Forget economic growth in FY21, here's how investors can use this scenario to create wealth

Despite the signs of gradual improvement, it is almost certain that the global and domestic economy will suffer a massive fall in FY21 due to COVID-19.

Economic activity continues to remain weak and will lead to a 6.1 percent contraction in India's GDP in the current fiscal, foreign brokerage Nomura said on July 21.

Economists and analysts expect a contraction in the GDP due to the COVID-19 pandemic, which has impacted both supply and demand forces in the economy since March.

Official data also suggests a surge in inflation, which will further drag down the GDP in real terms.

In recent times, the markets traded sharply lower due to the uncertainty regarding economic growth consequent to the pandemic and the shutdown.

Equity markets have been witnessing volatility after the prospects of economic growth weakened.

However, gradually the market started to move higher on liquidity push and hopes that growth is likely to look up in FY22 and this revival will push up corporate profitability also.

At this juncture, investors are trying to figure out how they can turn the falling GDP scenario for their benefit, considering the fact that GDP growth and earnings growth are closely correlated and earnings growth and the overall growth in the economy move together.

When the outlook for GDP growth is poor or if the GDP growth is likely to fall, the markets tend to trade lower.

Experts point out that the best time to invest in equity is when they are available at cheaper valuations after growth falls and earnings decline.

"For investors, the best time to invest is when growth falls and earnings decline. This makes the markets cheaper to buy. The best thing would be to accumulate as growth gradually comes back and markets start moving up. So any fall in growth and decline in prices is an opportunity to invest. Actually, it is when earnings peak that one should book some profits," said Joseph Thomas, Head of Research, Emkay Wealth Management.

Investors can look at sectors that have been resilient during such pressing times and also those sectors which suffered losses and now appear to be gearing up for upside.

Arjun Yash Mahajan, Head – Institutional Business at Reliance Securities advises to book profit due to the fact that the market-economy dichotomy is widening.

Mahajan underscores that the majority of the companies that were adversely affected by the COVID-19 lockdown, are yet to report their Q1FY21 earnings and it will not come as a surprise that we see few reporting a loss may be the first time or after many decades.

"In the continuing background of the dichotomy between the underlying economic fundamentals, falling GDP scenario, and the current stock market rally, it will be prudent to book profit at every rising level and take money home," Mahajan said.

"We have seen in the past that the market does give a better entry opportunity and this time also we should see a better and lower entry point. The other argument is why miss out on the rally and that one should continue to ride the wave. Well, in that scenario, it will be advisable to take the initial capital home and keep the gains invested until an investor’s comfort level."

Buying cheap, revisiting portfolio and booking profit are the three key things that investors need to keep in mind to benefit in the current market and economic scenario.

Thomas of Emkay Wealth Management believes some of the sectors that may do well are pharma and healthcare, telecom, technology, specialty chemicals, etc.

Rusmik Oza, Executive Vice President & Head of Fundamental Research at Kotak Securities said agriculture growth will be resilient in FY21 while the service sector and manufacturing could get impacted in FY21 but revive in FY22.

"Based on March quarter results and management commentaries, we can infer that many companies servicing global clients and selling daily essentials are faring well. For example, telecom, IT, speciality chemicals, agrochemicals, FMCG, insurance and pharmaceuticals are few sectors that are doing well even in these bad times and are likely to see earnings growth in FY21 when others could see huge profit erosion," Oza said.

"Investors can focus on stocks from these sectors in any near-term correction. Apart from these sectors, investors can also look at a few beaten-down sectors from a two years perspective. These are banks, oil & gas and capital goods," Oza said.

Oza finds value in few banking stocks such as Axis Bank, ICICI Bank, DCB Bank and Federal Bank.

Besides, Oza believes the capital goods sector also offers value as the average upside of 15 companies covered by us offers comes to nearly 37 percent.

"Within capital goods and related ancillary sectors we like Larsen & Toubro, Kalpataru Power Transmission and KEC International," said Oza.

"Oil marketing companies still offer upside on the back of renewed interest in BPCL. We like IOC in this space. We continue to like Bharti Airtel in the telecom sector. Other stocks we like are Hindalco, Titan, GAIL and ITC. In any near-term correction, investors can look at few auto stocks like Bajaj Auto, Mahindra & Mahindra and Escorts," Oza said.

Mahajan of Reliance Securities recommends sectors and stocks on a 2-year time horizon and said he will prefer to book profit and take both capital and gains home.

Among the sectors, Mahajan feels IT, FMCG (not covered by Reliance Securities), selected auto and auto components, city gas distribution companies, asset management companies, capital goods and pharma (not covered by Reliance Securities) look attractive.

Among the stocks, he likes Emphasis (TP: Rs 1,200), L&T Infotech (TP: Rs 2,550), Ashok Leyland (TP: Rs 101), Bharat Forge (TP: Rs 551), Indraprastha Gas (TP: Rs 602), Petronet LNG (TP: Rs 335), HDFC AMC (TP: Rs 3,250), KEC International (TP: Rs 328). The target price of the stocks with a two-year horizon.

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