The economy is seeing a slowdown at a time when the stock markets are scaling new highs comes as a surprise to many.
The economy is seeing a slowdown at a time when the stock markets are scaling new highs comes as a surprise to many. However, this can be explained if we analyze the returns given by the benchmark equity indices in recent times, says an analyst. These are largely skewed towards outperformance of 8-10 heavyweight stocks that remain least affected by the slowdown, Ajit Mishra, VP Research, Religare Broking told Ashish Pandey of Financial Express Online. Overall, the broader markets have seen a significant correction, tracking the economic slowdown, he added.
Here are edited excerpts of the interview.
Even as the stock markets are rising, the economy is seeing a slowdown. How do you explain it?
The Indian economy has definitely taken a severe hit in the last one year owing to slowdown witnessed across sectors. The overall consumption slowdown witnessed in sectors like Auto, FMCG, Consumer Durables has dragged economic growth lower. This can be mainly attributed to the struggling rural economy due to limited growth in Minimum Support Prices (MSP) and liquidity issues amongst NBFCs which has made financing difficult. The exports, too, have taken a hit due to trade war between US-China and global economic slowdown.
On the contrary, despite such broad-based slowdown, the benchmark indices are trading near its highs with minor correction witnessed in the last one year. However, it is to be duly noted that the returns in the benchmark indices are largely skewed towards the outperformance of few heavyweight companies (8-10 stocks). These companies remained least affected by the slowdown and their continuous market share gains while maintaining profitability, has led to the outperformance. On the flip side, the broader markets have seen a meaningful correction in the last 12-18 months pricing in the slowdown in their respective sectors.
Coming to the factors, the RBI and government have taken several steps in the last six months in order to revive the economy. In 2019, the RBI has cumulatively cut rates by 135bps due to low inflation and subdued demand. Lower interest rates are definitely positive for the economy as well as companies as it leads to demand push thereby promoting growth. The government too has announced several measures including corporate tax cut, easing of FDI norms, GST rate cut (in certain segments) and recapitalization of PSU banks. Further, despite rising concerns of global economic slowdown, the global markets, too, have remained largely stable which is also positive for emerging markets like India.
How do you explain the rise in gold prices currently?
The current rise in prices attributed to uncertainty about US-China trade relations. Traders are cautious and need clarity about trade negotiations which could be delayed until December as per reports. Also, global growth concerns amid fears of an economic slowdown have boosted the appeal of precious metals as a safe haven.
What’s your Sensex and Nifty target both in the short and long-term?
Sensex has made a new record high of late and likely to carry this momentum ahead also. However, sustainability above 39,800 would be critical in the near future. It has the potential to test 41,150 by the end of the calendar year and above 43000+ by next October 2020. For Nifty, we’ve an intermediate target of 12,100 and expect to test 12,900+ zone on a long term basis.
What should be the investment strategy of retail investors at the moment? What are the stocks that they can look at?
Since the market is near an all-time high, we would recommend investors to buy stocks in a staggered manner. We do have a positive view on the Indian markets led by positive trade developments between the US and China, improved domestic sentiments, anticipated recovery in the economy and earnings revival. Therefore, we are positive on stocks like Marico, Subros, Voltas, Havells, IFB Industries and Gujarat Gas. Amongst the large caps we like M&M, Maruti, Dabur, Reliance Industries, Axis Bank, HDFC Bank, HDFC Ltd which could be bought on dips to build a long-term portfolio.