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Focus on largecaps, FII could remain net sellers in April too: Kotak Securities

April 08
16:02 2020

We advise focusing on mega-caps or large caps as the valuation gap between the largecaps and midcaps has narrowed down. Since we could be in a longer bear market, one should have a higher allocation to defensive sectors like pharma, FMCG & technology, Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities said in an interview to Moneycontrol’s Sunil Shankar Matkar.

Edited excerpt:

Q: March was the worst month for equity markets. Do you expect some kind of recovery in April?

COVID-19 cases are rising at a fast pace in many countries and in India also the rise is very steep. Going by this rate it seems we are still far away from the peaking of this pandemic. The lockdown of 21-day could get extended in a few states, if not the entire country.

Hence, businesses could get impacted for a longer duration than originally estimated. Though volatility has reduced, markets are not showing signs of any material improvement. April could also remain a weak month with the range moving down with a lower top lower bottom formation.

Q: What should investors do now given the coronavirus-led steep fall in the market and what should be their strategy be with respect to their portfolio?

On various other parameters the index shows that too much of forthcoming negatives and outlook of a recession have got priced into stocks (too fast, too soon). In these panic falls it is difficult to fathom the bottom but given the favourable risk-reward situation investors need to take a long term view and keep on accumulating stocks at every decline. One should keep in mind that the probability of the market going down is far higher than going up.

Also, recovery will take time and mean reversion will happen in the medium to long term. We advise focusing on mega-caps or large caps at this juncture as the valuation gap between largecaps and midcaps has narrowed. Since we could be in a longer bear market one should have a higher allocation to defensive sectors like Pharma, FMCG & Technology.

Q: Banking and financial services have taken a huge beating in the market turmoil due to worries over likely NPA pressure after lockdown. Your thoughts.

BFSI is a leveraged business and since both manufacturing and service activity has come to near standstill, MSMEs and unsecured loans could see rise in NPAs. The slowdown in loan growth and rising delinquencies could impact earnings of banks and NBFCs in a big way.

For the last two-to-three years the BFSI space (excluding PSU banks) had been outperforming and we also saw fresh names from this space getting added in the Nifty-50. Hence, at the peak the weight of BFSI space had gone to around 45 percent in Nifty50. After the recent underperformance the weight of BFSI in Nifty-50 has come down to around 36 percent, but nonetheless it is still very much on the higher side.

In India, we don’t have any large next-generation technology companies listed and most of the other industries are cyclical with a lesser number of stocks in the Nifty-50 (as compared to BFSI). Hence, after some period of underperformance, the BFSI space could once again come back to the leadership position.

Q: Do you think the government or RBI will announce more measures?

Yes, we can expect more measures coming from both the government and RBI in the near future. The fiscal measures taken by the government are aimed at food and income security for the bottom of the pyramid population. It does not, however, address the cash flow problems of MSMEs and to that the extent they will require support, especially, in case of an extended lockdown. We see space for additional fiscal spending of around Rs 1 trillion.

Given a moderating inflation trajectory, the RBI can further reduce repo rates by 50 bps. Our in-house economists are predicting FY21 Gross Fiscal Deficit to increase to 5.2 percent of GDP. While some countries have announced fiscal packages worth 5-10 percent of GDP, we believe that India’s response will likely be relatively muted.

Q: What industries are likely to see opportunities after this crisis?

Going by past precedence, defensive sectors witnessing lesser disruption in demand could stand to outperform in the coming few quarters. Also when the dust settles we could witness higher outsourcing opportunities coming into India.

Keeping this in mind we feel sectors like FMCG/consumer staples, pharma, insurance, specialty chemicals, bulk drugs & contract manufacturing will attract investors interest. Leveraged businesses and consumer discretionary space will take time to revive and could see valuations suppressed for some time.

Q: Do you expect major earnings downgrades for Q4FY20 and Q1FY21?

Q4 earnings would disappoint as companies faced dual problems. January & February saw supply disruption from China while March will see the full impact of COVID-19 and lockdown on demand. We are still to access the full impact on Q4 earnings but optically the lower tax rate could provide some buffer. As of now our house is building in earnings growth of around 6 percent for FY20 and around 16 percent for FY21 for Nifty50 on a free-float basis.

The extent of earnings cut in FY21 estimates can be ascertained only after Q4-FY20 results when managements would talk about their outlook for next year.

Q: Do you see FII outflows continuing?

Considering the rising cases of COVID-19 and imminent threat to earnings we could see FIIs remaining net sellers in emerging markets and India. Pace of selling in April could be lesser than March as volatility has reduced and Indian markets have already fallen 35 percent from the peak.

Q: Do you think the COVID-19 will drag the global economy into deep recession? What about India’s economic growth in FY21?

Going by various forecasts, global growth is likely to be flattish in CY20 implying deep erosion in the first half GDP followed by some recovery in the second half.

Most of the forecasts are building in a smart recovery in CY21 GDP estimates which means the pain could be short-to-medium term. Unlike past recessions most governments and central banks have been proactive and have taken steps to avoid any prolonged slowdown. These measures and liquidity injunctions may not serve the desired purpose in the immediate future that to when the problem is health-related.

However, as and when the situation normalizes these measures could show their results. Similar to global trend we will see India’s GDP also getting impacted. Difficult to put a number at this moment but Q1-FY21 estimates could provide better clue for whole of FY21.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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