It would be pertinent to gauge the economy from managements’ commentary after Q1FY21 numbers, which would better portray the near-term demand trajectory and roadblocks if any, Umesh Mehta, Head of Research, Samco Securities, said in an interview with Moneycontrol’s Kshitij Anand.
Here are edited excerpts from the interview:
Q. Nifty50 reclaimed crucial resistance levels in the week gone by, and much of it could be because of short covering. What led to the rally?
A. The market is currently gripped by the most popular cognitive bias — anchoring as investors are paying heed to the noise of early invention of a vaccine against the novel coronavirus or a drug for COVID-19 treatment, and are expecting faster economic recovery due to the government’s intervention.
Further, a noteworthy historical trend is being observed. There are dozens of companies with zero equity value and penny stocks have moved higher hitting daily circuit filters since the start of April, along with a general rise in the market.
These retail investors are sitting at home during lockdown and driving the prices higher. It is quite likely that they may also have invested in frontline stocks which led to Nifty reclaiming crucial levels this week.
Q. What is your outlook for the coming week? And, important levels to track?
A. The tug of war between bulls and bears has come to a grinding halt. Open interest across all series is muted, delivery volumes are also lower than the previous month and the majority of stocks are at or near their 200-Day EMA.
Hence, markets are expected to remain range-bound unless some dramatic triggers turn the wheel either in the favor of bulls or bears.
Going ahead, it is also expected that volatility will subside and one may look for profit booking at higher levels. The index is hovering around 10,600-10,700 levels which might turn into a crucial resistance. Support for the index is now placed at 10,300.
Q. Small & midcaps have outperformed in the first six months of 2020. Do you see the momentum continuing in the next six months? If yes, what will drive the rally in the broader markets?
A. Anecdotally, it is seen that mean reversion plays its part in the stock market where prices tend to move to the average price over time.
Since, prices of small and midcaps had moved higher fast just like the frontline stocks, it is expected that the fundamentals would not rise that fast and therefore will fall and revert to the average prices once the correction begins in Nifty. Hence, the outperformance in small and midcaps may reverse over time.
Q. IT services major Tata Consultancy Services said its board will meet on July 9 to approve the financial results for June quarter. What do you make of the Q4 results and the expectations from the Q1 results for India Inc.?
A. Deciphering from the majority of India Inc.’s Q4FY20 management commentary, it is believed that the results of Q1FY21 will be a one-off dark quarter and a complete washout.
Hence, there is no point in predicting this quarter. On the other hand, it would be pertinent to gauge the economy from the management’s commentary post Q1FY21 numbers which would better portray the near-term demand trajectory and roadblocks, if any.
Performance post Q1FY21 would be able to reflect the ground reality better and will set the roadmap for the latter half of the year.
Q. Auto sector was back in focus on July 1 after the June numbers. What is your outlook for the auto sector?
A. Rural India is witnessing a faster recovery as compared to urban India in the aftermath of the lockdown.
Auto and two-wheeler companies registered a sharp month-on-month sales increase in June 2020 on the back of pent-up demand and ushering revival in economic activity which led to purchases of four-wheelers and two-wheelers across the country.
Commercial vehicles could not surprise the street with their numbers and it continued to remain muted. However, YoY numbers show better growth for the two-wheelers as opposed to four-wheelers.
Hence, faster recovery is expected in two-wheelers and tractor category compared to four-wheelers. CVs could experience the most pain going ahead.
Q. Gold seems to be making record highs on a daily basis. Well, the yellow metal outperformed equity markets by a wide margin in the first six months — where do you see India Gold heading in the next six months of 2020?
A. Gold is currently trading around Rs 48,000-48,500 levels per 10 grams in India and is expected to climb higher by 10 percent in the near-term.
The rise in gold prices is expected on back of depreciation of rupee along with rise in global demand for real assets.
In addition to this, gold has always been preferred as a hedge against inflation and another investible asset class for diversification which is comparatively risk-free in nature when compared to equities. Hence, investors must allocate a small portion of their portfolio to gold.
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