Chemicals, specific financial sector stocks, healthcare, and low ticket discretionary consumption could do well.
The strategy should be to pick market leaders in each industry sub-group. Price corrections and valuations multiple contractions occur only in crisis and should be utilised to add market leaders to one’s portfolio, Sahil Kapoor, Chief Market Strategist, Edelweiss Professional Investor Research, said in an interview with Moneycontrol’s Kshitij Anand.
edited excerpts:
Q) Indian market hasn’t looked back after hitting a low in March. Do you think the majority of the market has hit a bottom along with Nifty50? What is leading to optimism?
A) Global and Indian economy hit a rock bottom in April with most parts of the world under a lockdown. Since then many countries have seen a stronger than expected recovery.
India has seen a similar story play out although at a slower pace of recovery. But, it is quite clear that businesses bottomed in April to May for many sectors.
This has fueled the hopes of a reversion to normalcy over a period of time. In my last interaction with you, I had highlighted the global consensus of nearly eight weeks of lockdown and recovery. That seems to have played out and is the likely reason for markets to turn from gloom to stability.
Q) Was this the shortest bear market of all time?
A) From a pure price perspective, it does seem to a sharp fall and recovery. The price damage in most markets isn’t small by any measures.
Investors who would have bailed out in fear would have turned paper losses to permanent loss of capital. This makes the duration of little consequence.
Moreover, the extent of the rise from the bottom has been phenomenal in the US and some EU markets which does qualify as one of the shortest bear markets in history.
But, economic and stock market volatility isn’t over yet. It will take time for this volatility in business activity and stock prices to subside.
Q) Which stocks and sectors are likely to benefit the most when lockdown opens?
A) We expect chemicals, specific financial sector stocks, healthcare, and low ticket discretionary consumption to do well.
Q) Monsoon got off to a stormy start – how do you see it panning out? Stocks and sectors that will benefit the most?
A) The IMD has called for normal monsoon this year. This should help the rural economy and linked sectors shall do well.
The focus on rural demand when urban demand is questionable is already visible in the performance of rural-focused stocks from FMCG to tractors. We continue to remain positive on opportunities in tractors, FMCG and Agri linked stocks.
Q) FIIs are slowly making their way back into the Indian markets. After a strong May, it looks like FIIs will close the month in net inflows. What does it suggest about the future trend of the market?
A) In the March-May period, FPIs outflows from the Indian debt market were about Rs 95,000 crore. This seems to be tapering now. Outflows in the first five days of June is Rs 1,500 crore.
Equity outflows reversed in May. May and June's inflows are now at Rs 35,000 crore versus Rs 70,000 crore outflow between March and April. This means FPIs have ploughed back half of the outflows. The key in the upcoming weeks and monthd will be how FPI flows pan out in the debt market.
Any reversal in the inflows in debt market will be positive because it will provide a bit of cushion to debt markets.
Q) The foremost emotion of investors right now is to preserve capital especially at a time when the demand has contracted, and salaried class is under the stress of job losses. What should be the strategy of investors?
A) The strategy should be to pick market leaders in each industry sub-group. Price corrections and valuations multiple contractions occur only in crisis and should be utilised to add market leaders to one’s portfolio. This should be the focus area for the next few weeks.
Q) Life after 10,000 on Nifty will change – do you think that increased optimism and liquidity will also lead to a sharp rise in the small & midcaps?
A) Mid and small-cap stocks reflect the pain and improvement in the economy more closely. So the dynamics of liquidity, valuations, and recovery will get reflected in mid and smallcaps more closely. We expect a number of opportunities but with heightened volatility.
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