The equity markets are remarkably bullish over the positive trends, the continuing rampage of the Corona virus notwithstanding, stoking fresh optimism that we will bounce off the wave of negativity and hit the growth trajectory very soon.
Experts have even laid out a chart to help investors navigate through the pandemic that has run riots on the bourses for the last several months. “Investors are seeing the second wave as a short-term phenomenon and, going by the last year’s experience, not many of them are tempted to sell,” says Rusmik Oza, Executive Vice-President and Head of Fundamental Research at Kotak Securities.
This year the pandemic is a known devil and factories are being allowed to function by the authorities. The unorganised and informal sectors may face some pain vis-à-vis the organised sector and companies have learnt to adapt to the new normal much the way we had shifted to the WFH (work from home) format.
According to a report from the finance ministry, the impact of the second Covid wave is likely to remain muted as compared to the first wave so far as economic activities are concerned as actual economic recovery began in the third quarter and firmed up in the fourth quarter of FY21.
“This is the reason we are unlikely to see any dramatic movement in the market this year,” says Jashan Arora, Director at Master Capital Services. “While there have been some falls in the markets, it also recovered quickly.”
The government’s vaccination drive has also helped the markets remain resilient. With a large section of the 1.3-billion population expected to receive the vaccine by the end of the calendar year, consumer sentiment is also upbeat, compared to last year.
Market experts say that by the precedents of the second wave in the US and Europe, we can expect the fall in Covid cases to be sharp. On May 25, the country posted 1,96,427 new cases of infection over the preceding 24 hours. This was the lowest daily rise in infections since April 14, and less than half the 4,14,188 peak reported on May 7.
The revival in the Indian markets looks similar to the equity market rebound in the West. “Equity markets in the US and the UK have shown significant resilience while reacting to the lockdowns related to their second and third waves,” says Mayur Patel, Principal, Fund Manager – Listed Equities at IIFL AMC.
Thus, market watchers are hopeful that volatility on the Indian market will also subside as the situation stabilises over the next few months. “Market behaviour in the first wave has reinforced our view that short-term disruptions in businesses have very little impact on their long-term DCF valuations,” says Patel.
DCF stands for Discounted Cash Flows or a method to estimate the value of an investment based on expected future cash flows.
But, there will be certain pockets of turbulence that the markets will have to face. “We will see an impact on employment,” says Vishal Wagh, Research Head at Bonanza Portfolio. While businesses are recovering, hiring (with the exception of the IT sector) has been hit. “This is going to affect the purchasing power of the consumer.”
Movement in bond yields remains another cause for concern for investors across the world. So, how does the investor sail through the shoals of the equity ocean? Experts converge on the solution: keep a long-term view. “In the medium term, the market may see some volatility, investors would do well by staying calm and gradually accumulating good quality companies on declines,” says Arora, who sees corrections as part of any equity market uptrend.
“Valuations of Nifty-50 look reasonable only in 2022-23 estimates,” says Oza. If things go from bad to worse in the short-to-medium term, then the markets could see a shift in earnings growth from FY22 to FY23, he says. Thus, the risk to earnings from a two-year perspective seems lower but high from a one-year angle. Another big blow to the markets could come in the form of a more devastating third wave. “Any correction in the near term should be viewed as a good buying opportunity and investors should look to increase exposure in every decline. For investors who are fully invested, it is ideal to stay put and wither any near-term volatility as the correction could be short-lived in nature,” says Oza. He feels that the Nifty would trade between 15,500 and 16,000 by the end of 2021-22.
“There is a strong case to look beyond the current volatility,” says Patel. Given the impending economic recovery over the next few years, investors should take a slightly long-term view on the market. Patel notes that the economy was already on the rebound, a recovery that was impacted only by the second wave. The year 2021, according to most experts, will be a year of restructuring rather than a significant increase from current levels.
Indian Equities: An Insight
Indian equities have a number of constituent sectors. Experts decipher which have value and which are to be treated with caution. The sectors that may benefit from the coronavirus could be pharma, FMCG, consumer durables, IT and chemicals.
Pharma rides on the higher spending on medicines, while FMCG and consumer durables remain largely unresponsive to market changes. The IT sector is on the rebound with digital disruptions making a complete change in the way we lived and worked forever. The chemical space sees opportunity in the global discontent with China.
While the intensity of the impact may vary from sector to sector, there are few sectors that are majorly hurt due to the pandemic. These include aviation, financials, retail, realty and automobiles.
Lockdowns and social distancing have already hit the aviation and hospitality terribly. With the pandemic leading to a lower GDP growth for FY2021, the risk of an impulsive fall in loan growth is getting stronger. Along with that, as Covid-19 has hit businesses strongly as several small and medium-scale industries are on the edge of collapsing, there is a fear that the NBFCs and banks may see a rise in NPAs.
New constructions have stopped and sales have taken a hit. It is difficult to completely predict the extent of the impact as the sector may face the slowdown in sales and delayed product launches.
The pandemic has hit hard the automobile sector which had been grappling with a slowdown in demand.
Principal, Fund Manager – Listed Equities at IIFL AMC
We follow an SCDV framework (Secular, Cyclical, Defensives, Value Trap) which allows us to play the long-term secular themes and at the same time capitalise on the impending cyclical uptick. Based on our SCDV framework, we invest 40-60 per cent of the portfolio in high-quality Secular growth companies, which are long-term compounding stories. The rest is invested across quality Cyclicals and Defensives while avoiding Value traps.
The writer is a financial journalist