Our Top Value Picks with 12-18 month investment horizon are: Bharti Airtel, ICICI Bank, Tata Consumer, Bajaj Finserv, and Hero MotoCorp.
This is not the first time the equity markets have witnessed sharp correction and it would not be the last time. Crisis-driven weakness and volatility is an opportunity to invest in the equity market for handsome returns over the next few years. This time is no different, Gaurav Dua, SVP, Head - Capital Market Strategy & Investments, Sharekhan by BNP Paribas, said in an interview with Moneycontrol’s Kshitij Anand.Edited excerpt:
Q) IMF global outlook is slightly worrying but is not something that is not known to markets. We saw some knee-jerk reaction in equities across the globe, and India was no exception amid rising cases of COVID-19. Do you think these factors would cap the upside for Indian markets?
A) Corona pandemic has serious consequences for Indian as well as the global economy. IMF and other reported institutions estimate contraction of 3-5 percent in the global economy in the year 2020.
However, the policy response by central bankers and government across the world has been pretty aggressive. A fiscal and monetary stimulus to tune of US $19-20 trillion has been announced globally.
In the US alone, the US Federal Reserve balance sheet has expanded by $6.2 trillion in 2020 (almost 30% of US economy). The gush of money and signs of flattening of the corona curve in many nations has supported equity markets.
With the recovery of over 30 percent in Indian equities, the valuations are not cheap anymore and further upside would be dependent on the pace of recovery as the lockdown unwinds and businesses stabilise.
Q) How would you describe the last six months of 2020 in one word? And why?
A) Opportunity! This is not the first time the equity markets have witnessed sharp correction and it would not be the last time. However, it has been seen that eventually the economy stabilises and the markets recover over a period of time.
The crisis-driven weakness and volatility are an opportunity to invest in the equity market for handsome returns over the next few years. This time is no different.
Q) Where do you see markets, earnings heading in the next six months? Your outlook for the markets.
A) Fundamentally, it is difficult to predict the market movement in the short term. Historically, we have seen that the markets have more than doubled over 18-24 months from the low levels. This has happened in 2000-2003 and again in 2008-2010.
Q) In the first six months of 2020 we saw plenty of buybacks as well as companies announcing delisting. What is the rationale behind it, and do you think this trend would extend in the next six months as well?
A) Tough times do not last forever. Thus, the sharp correction is seen as an opportunity by promoters and company management especially since they have a very long investment horizon. Moreover, buybacks are a good way of utilising free cash on the books and also rewarding for minority shareholders.
Q) Which sectors are likely to turn out to be leaders and laggards in the next six months?
A) As the lockdown unwinds and the economy stabilises, we see a lot of opportunity in the consumer discretionary companies which will see revival in demand and also share prices in certain consumer segments has been beaten down considerably.
Pandemic has a relatively lower impact on rural and Agri economy, consequently, we also see rural demand-driven stocks outperforming in the near term.
On the other hand, consumer staples (FMCG), capital goods and IT Services companies could underperform over the next six months.
Q) Many new investors joined the party on D-Street in the first six months to start their journey of becoming a millionaire if they remain invested for the long term. But, as we head into the next six months – which are the survival tips you would like to share with them to keep them afloat amid volatility?
A) Investors can stay invested in quality companies with a proven track record, healthy balance sheet, and reputed pedigree. However, one needs to be careful while investing in penny stocks and companies with stretched balance sheets.
It is wise to always maintain 10-12 percent cash on hand to take advantage of volatility.
Q) Gold hit a fresh record high in the week gone by. Do you think it could again outperform equities in 2020? What is your outlook on the yellow metal for the next six-12 month's perspective?
A) We have a positive view on gold for the past 7-8 months and see no reason to change it despite the recent rally. We recommend some exposure to gold for investors in their portfolio as it is a hedge against volatility in equities and also weakness in rupee.
With fiscal deficits set to surge for most countries including India and ample easy liquidity globally, we believe that gold prices will remain firm over the next couple of quarters.
Q) Key 3-5 stock recommendations (value picks) to investors for 1-year perspective?