Portfolio check | HDFC Sec is bullish on these 3 sectors, should you buy?

Dhiraj Relli, MD & CEO, HDFC Securities, is bullish on oil & gas, BFSI and digital/internet stocks and advises against investing in metals, realty and healthcare at the current juncture.

On consumer durables, he feels stiff valuations warrant a buy on dips strategy.

For traders, he suggests beaten down sectors like auto space provides a trading opportunity after underperforming for the past few quarters.

Edited excerpts:

Dhiraj Relli

MD & CEO|HDFC Securities

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A: Global cues have stabilised at least temporarily, while local economic data still needs to improve. Festive season offtake has been good, going by first indications. The monsoon has been reasonably good. These will have an impact on urban and rural consumption.

One hopes that these developments, along with the measures announced by the government over the past few months, will be able to turnaround sentiment and bring the economy back on the fast track a few months later.

Resolution of liquidity issues and NPA menace, with bolder steps like setting up of a bad bank and speeding up the judicial process across the board, is the need of the hour.

A: In the near term, the indices are slated to rise further, though gradually, even as corporates announce results for the second quarter. In case the commentary accompanying the results are muted, then we could run into another bout of profit-taking at higher levels.

A: We have partnered with Stockal to launch global investing for our customers. Now, they can invest in US equities and be part of the global growth stories like FANG (Facebook, Apple, Netflix, and Google [Alphabet]) stocks.

We are extremely optimistic about this offering as, through investments in a developed market, our customers can expect to be better insulated from domestic movements: political, economic, currency, etc.

The US market being well regulated and transparent also adds to the comfort of the Indian investing mentality. We see this to be a great option available to our customers where they can periodically park some of their money in US stocks and treasury bonds.

A: FIIs need to see pick up in corporate earnings growth, which has been elusive over the past few quarters. They have the option to invest elsewhere.

While the Indian market remains an attractive destination given its demography, rule of law and medium term growth rate of mid-to-high single digits.

FIIs seem unsure of the way the current situation of slow growth, tight liquidity, bulging NPAs (from newer areas like retail, agriculture, MSME, etc) will play out. The fiscal situation at the Centre and states also seem to be bothering some FIIs.

A: Mutual fund investors seem wary of enhancing their SIP/lump sum investment exposure given the subdued returns.

However, these flows can pick up fast in case the macro data improves and confidence about growth in corporate earnings emerges.

Investors have chosen to keep their funds in fixed income instruments for the time being, but want to increase their equity allocation when sentiments improve.

A: If one goes by the macro numbers available so far for Q2 FY20, corporate earnings are expected to be unexciting and if at all they may disappoint in some cases.

Liquidity issues, slowdown in consumer spending could mean that Q2 growth numbers, especially on the topline, may not be exciting. This is more the case because, in the base quarter i.e. Q2 FY19, sales of listed corporates jumped more than 23 percent. However, the margin/profit numbers in that quarter were not encouraging due to higher input and interest costs.

In Q2 FY20, although corporates would have a lower profit base, lower operating leverage would mean that margins may not show a commensurate rise.

A lot of these negative expectations are already in the price. However, the moot point is whether we would have seen the worst in Q2 numbers or more pain awaits us going forward.

A: Investors can continue to invest in fixed income funds, with minimal credit risk at the shorter end of the curve. Even gilt funds, including 10-year constant maturity schemes, can be looked at preferably from a SIP point of view given the low 10-year yield currently.

Despite the fall in the yields, fixed income funds can still earn you a higher post-tax return than other comparable avenues.

A: Oil & gas (divestment-related expectations and better refining margin outlook), BFSI (post-clean up the sector could regain its glory with lower participants), digital/internet stocks (low number of companies, relative valuations and high growth visibility).

A: We are comfortable with the consumer durables space, though stiff valuations warrant a buy on dips strategy. The auto space provides a trading opportunity after underperforming for the past few quarters.

A: Financial services including banks have a weight of 39 percent in the Nifty and hence have always remained in limelight due to emerging developments (positive or negative).

State-run banks suffer from: 1) Poor credit quality in their loan books; 2) Governance short of requirements; 3) Small non-interest income; 4) Flat net interest margin; 5) Tight capital adequacy; and 6) Consolidation challenges. Private sector banks are besieged by slippages, loss of trust in some cases, capital adequacy in a few cases. However, they can capture the space vacated by PSU banks.

Q: Any particular sector you are advising your clients to avoid?

A: Metals (growth concerns globally, high leverage), realty (high inventory and leverage, low affordability), healthcare (recurring regulatory concerns, pricing pressure, generic competition locally).