The market is expecting the Reserve Bank of India (RBI) to maintain its accommodative stance until the economy shows signs of revival.
Rate sensitive stocks and sectors like PSU Banks, Metals and Realty were amongst the best performers in the last one week. We feel such stocks will maintain its buoyancy in the long term as the economy improves, and the cost of funds reduces in the future.
Additionally, the government’s efforts to maintain the fiscal prudence and stimulus measures helped the broader market to maintain positivity. Mid- and Small-caps are doing well, led by better liquidity and in expectation of a revival in the economy.
Today, they are considered as a better play in the market because of the premium valuation of blue-chips, which does not provide them with enough leeway to provide good returns in the short to medium term.
The recent performance of Reliance Industries to the market cap of Rs 10 lakh crore was driven by its solid growth of retail and telecom business. The disruption in the Indian telecom sector and the improvement in tariff rates are going to benefit the company in the long term.
But, after the rally, the valuation is at the upper hand on a long-term basis. We suggest a hold rating on the stock at CMP. The refinery business is under challenge due to lower margin and low crude demand.
On the global front, the outlook for oil and gas is currently weak due to lower demand and prices. But, this can improve if the US-China trade deal and the Brexit deal are done soon, regarding which we are hearing positive developments.
Also, it is anticipated that the usage of high sulphur-based oil will be reduced by replacing the demand for diesel, which is positive for refineries. In India, the additional trigger is the divestment plan of the government which will improve governance and better valuation for the oil and gas sector in the medium term.
Regarding Q2 GDP, the consensus was very wide with expectation in a range of 4.2 percent to 4.9 percent.
The actual was 4.5 percent, and we do not expect the actual performance to impact the market since it has factored the worst in the domestic economy and is expecting a revival in the next two quarters, considering the relief measures announced by the government after the union budget of FY19-20.
Lower interest rates and good monsoon are expected to help the economy. While positive developments in the global arena for the US-China trade deal and the Brexit resolution will provide additional support to the domestic economy in the future.
More than the economic factors, the bigger concern is the supreme valuations of key indices and blue-chips which will impact the market’s momentum.
The market will have to handle transitory pain of shifting allocation from highly-valued stocks which may take some time and add volatility in the short term.
The best strategy is to shift from premium scripts to value, cyclical and quality mid-small caps stocks. We feel that rising foreign inflows and confidence that government will address the fiscal gaps through divestment will maintain the buoyancy of the market in the long-term.
The author is Head of Research at Geojit Financial Services.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.