Sundar Sanmukhani, Head of Fundamental Research Desk at Choice Broking in an interview to Moneycontrol, said that the FY21 economic growth would be significantly lower than the FY20 levels.
Sectors which were already victims of global slowdown will continue to remain under pressure for the next three-six months. Assuming that the recovery will to be gradual and that the 2021 monsoon is normal, we expect economic recovery to happen in Q3 or Q4 of FY21, Sundar Sanmukhani, Head of Fundamental Research Desk at Choice Broking said in an interview to Moneycontrol's Sunil Shankar Matkar.
"Overall, FY21 economic growth would be significantly lower than FY20 levels," Sanmukhani added.
Edited excerpts of the interview:
Q. Do you think the market has bottomed out and value buying is happening at current levels as benchmark indices have corrected more than 33 percent from record highs?
A. It is too early to comment on whether the market has bottomed out. If FIIs remain net buyer for few more trading days and volumes are substantial, then we can say of market bottoming out in the near term.
As far as value buying is concerned, the market itself is in the value zone. Most of the fundamentally strong stocks are available at almost five years low valuation. Value buying has happened last week and is expected to intensify in the coming days. But the market recovery will be gradual.Overseas, the situation (spread of the novel coronavirus pandemic) in the US and in Europe is of grave concerns. These markets can put pressure on the overall recovery in global economies in the near term.
Q. Earnings and economic growth is expected to be hit by COVID-19-led lockdown. What are your revised estimates for earnings and economy for Q4 and FY21. Also do you expect the recovery to happen only in FY22 than FY21?
A. Right now, we do not have the estimates for earnings and economic growth in Q4 FY20.
Before the lockdown, the economic growth was in declining trend. Certain positivity was reported in January and February. But, it was followed by the pandemic and the lockdown, which resulted in a sudden stop of around 75 percent of the economic activities. Definitely, there will be a hit on the earnings and economic growth because of the COVID-19 lockdown.
On a global level, the key concern is that this weakness in economic activities is not extended into a short-term recession, which will have a negative impact on the growth revival in the domestic market.
The lockdown started in the last 10 days of March 2020. So we are not expecting a substantial impact on the earnings of the company in Q4 FY20. However, the earnings growth would be impacted in Q1 FY21. The sectors, which were already victims of global slowdown (before the lockdown) will continue to remain under pressure for the next three-six months. Assuming the recovery to be gradual and 2021 monsoon at normal levels, we feel that an economic recovery will happen in Q3 or Q4 of FY21. Overall, FY21 economic growth would be significantly lower than FY20 levels. FY22 will benefit from overall recovery and from the statically low base in FY21.
Q. Most experts feel that valuations have turned more attractive now. Do you feel the same, and if so, what are you advising to your clients now? Also, what should be one's portfolio strategy now?
A. Definitely, the valuations have significantly corrected and are currently in the value zone. However, considering the volatility in the global markets and the uncertainty with the coronavirus pandemic, we are cautious on the equity market performance in the near term. Our recommendations to the investors are to stick to quality fundamental stocks, which have minimal impact from the lockdown and can rapidly revive post that.
Since the valuation gap between the largecap and midcap stocks have narrowed significantly, our portfolio strategy is stick to large & mega caps and investors should be in the accumulation mode. If there is a recovery, the markets will be polarized in the initial days and these large caps will be in demand.
Q. What are the top three sectors that should be bought into now to get multibagger returns in coming quarters and why?
A. Our overweight sectors in the mid-term would be the new age companies which are asset light and have substantial scalability factor. The sectors in which we have positive views are the internet based companies, contract consumer durable manufacturers, insurance, AMCs and few consumption stocks.
Q. All governments have announced major stimulus packages to support the economy and their people suffering from lockdown due to COVID-19. Do you think it will help the economy, people in short term and markets to get stabilised at current levels?
A. Since this is a medical crisis resulting in economic pain, both fiscal and monetary stimulus provided will not be sufficient for reviving and stabilizing the economy. Most of the developed economies have already provided massive stimulus package. But they are not anticipated to have any positive impact and can be demonstrated from the equity market performance. The only relief will be a crackdown on the pandemic crisis and any medical solution for the same.
The stimulus package provided by the Indian government is not expected to provide any substantial benefit for the overall economy. To some extent, there will be relief for the organised market, but for the unorganised, we still see no relief for the lockdown pain. We strongly believe that the government would bring another stimulus package for the unorganised sector, which could be in the area of indirect taxes and others.
Q. Is it a buy on dips or sell on rise markets, why?
A. Considering the valuation gap in mid and largecaps, it is an accumulating market. Also anticipating a gradual recovery, it will be a polarised market in the near term.
Q. Do you think the government, the Reserve Bank of India (RBI) or other regulatory bodies are doing their best to fight with COVID-19 and minimise the impact of viruses on economy and people, or do you feel more things to be done at every level?
A. Yes, all the regulatory agencies, and the state and central governments has already taken proactive measures to minimize economic impact of the coronavirus pandemic. More needs to be done by forcing the population to follow the lockdown and educate them of the negative impacts of virus.
Q. Do you think the nationwide lockdown will continue beyond April 14?
A. The rate at which coronavirus patients are increasing in the crucial week, we strongly believe that we are in a relatively better position as far as combating the virus spread. Also the patient's recovery level and the casualty level are also not so disturbing.
Thus, in totality, it is expected that the nationwide lockdown will not continue post April 15. According tomedia reports, Cabinet Secretary Rajiv Gauba has stated that there are no plans to extend the lockdown. This seems to be an encouraging development for the economy and for the equity market. However, there is a need for caution about possible rise in new cases once the lockdown in removed.
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