The technology sector is expected to be relatively less impacted due to the domestic slowdown—therefore making it a more attractive defensive play, says Sampath Reddy, CIO, Bajaj Allianz Life.
We are overweight on the healthcare sector, as these companies are expected to benefit from easing of pricing pressure for generics in the US market, Sampath Reddy, CIO, Bajaj Allianz Life, said in an interview with Moneycontrol’s Kshitij Anand.
edited excerpts:
Q) What are the key risks in the second half of 2020?A) One of the key risks is the escalation of COVID-19 cases in India (India crossed 1 million marks and has third-highest cases in the world), which is again prompting lockdown in certain states.
However, the mortality rate remains in control in India at below 3 percent and the recovery rate is also high at above 60 percent.
High-frequency indicators have shown some partial recovery in the economy in June as the economy opened up, but more lock-downs (due to COVID escalation) can hamper this recovery to some extent.
The other risk is the escalation in geopolitical tensions. This can impact global risk appetite, and affect foreign capital flows/global liquidity, which has supported the rally in global equity markets from the March lows.
Q) What is your call on the IT sector? This has been one of the better-performing sectors amid the lockdown. Where is the value in this sector – is it midcap IT or largecap bellwethers such as TCS, Infosys, HCL or Wipro?A) Given the cash-rich balance sheet, high RoE, and attractive valuation multiples, the IT sector is likely to be better placed in the current uncertain environment. Global IT spends continues to grow at a healthy pace which augurs well for Indian IT services companies. We prefer largecap names over midcaps within this sector.
This is because largecap companies have a stronger balance sheet and diversified client base across verticals and geographies that may prove vital to steer through current volatile times. Also, the impact of COVID is relatively smaller in the IT services sector.
Q) One trend which was evident was the new race of investors who joined D-Street despite sharp volatility. Do you think this new breed of investors/traders have come off age and are more matured in making investment decisions? Do you see any specific trend?A) Yes, we have seen a sharp rise in the registration of new Demat accounts and online trading accounts. The share of retail volumes on the exchanges has gone up substantially and are at close to historic high levels.
This could have been helped by lockdown, and by some investors to make use of the earlier market correction as an investment opportunity.
However, we recommend investors should do their due diligence thoroughly before investing in a company and may also use professionally managed investment vehicles like mutual funds, insurance (ULIPs) etc for their investments.
Domestic institutional flows (from mutual funds) also indicate some level of maturity amongst investors nowadays.
Amidst the sharp correction in Feb-March, we saw healthy inflows and with the market recovery in June/July, we have seen some profit booking/lump sum outflows. SIP flows (indicating retail investor activity) have moderated a bit, but still remain quite healthy.
Q) What is your take on Agricultural space? It is one sector which has remained unfazed from the COVID-19? What are the top stocks which one can look at?A) The agriculture sector has been less impacted as a result of the lockdown, and we have seen good advancement of monsoon season & sowing of crops.
The increased allocation to MGNREGA scheme and various agriculture reforms will further benefit the rural sector. Therefore, we are positive on the rural consumption theme. Tractor sales have also picked up strongly, and most companies that are exposed to the rural sector is expected to grow in FY21
Q) Growth is likely to take a hit, but how can equity investors turn the falling GDP scenario to their benefit? Which sectors are likely to see a rebound once the tide reverses?A) We are overweight on the healthcare sector, as these companies are expected to benefit from easing of pricing pressure for generics in the US market.
Also, the clearance of plants by the US FDA will support earnings for the sector, which was a concern earlier. FMCG sector may continue to do well selectively as demand remains strong, even though valuations are elevated in the sector.
The technology sector is expected to be relatively less impacted due to the domestic slowdown—therefore making it a more attractive defensive play. We are also positive on the telecom space, where ARPU’s have bottomed out and the sector will benefit from increased digital adoption.
Select stocks in agriculture/rural space have been resilient to the pandemic and should continue to do well.
Once the domestic economic recovery starts to gather pace/momentum, then we are likely to see greater interest or recovery in cyclical sectors like financials, capital goods & engineering.
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) We have been cautious on Financials due to potential asset quality stress on account of COVID related disruptions. Given the inherent leverage in the business, financials corrected significantly and have also lagged in recovery.
This has resulted in better relative valuations. Also, most large financials are raising capital in anticipation of upcoming stress, which we believe is the right thing to do.
We continue to like large private banks that have a strong liability franchise and are adequately capitalized.
The auto sector has outperformed the Nifty Index from the March lows when the sector was trading at a deep discount to its historical valuations. Personal mobility is gaining traction and people are buying vehicles to avoid public transport.
We like rural-focused themes within the sector. While there is a belief that auto volumes will recover during the festive period, we believe that improvement in the economic scenario will be the key driver of demand. Hence, we are maintaining a cautious stance on the sector.
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