Ambareesh Baliga, Market Analyst and Independent Consultant, said that when the economy reopens the demand may not return as quickly as it did after the first wave of COVID as fears of a third wave continue to linger.
In an interview with Moneycontrol’s Sunil Shankar Matkar, Baliga said a correction of over 1o percent will create panic in the market as most people are riding the momentum with overconfidence.
Edited Excerpt:-
Q: Do you think the state-wise restrictions to reduce the spread of fast-rising COVID-19 will hit earnings growth for the June quarter? Have you reduced your earnings growth estimates for FY22?
We have had a near-complete lockdown in an economically important state like Maharashtra since the last three weeks and this has been followed by other states and union territories. A few other large states like Bihar and Telengana would be considering a lockdown in the next few days.
In this sort of scenario, it’s natural that economic activity will reduce sharply, availability of labour would be limited, disruption of the supply chain would be a reality. Unlike the first wave of the pandemic, the devastation in the second wave has been massive, in terms of people affected as well as deaths. This could lead to a deep emotional drain and people may fear a third wave, unlike last time when we thought we had defeated COVID.
Thus, we may not see a surge in demand on the opening up of the economy. The first quarter could be a wash-out, but may not be as bad as FY21. I will surely be reducing the earnings estimates for FY22, however would wait for the rest of the earnings for Q4 FY21 to be declared.
Q: What will be the impact of the second wave of COVID-19 on the Indian economy in Q1FY22?
When a country is in distress, normally, the bottom of the pyramid is the most affected. The second wave would have disastrous effect on most of the small and micro entrepreneurs who are not listed as providers of ‘essential services or products’. After a tough FY21, though there were government sentimental booster and some sops for this segment, they were trying to get back on track when again got struck by the pandemic. I wonder how many of such businesses will wind up, further creating further pressure on the financial sector.
Already economists have reduced the growth forecasts by 1-2 percent and I will not be surprised if there is a further downgrade of 3-4 percent on the forecasts made at the beginning of CY21.
Q: Is it a year (FY22) of consolidation for the market after a stellar 70 percent growth in benchmark indices? Is there any chance of double-digit returns for the year?
I doubt whether FY22 will be a stellar year for the stock markets, though as yet we still seem to be having a strong momentum backed by liquidity flows. If the markets are holding up despite the expectation of a weakening corporate performance as a fallout of the second wave, we would be creating a bubble powered by liquidity. And such bubbles create an environment where most of the participants tend to believe that the rally will continue to eternity and they turn complacent. Liquidity is a friend of the trend, but it comes at a price.
Every rupee of fresh investment flows as long as it gives a higher marginal return. Thus, when the markets correct for any reason, which could be an extension of the pandemic, global market cues, rising yield, below expected earnings or geopolitical issues, the rich valuations will not provide enough cushion for the markets, and liquidity could dry up. A correction beyond say 10 percent is bound to create panic as most of the people have been playing momentum with overconfidence. We could close in the negative.
Q: If in case there is more selling pressure, what are those key sectors to buy and why?
The sectors which I would buy are those which benefit from a pandemic or are immune to it. Some of these sectors would be FMCG, pharma, defence, telecom, select integrated steel players and speciality chemicals. I would avoid automobiles, white goods and BFSI with some exceptions.
Q: Have you spotted any stocks that should be bought in the current correction. Kindly mention a small rationale for the same?
I would buy Jindal Steel & Power as the company has been able to repair the balance sheet, reduce leverage and is in a good position to benefit from the upcycle in steel. A couple of years back it was on the verge of being taken to the cleaners…. Thus a rediscovery. Praj Industries would be a great play for Ethanol where India’s capacity will be increased 3x in the next 4 years to meet the 20% fuel mixing norm by 2025. Praj would be the major beneficiary of this capex.
IRFC is among the ignored stocks in the BFSI space since its business is limited to Railway Project Financing. It is, however, among the rare funding agencies declaring Zero NPAs and is expected to continue that way. Thus a stock that provides a good dividend yield, expected to grow at 20 percent, having a good cushion of quoting at a discount to book value, a safe investment option in this volatile market.
Q: The market, so far, has not seen any major impact of record infections and in fact getting buying support on every major fall. What are the key supporting factors? Also, what are the major reasons for FII selling in the month of April?
The key supporting factor is the central bank’s easy monetary policy which also translates to liquidity flowing into performing emerging markets. The Robinhood investors are overconfident on the equity markets since they have rarely lost in the last 12 months, thus shifting funds from other asset classes to equity. And in a bull market, there is a tendency to overlook every bad news for a silver lining. Markets are ignoring the tsunami of COVID patients vis-à-vis the possibility of the population getting vaccinated, despite the short supply.
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