'Buy-on-dips' best strategy for this market; bet on telecom, consumer, pharma, say experts

The coronavirus outbreak has left investors grappling with the question of how to trade in an environment where uncertainty looms.

From March low of 7,500, the Nifty is now trading above 10,000 on easing of lockdown restrictions, hopes of a government stimulus and in anticipation of a recovery.

Hopes of a COVID-19 vaccine and expectation of more relief from the government have kept the sentiments positive. Global cues, too, have been helped as investors seem to have shrugged off concerns over political unrest in the US, worries about a second coronavirus wave and US-China tensions.

There is a broad consensus among observers that the market will remain in the 10,000-10,500 range and if it goes beyond 1,500, profit-booking may emerge.

'Buy on dips' the best bet

The most important thing that we must keep in our minds is that there is unprecedented uncertainty in the market.

"We have a better idea about things today compared to what it was two or three months back but it does not warrant an excessive optimism too," said Joseph Thomas, Head of Research, Emkay Wealth Management.

"Only over the next three months, we may have some fairly accurate idea about the impact of this event on the macro variables and the numbers, and also about employment and demand. It is likely that we may continue to encounter volatility for an extended period of time. Because of these factors, the investment approach needs to be well thought out."

In this uncertain climate, experts recommend “buy on dips” and “bottom-up stock picking” to reap gains in such a market.

"Under the given circumstances, it is better to focus on bottom-up stock picking. However, post the near-term run-up, we advise investors to remain cautious," said Pankaj Pandey, Head – Research, ICICI Direct.

"Some profit-booking can be done on trading plays. For medium to long-term perspective, we advise investors to position their portfolio for a long-term perspective through companies with excellent and reliable performance over the years, based on the established business models, strong balance sheets, and quality management," Pandey added.

Siddharth Khemka, Head – Retail Research, Motilal Oswal Financial Services, too, favoured buy-on-dips strategy.

"Given the sharp rally witnessed over the last few days, we may see the Indian markets consolidating or taking a breather for some time before starting the next leg of the rally. Hence, 'buying on the decline’ would be a better strategy over the next few weeks," Khemka said.

Indian equity markets have moved up around 13 percent in the last two weeks as investors ignored near-term growth concerns and cheered the gradual easing of the lockdown and prediction of a good monsoon.

Rusmik Oza, Executive Vice President & Head of Fundamental Research at Kotak Securities, is of the view that the next big resistance for the Nifty will be 10,350 level, which is the 200-WMA.

Oza says markets may stay aloft because of action by central banks and liquidity chasing riskier assets. Valuations are getting stretched across all indices and it is a serious concern, he said.

In such a market, buying on dips is the strategy to follow, he says.

"The recent stock movements are very tempting but one should know what one is buying. It is turning out to be a good trading market. For long-term investors, it is ideal to wait out and look to accumulate on declines," Oza said.

Arun Kumar, Market Strategist at Reliance Securities, said the market began to rise much ahead of the lockdown, as was seen in the way the cash segment attracted delivery-based buying.

Besides, private offerings by the leading corporate houses were lapped up, induced positive change in sentiments, he said.

"Since the leveraged or speculative positions are still low, the index and frontline stocks should continue to move up. One should focus on high-quality and highly liquid stocks, to mitigate any sharp falls. Also, proactively manage risk by way of shifting the stop exit regularly, so that a majority of the trend can be captured," Kumar said.

Prefer recovery plays

COVID-19 is expected to change market leadership. While the weight of financials may reduce to some extent, the future may see the strong emergence of telecom, consumer, specialty chemicals and pharma sectors.

Khemka of Motilal Oswal said the best strategy would be to accumulate good fundamental and quality stocks over the next few months.

"Every crisis creates opportunities for certain segments, which often creates new market leaders. Post COVID-19 pandemic, some of the themes or sectors we believe could emerge as leaders are telecom, healthcare, specialty chemicals, while one can look at rural consumer space as a recovery play," said Khemka.

Thomas of Emkay Wealth said more than the macro numbers and global developments, the focus should be on companies with strong balance sheets and leadership.

“We should also be satisfied with the sectors or segments, as the ones which have relatively better prospects over the next two to three years, like pharma and healthcare, telecom, specialty chemicals, etc,” he said.

Investments should be done in a phased manner, leaving some cash and space for future investments. "This is critical in a market which is likely to see corrections on the way, based on interludes of pessimism and optimism," he said.

Kumar of Reliance Securities was bullish on the pharma sector.

"This sector could consolidate for a couple of weeks before resuming its up move. On a near-term timeframe private banks, auto and metal stocks look attractive from a trading perspective," he said.

For Pandey of ICICI Direct, private banks, two-wheelers and low-ticket discretionary are the preferred play on economic recovery.

Oza of Kotak Securities likes some auto ancillary companies that have a good mix of domestic (OEM and replacement market) and exports.

Besides, power transmission companies, consumer, insurance and oil & gas stocks are also among Oza's preferred recovery plays.

"Automobile sales have started showing signs of improvement in some of the developed economies because of the preference to travel in one’s own vehicle,” he said. Power transmission companies are back in business as work has commenced on 80-85 percent of the sites and ordering activity would improve in the T&D space in the near-term. “Power demand has recovered smartly which makes a case to invest in some of the bigger power companies," Oza said.

Select consumer companies with higher exposure to rural areas could witness strong demand because of likely normal monsoon and migrants going back to their home villages. Insurance would gain because of the ongoing threat of COVID-19. “Oil & gas stocks should also perform well as the Brent crude price has pulled back to $40/bbl mark," he said.