'See sell-on-news scenario once lockdown is lifted, Franklin-like case unlikely to occur again'

Contagion across the financial sector remains a possibility unless the lockdown is lifted soon and the economy gets back on rails fast, Deepak Jasani, Head of Research at HDFC Securities, tells in an interview to Moneycontrol's Sunil Shankar Matkar.

Q: The government and the RBI have been quick to react during the coronavirus crisis and the same was seen in terms of help to the mutual fund industry after Franklin Templeton fiasco. Given the prolonged lockdown and weak global environment, do you expect more such problems?

Under the circumstances, the government and the RBI are doing a good job. Although the government can exceed the projected fiscal deficit by a wide margin as it has sufficient justification, it is going slow and being prudent, being aware of the risk of sovereign rating downgrades. So far understandably, the focus has largely been on monetary stimulus and less on fiscal stimulus. Some innovative methods to speed up the growth in the economy are warranted.

As far as lifting of lockdown due to COVID-19 is concerned, the government has to take a tough decision between health versus economic concerns. It will be very challenging to resolve the conflict between social isolation and economic recovery.

Deepak Jasani

Head of Retail Research|HDFC Securities

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One hopes that Franklin is a one-off case and we will not see more such cases even though the economy is yet to come out of this difficult phase. Contagion across the financial sector (due to delay in repayment, downgrades etc) remains a possibility unless the lockdown is lifted soon and the economy gets back on rails fast.

Q: Do you expect the lockdown to continue beyond May 3 or will it be extended only for red zones/states? Has the market priced in an extended lockdown?

We think that the lockdown will be lifted across most parts of the nation w.e.f. May 04. However, red-zone areas may see a small extension. Also, in all areas social distancing will be implemented rigorously and hence, some services may be partially available and some businesses will run at below rated capacity for some time.

Q: The pharma sector has been the outperformer with over 18 percent rally so far in CY20. Do you expect the outperformance to continue during the year or is it highly valued now?

After underperforming for the past several years, the defensive nature of the sector and easing out of most concerns (USFDA issues, generic pricing war in US, fall in rate of new drug launch etc) may lead to the pharma sector remaining in the limelight for some more months. Valuation wise, though, they are not cheap. Going by historical earnings, their growth going forward may accelerate, resulting in the valuations seeming better.

Q: The market has been in a tight range after a strong recovery of 21 percent from March lows. Will the market turn stronger or remain rangebound in May?

In anticipation/hope of post lockdown scenario, markets have done well, aided by limited redemptions from FPIs and domestic investors. However, we could see a sell-on-news scenario once the lockdown is lifted and the grim realities in terms of economic growth and micro performance come to the fore.

Q: There are expectations that the government will come out with a bigger relief package (or second stimulus) in the coming days but some experts say the government has limited leeway and may support only troubled sectors. What are your thoughts? What are the sectors that should get help from the government?

This government has believed in prudence and may not announce large fiscal stimulus. Also the two stimulus packages announced in the past two months have not done much to improve the economy or capital-market sentiments. Also, the various strata of society may keep wishing for more and more reliefs. Such largesse, although necessary for the most vulnerable sections of society, often creates a wrong precedence and punishes the genuine law-abiding diligent businessmen and such other strata of society.

Blanket packages will only postpone pain in several businesses (all inefficient and outdated businesses must be allowed to die) and we will have to face it in a few quarters again. The government can instead focus on healthcare and education spend for the next few years, speed up legal processes and reduce spending money in other infra sectors, which can prove to be a burden on future generations given the sufficient alternatives available and unwillingness on the part of Indians to pay for infra services.

Q: Banks were the leaders in the past bull runs, especially after 2008's global financial crisis. Do you expect the same to continue or will the leadership get changed? If it changes, which would be the leading sector and why?

In a country like India, where capital is scarce and aspirations are rising, the financial sector can never lie low for long. However, for till the ill effects of the COVID-19 and economic slowdown is out, this sector may underperform and see some shakeouts. Consumer discretionary, staples and healthcare could be back in favour for some time.