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Market sees sharp divergence across sectors in 2020; how does the road ahead look?

The year witnessed an unprecedented disrupting force COVID-19 which caused strong volatility in the market and made the economic outlook highly unpredictability.

October 30, 2020 / 12:43 PM IST

The calendar year 2020 (CY20) so far has seen sharp divergences across and within sectors and companies, said a report from the brokerage firm Motilal Oswal Financial Services.

"The defining feature of equity market performance in CY20, so far, has been sharp divergences across and within sectors and companies. This highlights the differentiated impact of COVID on various sectors," said the brokerage firm, in a report on October 29.

The year witnessed an unprecedented disrupting force COVID-19 which caused strong volatility in the market and made the economic outlook highly unpredictability. The market still appears torn between pessimism and optimism.

The essentials, such as healthcare, staples and technology (online/e-commerce) businesses were impacted far lesser than the financials, cyclical (metals, infrastructure, oil and gas) and discretionaries (travel, aviation, restaurants, hotels, etc.).

"In fact, for healthcare and technology sectors, the pandemic acted as a tailwind, which can be gauged from their sharp outperformance in CY20. On the contrary, financials, the preferred sector of the market over the last few years, bore the maximum brunt of COVID, which resulted in wiping out of the Bank Nifty’s entire outperformance of four years over the Nifty (December 2015-December 2019) in just six months of FY21," said Motilal Oswal said.

As the market sentiment had been fragile for the most part of the year so far, investors chose to stick to quality names to avoid suffering losses.

"investors chose to play safe, betting on proven companies even at high valuations rather than betting on others that are temporarily impacted by these events. All these led to the wide difference in performance of components of Nifty in CY2020," said Deepak Jasani, Head of Retail Research, HDFC Securities.

After two consecutive years (CY18-19) of sharp underperformance, the NSE Midcap 100 and NSE Smallcap 100 indices have outperformed the Nifty in year-to-date CY20.

The outperformance of mid and small-caps are on expected lines after the Securities and Exchange Board of India (SEBI) announced the new norms for multi-cap funds.

Chart - Motilal Oswal

The road ahead

While IT and pharma may continue to see buying interest from investors, the financials are expected to start looking up due to the fact that some of them have reported a decent set of numbers for the September quarter.

Also, even though COVID-19 remains a reality, signs of gradual improvement in the economy and the government's push to reforms and infra initiatives may also tilt investors' focus to sectors such as construction, cement and metals.

Prime Minister Narendra Modi in his latest interview with a business daily assured that economic revival is on track, and identified 5 indicators to support the thesis.

Five indicators include agriculture which has shown record production, foreign direct inflows (FDI) which topped $35 billion in the April-August period, automobile, manufacturing, as well as EPFO.

“Our thematic approach has seen consistent results and we continue to believe in our structural themes of IT, digital, pharmaceuticals, consumer staples, rural, chemicals, and automobiles,” Neeraj Chadawar, Quantitative Equity Research at Axis Securities told Moneycontrol.

Also, when normalcy returns and investors start looking at undervalued stocks, the divergence in sectors may get narrowed.

"At some point when things settle down, this trend could reverse to some extent. However, a lot depends on how the bets of shifting out of favoured stocks to other undervalued stocks plays out in the first 1-2 quarters. In case this does not play out well, there will be return to earlier times with higher vigour," said Jasani.

Jasani pointed out that IT and healthcare have done well due to the fact that COVID-19 created new opportunities for these sectors globally.

Financials, Jasani said, are still reeling under the unknown impact of stressed assets, a better handle of which will be known after the moratorium ends and restructuring of assets gets over.

"There is this hanging sword for financials which are still awaiting growth momentum to pick up in India and the effect of COVID-19 will be eliminated as soon as possible. These are triggers whose timing is not yet clear," Jasani said.

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Nishant Kumar
first published: Oct 30, 2020 12:43 pm