Pharma is one sector that has been consolidating for some weeks and it is likely to show strength as a defensive play when markets witness selling pressure, says Umesh Mehta of Samco Group.
The SEBI’s new norms for multi-cap funds have injected steroids in the small and mid-cap categories as it mandates that these funds must invest at least 25 percent equity each in large, mid and small-cap stocks. This mandate will create overall pressure on the Nifty50 stocks, Umesh Mehta, Head of Research at Samco Group, says in an interview to Moneycontrol's Kshitij Anand. Edited excerpts:
Q: A volatile week for Indian markets as the Nifty retested support at 11,200 and then bounced back. What led to the price action on D-Street in the week gone by?
The confidence of the bulls got shattered at the beginning of the week when tech-heavy US companies crashed rattling the whole financial markets. Nasdaq's crash doesn't look like a normal correction but a sign of caution to everyone as a bigger downward spiral could be unfolding after sky-high valuations hysteria.
However, 11,180-11,200 is a strong support zone to break and the Nifty, too, continued to remain afloat especially because of the heavyweight Reliance Industries, which is continuing to rise on expectations of fund-raising in their retail arm from foreign investors. This led to mixed emotions on D-street—caution due to Nasdaq and little optimism due to Reliance's likely second wave of fund raising.
Q: What is your call on markets for the coming week? Which are the important technical levels that one can track?
The Nifty50 traded in a narrow range this week post a Bearish Engulfing pattern the week prior. The benchmark index is still trading in an overbought zone on a weekly time frame and it could retest the lower end of the channel drawn from March lows on a weekly chart. Immediate support and resistances are now placed at 11,180 and 11,590, respectively, and traders should maintain a cautious stance with sell on rally strategy and not buy on decline in general.
Q: A mixed performance was seen from the small and midcap space in the week gone by. Smallcap stocks got some momentum going while midcaps recorded some profit-taking. What is your view on the broader markets?
Mid and small-caps had undergone a tremendous amount of correction in the past year or two but investors saw them at cheap valuations and entered these stocks during the pandemic. Now SEBI has injected steroids in this category of small and midcap shares by mandating 25 percent proportion each in large, mid and smallcap in the multi-cap fund categories. It is estimated that some Rs 30,000 crore might move from large to small and mid caps which will further fuel a rally in them.
This mandate will create overall pressure in Nifty50 stocks and therefore the frontline indices will underperform the mid and small-cap indices. Such changes in apple cart beginning the next calendar year will impact returns in the medium-term for all investors category at large.
Q: Sectorally, action was seen in energy, oil as IT index while on the downside, telecom and realty took a hit. What led to the price action on different sectors?
A sector rotation kind of scenario is panning out in Indian markets. However, this week's sectoral movement can be attributed to the strengthening macros. The Indian rupee continues to appreciate compared to the US dollar since the past few weeks and IT was consolidating at that time. But most of this has been factored in which caused IT to experience a brief pullback and now again the rally has begun. Energy and oil, too, have gained due to the continuous decline in crude prices from $46/barrel to sub-40 levels. Telecom and realty were in focus the previous few weeks and hence there was some profit-booking in that space too.
Q: Any trading ideas for the next three-four weeks?
Pharma is one sector that has been consolidating for some weeks and it is likely to show strength as a defensive play when markets witness selling pressure. With the ongoing research for COVID-19 and a number of vaccines in the trial phase, pharma could soon begin its upmove. Given the renewed support from various governments, quicker USFDA approvals and stable pricing, investors should look for strong bets in the API and generic drugs space from a long-term perspective.
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