Earnings expected to be soft over the next two quarters due to forced lockdown but should recover in the second half as the unlocking of the economy will give some fillip to recovery.
As per the CANSLIM methodology, sectors where earnings should relatively hold up include pharma, FMCG and speciality chemicals, Mayuresh Joshi, Head- Equity Research, William O'Neil India, tells Moneycontrol’s Kshitij Anand in an interview. Edited excerpts:Q) With the fundamentals and the market heading in different directions, what is your take on markets?
A) The economic and financial deleveraging expected to be caused by the pandemic has been largely gestated by the markets and the same has been reflected by the downgrades in global GDP and individual economies as well.
However, GDP is expected to bounce back significantly in the next financial year and as markets are a discounting mechanism for events that are expected to unfold over the next four-six quarters, the fall took the expected economic issues in its stride.
To tide over the probabilities of this economic fallout, central bankers and governments across the globe have infused tremendous amounts of liquidity, which has led to asset price inflation across the globe.
The worries about the pandemic and cases rising across the globe, the trials of the vaccines and the various stages that they are in and other macro developments shall lead to huge bouts of volatility and the markets need to adjust for the same in the next few weeks and months.
So, liquidity shall act as a support for the markets but they shall also be reacting to all these developments that take place on a macro and micro basis.
Also, the recovery in the markets has been stark compared to the previous crisis periods and the expectation is that the markets shall gyrate in a very large and broad range, purely based on the fact that corporate earnings downgrades shall cap any substantial rerating for the markets as a whole.Q) How will you describe the first six months of 2020 in one word?
A) Gruesome. The economic losses can be recovered over a period of time but human losses cannot.Q) Where do you see markets, earnings heading in the next six months? Your outlook for the markets.
A) Earnings form the base for how the market positioning shall be. Our methodology at William O’Neil lays great emphasis on the quality, sustainability, and consistency of earnings.
Consensus suggests that earnings shall de-grow in higher single digits in the first half of this financial year, with recovery expected in the second half and substantial improvement seen in the coming financial year.
Everyone largely expects Q1 to be a washout, Q2 to be soft and recovery to start from Q3 onwards. Albeit, if the estimates drawn by a consensus of analysts de-grows quite substantially than the higher single-digit de-growth as estimated, the market rerating might come under pressure.
How the demand outlook plays out and how individual companies can address their supply constraints shall be factors on how earnings recovery takes place for individual companies and the overall index.
So earnings expected to be soft over the next two quarters due to forced lockdown but expected to recover in the second half as the unlocking and restart of economic activities locally and globally shall give some fillip to expected earnings recovery.Q) In the first six months of 2020 we saw plenty of buybacks and delisting of companies. What is the rationale behind it and do you think it will continue in the next six months?
A) Yes, that seemed to be the trend. Again the perspective for deciding on buybacks is broadly based on the premise that they assist in consolidating promoter ownership, in times of market downturns it acts as a means of increasing equity value, acts as a signal to the market that the stock is undervalued as well as key financial ratios are pumped up and also in some cases prevents any hostile takeovers.
Delisting and the rationale behind it depend upon varied reasons, whether the promoters wish to restructure their businesses, is there a case due to its acquisition or if the promoters wish to raise their stake above the mandatory limits.
So, it depends on how each company is placed with the above two aspects but the trend will selectively continue as businesses, locally and globally, will exhibit inherent signs of consolidation.
Q) Which sectors are likely to turn out to be the leaders and the laggards in the next six months?
A) As per our CANSLIM methodology, sectors where earnings should relatively hold up include Pharma, FMCG and speciality chemicals, and are likely to turn leaders in the next six months.Q) Many new investors joined the party on D-Street in the first six months. What are the tips you will give them to keep them afloat amid volatility?
A) For any new investor, the journey of compounding your wealth comes through systematic investing made with a medium/long-term horizon, defining the risk/reward perspective and objectively being pragmatic on the returns that can be generated, the patience that needs to be maintained to ride through different phases of the market volatility and last but not the least, deciding the right quantum of investments to be made over a period of time to ensure reasonable ROI from the investments made.
So, the objective of being a millionaire is in the right spirit but do we follow what is needed to achieve those targets and specifically reiterating the point that markets reflect the economic reality locally and globally which plays out over years in consideration and therefore keeping an eye on the larger picture is paramount. The next six months shall be volatile and therefore, sticking with investment objectives on hand shall help to tide over any short-term pain that the markets can or shall witness.Q) Gold hit a fresh high in the week gone by. Do you think it will outperform equities in 2020? What is your outlook on the yellow metal?
A) Gold prices have gone through the roof. As an asset class, it does provide a hedge against inflation and as a safe haven when riskier asset classes like equities turn volatile. Diversification of asset allocation is key but your financial adviser will be in a better position to assist you in this as we do not track this asset class closely.
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