The sustainability of the rally is a point of concern given the fact that the spread of the virus continues in a linear fashion in many parts of the world and its impact on business is getting extended. Stringent lockdown is expected to continue, distracting businesses heavily this quarter. And, the implication may get extended unless we start to get the benefit of lockdown and visible remedies in terms of control and treatment.
The market has been in a bear rally in the last one month. The Nifty50 intraday low was 7,511 on March 24 with a high of 9,391 on April 20, up 25 percent on absolute terms. The closing on April 24 was 9,154, which is up 20 percent on a closing basis.
During the week, the high volatility of crude, currencies and winding-up of MF schemes highlights the selling pressure of investors (including, corporates & retails) to reduce risky assets and go for the safety of cash.
Similar tactics were seen in the equity market, wherein India's main indices corrected by 40 percent. Now, we are seeing a second wave of correction in the financial market, which may impact equities in the future.
Having said that, the market still believes the world will win the situation and hoping that the economy will open by June-end. In that case, if this thesis is still correct that to see reversal in business post June, then the low in equity is intact in place.
For traders we suggest to capitalise from this trade and long-term investors to accumulate for the next one to two quarters.
I would like to mention about two queries we got this week, very relevant during the period of consolidation, about developing a contrary view on auto and a positive view on pharma.
Yes, the auto sector, which has been hugely underperforming in the last two years due to low demand, could be a good contra bet at this juncture. The demand was impacted due to slowdown in the economy, an increase in inventory, higher cost of insurance and safety and relaxation of loading. Smartly, consumers put off purchasing to get new engines, starting from April 1, 2020.
Now, we can expect new buying if the economy opens post-June and the carmakers have converted their entire fleet to BS-VI vehicles, provided salaried class or the urban demand is less impacted.
We also assume that the calibrated move by the government and RBI will spur rural demand and open up selective auto stocks during the second half of the year. A scrappage policy act could be a bonus.
Currently, we are suggesting only two stocks Maruti Suzuki and Escorts.
Pharma has been outperforming, which we expect to continue for the years to come.
Due to the health issue, the outlook has improved for the healthcare sector, including pharma, clinics, health products manufacturers and services providers.
The pharma sector has been underperforming for five years due to pricing issue in the US, fall in brand value and businesses in that country during which valuation decreased. Now, this issue is getting relaxed because higher spending and demand are expected for health this year.
The demand for pharmaceutical products has been largely unaffected during the lockdown period. Therefore, companies with strong domestic and export presence have benefited.
Although export restrictions were placed for few drugs, exports of other drugs have continued, thereby benefiting companies, especially with the depreciation of rupee.
Due to supply disruptions from China, which is the world's largest manufacturer of APIs, there has been a shortage of raw material. Although a few companies have said they have sufficient inventory for the quarter, this disruption may impact margins in the short term. Attractive valuations for many pharma companies could also be seen as reason for the recent rally. We have two pharma stocks in our model portfolio Torrent Pharma and Biocon.
Source:- moneycontrol.com