Cement, oil & gas among 3 sectors likely to outperform; here’s why

The Goods and Services Tax (GST) Council meeting scheduled on September 20, and the Reserve Bank of India (RBI)'s meeting in October will be watched keenly, Rusmik Oza, Head of Fundamental Research, Kotak Securities, said in an interview with Moneycontrol’s Kshitij Anand.

"We expect RBI to cut repo rate by another 75 bps in the remaining period of FY20 with 40 bps likely in October itself," Oza added.

Edited excerpts:

Q) Market closed the week with gains of over 1 percent. The macro data also did not infuse much confidence in markets, and the coming week will be dominated by global cues. What are the important levels to watch out for in the coming week?

Rusmik Oza

Head of Fundamental Research|Kotak Securities

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A) The global cues, especially coming from ECB is very positive for the emerging markets (EMs). ECB’s move of cutting rates and restarting bond purchases will put pressure on other central banks to turn dovish.

As central banks start infusing fresh liquidity into the system, we can expect a risk-on rally in emerging markets. On the domestic side, we expect the government to provide relief to stressed sectors.

The GST Council meeting scheduled on September 20 and the RBI Monetary Policy Committee (MPC) meeting in October will be keenly watched. We expect RBI to cut repo rate by another 75 bps in the remaining period of FY20 with 40 bps likely in October itself.

Keeping these factors in mind, we expect Nifty50 to inch towards 11,500-11,600 shortly. The Nifty50 could see a brisk movement as and when it crosses the 200-DMA placed at 11,222 level.

Q) What are the important data points to watch out for in the coming week both global and domestic?

A) The initial round of talks between the US and China representatives will provide some clue on the likely points of discussion between the US President and the Chinese Premier.

FOMC rate decision is due next week where investors are expecting a 25 bps rate cut (from 2-2.25 percent to 1.75-2 percent). The GST Council meeting is the key domestic event to monitor next week. Most of the other domestic macro data points likely to come in September have already been published.

Q) Rupee also touched 1-month high in the week gone by. Do you see the momentum continuing in the coming week?

A) Considering the central bank moves and positive trade talks between the US and China the INR/USD can pull back to 70.2. Any appreciation of INR/USD below 70 mark could only happen if the Yuan appreciates sharply against the USD.

For any material currency appreciation, the Yuan needs to again go below the 7 mark against the USD. We can expect positive flows on the FPI and FDI side if steps taken by the government are taken positively. The longer-term movement of the INR/USD will be a function of Yuan, which in turn will depend on the trade war and its progress.

If for reasons the trade war between the US and China intensifies in future then we can expect the Yuan to go down to ~7.6-7.7 against the USD and INR could also follow a similar depreciation pattern against the USD.

Q) Any specific sector which could remain in limelight based on any domestic or global news. What are the important levels to watch in terms of NiftyBank, and govt is likely to announce some more important measure which could benefit the sector?

A) I feel that a few sectors can outperform in the coming months based on the dynamics playing in their favour. Cement is one such sector that can benefit from higher demand and better pricing.

The recent flooding in many states and the possible resumption of government expenditure on infrastructure can aid demand for cement in the coming months. The lower base effect of cement prices should benefit the sector until the end of December.

We also like the Oil & Gas sector wherein gas distribution companies and oil marketing companies, both look attractive.

Specialty chemical companies are defying domestic slowdown and reporting healthy earnings growth. India is becoming the alternative sourcing hub for multinational companies which is helping larger specialty chemical companies to scale up big time. There is scope for the larger specialty chemical companies to get re-rated, similar to what we have seen with CRAM players in the pharma space.

For Bank Nifty, 28,600-28,800 are crucial resistance levels. Any break above these levels could lead to faster up move.

Banks will be the main driver of incremental Nifty earnings in FY20 and FY21. Hence, Bank Nifty has to cross and sustain above 28,600-28,800 levels for Nifty to go closer to 11,500-11,600 levels.