Markets are witnessing extreme volatility and unprecedented times, that’s keeping investors on the cautious side. But at the same time, offering opportunities to those who seek them out.
Global as well as domestic share markets have been reeling under pressure since the start of the calendar year 2020, first due to the US-China Phase 1 trade deal, and then due to the novel coronavirus (COVID-19) pandemic outbreak. Headline indices S&P BSE Sensex and the broader Nifty 50 index tanked 24 per cent and 26 per cent, respectively, in the last financial year 2019-20, recording their worst performance in over a decade, mainly due to the slump during February-March. Amid uncertainties in the market, sectors such as FMCG, Healthcare, Pharma and select stocks in Telecom are expected to perform well, as to a certain extent, they are cushioned against the current global events, Aamar Deo Singh, Head Advisory, Angel Broking Ltd told Financial Express Online. He also elaborates that few consumption stocks have bucked the trend but if the COVID-19 pandemic gets prolonged, consumers could cut down on their consumption requirements, which could, in turn, affect this sector as well. Edited excerpts of Aamar Deo Singh’s conversation with Surbhi Jain:
Q1) In FY20 Sensex and Nifty have given negative returns. What is your forecast for FY21?
Valuations are becoming attractive – Nifty is currently trading at a P/BV of nearly 2.2x which is the same levels at which markets bottomed out in 2008-09. Though on a P/E basis markets are still expensive as compared to 2008, we believe that P/E is not the right measure currently given that structural reforms and the NBFC crisis have had an adverse impact on corporate profitability which will normalize over the next 3-5 years. Pickup in growth, increase in profitability and P/E rerating will drive markets over the next 3-5 years.
Q2) Which sectors would be the top performers for FY21 and why do you see them benefitting?
High-quality businesses will outperform in difficult market environments. The Indian Government announced a lockdown of the entire country on the 22nd of March. The proactive measure by the Indian Government should help prevent a widespread COVID – 19 pandemic though the impact of the global slowdown could last longer as developed countries may take time to fully roll back all restrictions. Therefore given the uncertainties, we would recommend to avoid vulnerable sectors and invest in the high-quality business in 3-4 tranches. Sectors which are expected to perform well include sectors such as FMCG, Healthcare & Pharma & select stocks in Telecom, as they to a certain extent, are cushioned against the current global events.
Q3) Currently banking/financial stocks are facing a huge downturn. Do you see them making a comeback this FY20-21?
Banking and Financial stocks could face tough times in FY20-21 as the impact of the coronavirus will be severe. Looking at the current flow of data, bank credit growth decelerated to an over five-decade low of 6.14% in the fiscal ended March 31, 2020. Also, bank advances growth in FY20 was the slowest since the fiscal ended March 1962, when loans had grown by 5.38 per cent. Further, Moody’s Investor Service changed the outlook for the Indian banking system to negative from stable, on the possibility of further deterioration in bank’s asset quality, as the economic activity gets severely impacted due to the pandemic COVID-19, putting pressure on the profitability. Further, the YES Bank issue also puts pressure on the sector. All in all, it will be a tough year for the banking sector & financials.
Q4) In the current scenario, only consumer stocks have done well. Do you foresee them to continue doing well this FY21 and why?
Consumption stocks have bucked the trend and the likes of Hindustan Unilever (+23% YoY) and Nestle India (+13.89% YoY) have delivered superior returns this year in spite of all the turbulence. Consumer stocks in India have really been little resilient in this whole downturn. And it is expected that this sector is better placed to weather the corona storm. But at the same time, if the corona issue gets prolonged, consumers could cut down on their consumption requirements and stick to most essentials, which could affect this sector as well. Having said that, this sector still offers safer and better bets as compared to many other sectors. Quality companies with strong fundamentals would recover faster once we see the volatility subside.
Q5) Top five stocks that you believe will outperform in this fiscal?
Stocks to watch out for include the likes of IPCA Laboratories, Asian Paints, Bharti Airtel, Bata India and Dr Lal Pathlab, which are expected to outperform this fiscal. Overall, markets are witnessing extreme volatility and unprecedented times, that’s keeping investors on the cautious side. But at the same time, offering opportunities to those who seek them out.
Q6) By when do you think, mid-caps and small-caps will start outperforming large-cap stocks?
The markets have witnessed significant correction since January, with the benchmark indices down by over 25% from their all-time highs whereas the Nifty Midcap 100 & Small Cap 100 are still down by more than 40% and 60% respectively from their record highs. Going forward, it’s the quality stocks in all categories that will find favour with the investors, and also the track record in terms of corporate governance will also be equally important. Just growth without quality would not stand a chance with the investors. Few mutual funds of late, have removed the maximum investment limit in their small-cap funds as the valuations of many companies in this space, are attractive, and could offer significant gains over the next couple of years. But at the same time, given the risks of a significant slowdown because of the COVID-19 outbreak, adopting a SIP mode is recommended as compared to the lumpsum investment. The volatility index (India VIX) still continues to trade at significantly elevated levels, around the 50 mark, which indicates that investor fear still remains high. Over the next quarter, a clearer picture would emerge, because any rally to be sustainable, has to be broad-based. It would be quality that will be valued along with resilience, be it Large, Mid or Small. Invest with caution but definitely look at investing in tranches as opportunities are plenty.
(The stock recommendations in this story are by the respective research and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)