Investors will have to be careful to check whether the pandemic has caused any structural damage to the stories of the companies in these sectors, and if yes, stay away from them.
Assuming that the pandemic will come under control within the next few months, investors will have to look at sectors that have fallen the most and not recovered as much as the others to see whether they still offer value, Deepak Jasani- Head of Retail Research at HDFC Securities, said in an interview with Moneycontrol’s Kshitij Anand.
edited excerpts:
Q) What will be the biggest risk for investors in the second half of 2020?
A) Elongated COVID-19 led lockdown and casualties are the biggest risk in the second half of 2020. This apart from irregular/delayed/short rainfall, a resurgence of geopolitical tensions between India and China and/or US and China, social unrest, and spread of financial stress are some other risks India may face.
Hints of reversal of easy money policy by the Central Banks across the globe can also spoil the sentiments.
Q) What is your call on the IT sectors? This has been one of the better-performing sectors amid the lockdown. Where is the value you foresee in the sector – is it midcap IT or large-cap bellwethers such as TCS, Infosys, HCL or Wipro?A) Both the largecap and smallcap have their strengths. While the largecaps provide stability in order bookings/execution and visibility in revenue growth despite the pandemic, the midcaps have their niche areas of specialty.
These niches help midcap companies perform well in certain periods. These niches are also valuable to some investors as was seen in the recent buyout of Majesco US.
IT sector’s importance has risen off late due to the urgency by the clients to digitize their operations to compete effectively and operate in tough times.
Q) One evident trend was the new race of investors who joined D-Street despite sharp volatility. Do you think this new breed of investors/traders has come off age and are more matured in making investment decisions? Do you see any specific trend?A) In the lockdown, we saw a rise in customer signups with most broking houses. This displays the urge of people at home or working from home to try their hand at investing/trading.
The initial period also coincided with valuations of companies falling to very attractive levels. Investing/trading online is convenient and people wanted to try out new things.
The experience of most of these traders/investors has so far been good as the markets have not seen a substantial correction in the rally. Their true test will happen when the markets start to correct and/or see choppy times.
Their exposure to Mutual funds has not seen a large rise and hence most people want the excitement of direct investing and want to make quick money.
Hopefully, over time they will realise whether they are good at trading/investing or else should move towards investing through mutual funds.
The low delivery ratio displays an increasing tendency to trade beyond one’s capacity and to speculate. As long as the markets are rising everyone is happy.
One hopes that people refrain from going overboard and start diverting a large part of their trading profits into an investment so that they don’t have to face sudden and sharp losses in trading when the tide turns.
Q) What is your call on agricultural space? It is one sector which has remained unfazed by COVID-19? What are the top stocks which one can look at?A) India has been lucky as the IMD forecast for this year’s monsoon is above average. We saw a lot of migrant labour moving back to their villages due to the shutdowns and the spread of the virus.
This improved the availability of labour on farms in rural areas. Also, the government has focused on alleviating rural distress and is spending a large sum in that direction.
In a year when all other segments are facing challenging times, agriculture has come to the rescue of the economy.
We are staring at record agri output in the two seasons put together. Reflecting this, the stock prices of seed, agrochem, and fertilizer companies have already moved up.
This apart, stocks of companies in agriculture implements including tractors, two-wheeler stocks, and consumer staple companies will also benefit from this development.
Q) Growth is likely to take a hit this is given, but how can equity investors turn the falling GDP scenario into a benefit? Which sectors are likely to see a rebound once the tide reverses?A) Investors had a chance to bottom fish in March when the markets sold off in fearful anticipation of worse times ahead. However, easy liquidity, support from the government’s and Central Banks globally has meant that most markets are now at or near all-time highs even though the macro or micro situation does not look so great.
Assuming that the pandemic will come under control within the next few months, investors will have to look at sectors that have fallen the most and not recovered as much as the others to see whether they still offer value.
Auto, Financials, Oil & Gas and Metals are some sectors that could fall in this bracket. However, investors will have to be careful to check whether the pandemic has caused any structural damage to the stories of the companies in these sectors, and if yes, stay away from them.
Q) What is your outlook on the auto and financials -- the two themes which have seen the worst of COVID-19 impact? Can they turn out to be the dark horse of 2020?A) While Auto had begun to underperform even before the pandemic fears set in (due to BS-VI transition, increased cost of ownership, stagnant spending power, etc), the pandemic accelerated problems for the sector even more.
The supply chain got disrupted and the sales channel was shut. People were not allowed to move and hence the need to buy Autos got postponed.
Need for personalized vehicles to save oneself from getting infected could be a trigger for Auto demand over the next few months until the fear of the virus is out of mind.
Financials as a sector was more or less placed similarly. Credit growth had started to slow over the past few quarters, NPA fears kept resurfacing now and then and IBC process kept showing promise in spurts.
Once the pandemic set in, the financials went into a bigger shock as credit growth came to a standstill, borrowers stopped repaying due to moratorium announced (and extended by the RBI) and offices of these companies ran on skeletal staff to service the existing clients while little effort was made to attract new customers.
These companies also became a bit more risk-averse in lending. The availability of funds remained in question for all borrowers below AA+.
There is an overbearing fear as to how many of the borrowers who have opted for a moratorium would turn bad once the moratorium period gets over.
In terms of stock prices, the private banks and well-run NBFCs have seen their stock prices recover most of their losses. Auto stocks have also recovered some part of their losses.
Going forward, we think that it would be difficult for these two sectors to continue to outperform. Investors may have to wait for their stock prices to correct before they start to bet on them in terms of lump-sum investing.
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