In last three weeks, the momentum of the main indices is getting polarized and viscous, as Nifty50 is not able to take concrete steps and move beyond 11,300 decisively. The fundamental factor impacting the trend is that the good set of heavyweight Q1 results is nicely factored in their prices. In addition, we are witnessing the second wave of weaker Q1 results along with all-time high valuations, increased local lockdown, upside in US-China trade war and volatility of global market and currencies.
Q1FY21 earnings for Nifty50 was expected to degrow by -38 percent (based on our Bloomberg data analysis) due to COVID-19 lockdown leading to subsequent economic standstill.
Most sectors apart from pharma and financials were expected to see de-growth in earnings. So far, 44 companies have announced their results and the net total net profit has de-grown by 52 percent against de-growth expectation of 33 percent. They are worse than though but outlook was improvement with better guidance. All the BSFI companies of Nifty 50 have announced their earnings and their net profits have grown by 13 percent against in-line expectation of 11 percent, a dark horse with cheap valuation.
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Technology sector has posted marginal fall of -5 percent, in line with expectations backed by better business forecast, cost control measures and large deal wins. The Consumer and FMCG sectors saw a -13 percent decline in net profits, better than -20 percent expectation. Other than that, staples demand continues to be weak and expected to improve from H2.
Of course, the market had factored this weak numbers and collapsed in the month of February to March. Post that phase, market reversed due to financial support and re-opening of the economy leading to MoM improvement in economic data.
Although the lockdown restrictions have eased, overall earnings recovery may happen only from H2FY21 onwards in most sectors. A good amount of this improvement in economy is factored in the price. While increased local lockdown in India and abroad, slowdown in recent frequency economy data and increase in India retail inflation may impact further improvement in economic data.
In the last three-to-four weeks, largecaps were volatile and because of that, momentum shifted to mid and small caps. The broad market is maintaining its buoyancy with optimism to catch-up with large caps which witnessed a strong V shape recovery from March low.
We feel the possibility of Mid & Small caps outperforming the broad market is decent today, at least in the short-term but stock specific approach is recommended. This is because of the low-priced valuation compared to large caps and fall in bankruptcy risk given supportive fiscal measures. So, we can expect high quality mid and small caps with strong credentials, clean balance sheet and leadership qualities to outperform the market.
It has also been observed that there are companies which were able to register growth in financials highlighting their resilience during the standstill phase of the economy as well as underlining its supremacy and elasticity of business. We can assume better forecast for such companies post normalization and those can outperform the industry.
In such a case, sectors like Pharma, IT, FMCG, Chemicals and export-oriented businesses have done better and are likely to continue. Nevertheless, we have to look into valuation too as some stocks and sector have become very expensive.
The market may tend to go into a defensive mode shortly, in which sectors like Pharma, IT, FMCG and Telecom will be the best sectors to hide in the equity portfolio. Growth-focused sectors like chemicals and export-oriented companies will also fair well.
For a risk averse investor higher exposure is advisable in safe-haven assets like government bonds, rated bonds, gold bonds/ETF, defensive sectors and cash. At the same time, no one knowns the timing and extent of this correction, if any. In-terms of a pure equity investments plan, we have been advising our clients accumulation as the best strategy of investment given the discussed situation.
Today, to have cash-in-hand will be the best weapon to grab the opportunity, as a correction is bound to happen. We are not expecting a big correction in the market, but a consolidation in price and time.
The author is Head of Research at Geojit Financial Services.
Source:- moneycontrol.com