs also poured in money which lifted sentiment.
The broader markets also participated in the rally with midcap and smallcap indices showing similar returns as frontliners. But in the last few session, some profit-booking has been witnessed
Nilesh Shah said, "The June quarter, as well as September quarter numbers, are definitely going to see a sharp dip for most companies across the board. And to that extent, this could be one the reason for the market to peak out or not advance further from current levels. One essentially has to be extremely cautious at this kind of levels and wait for some kind of correction or retracement for buying the favoured stocks."
March Lows Unlikely
He assured investors that the market is very unlikely to see March lows again. "Given the rally, we have already had and we are now at 10,000 already, it looks very unlikely that we can go back to 7,500 or break it 7,500 decisively. I think we can now say lows are in place. It is quite possible that may be some sectors where there is excessive pain or there are some companies where they do extremely badly over the course of a couple of quarters which may make fresh lows."
He feels the market is beginning to see strong leadership coming in from some other sectors that could neutralise the effect of any downward move at the index level by the banking sector which continues to be under pressure and will remain under pressure going forward.
The only concern for the market going forward is the second wave of the virus which could lead another round of lockdown. "But these things are entirely unpredictable right now. It would be premature to bet on that kind of scenario."
Sectors to Bet On
On building a post-COVID portfolio, Nilesh Shah said the best way to navigate through this market would be to pretty much ignore what is going to happen in FY21 and see whether individual companies will be able to come back to FY20 levels in FY22 on the basis of financial and operational performance.
He feels FY21 has pretty much been given a pass in terms of outlook. Hence, he advised one can look for pockets of strength where the demand will come back or still continue to be resilient.
In financials, Envision Capital still continues to like general insurance, life insurance, health insurance. "We like that space significantly. We think that will continue to be a very strong performer."
The investment firm also bets on strong consumer businesses line kitchen appliances, home appliances which are going to do extremely well. "Also pockets of health and wellness and personal care segment are going to be pretty strong," he said.
He believes that over the next few months, technology stocks will bounce back sharply as some of the tier-2 names are looking extremely attractive.
"I think demand is going to be relatively strong, the US economy should be fine, spending on technology will not just to continue and stay but also maybe even grow going forward," he said.
Midcaps at Attractive Valuations
Despite rally in the broader markets, majority of midcaps and smallcaps are 50 percent off their highs seen in 2017-18. Most analysts feel valuations are attractive in the space but one has to stick to quality names.
Nilesh Shah also clearly believes that valuations now are far more attractive in the midcap space versus the largecap space.
"In the largecap space, everybody has been flocking to over the last couple of years. But in the midcaps space, there has been severe price damage. So, be it consumer appliances, health wellness, these are some of the pockets where the valuations have turned attractive. Balance sheets are pretty much light, there is no debt, have tremendous amount of cash, PE multiples are significantly lower than what we had seen in 2018 or in the start of this year," he explained.
Hence he feels that is really a very attractive place to be in and over the next few years, Envision is going to see a strong resurgence in pockets of excellence in midcaps. "We are going to see a tremendous amount of wealth creation in that space happening over the next few years. Issues around COVID are behind now."
NBFC a Clear Avoid
NBFC space has seen a sharp sell-off when the market bottomed out in March.
According to Nilesh Shah, the NBFC space should be avoided.
"I think there are structural challenges with respect to models of NBFCs. Of course, there are a couple of NBFCs which are reasonably well capitalised and they will not face challenges on the liability side. I still think in the short term, they will continue to see challenges in terms of asset quality, collections, this whole moratorium thing and what final impact to have in terms of collections. Hence, one has to basically watch out for that. That will remain a challenge for the next two-three quarters or maybe most part of this financial year," he reasoned.
According to him, NBFCs may be a nice trading or tactical bets but purely from a structural investment opportunity, NBFCs should be avoided.
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