Betting On An Economic Recovery? These 4 Sectors Likely To Hog The Limelight

Ajit Mishra, Vice-President Research, Religare Broking, said investors with a two-to-three year horizon can start investing in quality midcap and smallcaps with a strong promoter track record, low leverage as well as healthy growth prospects. He advises avoiding stocks that have run into trouble owing to mounting debt, promoter pledge or other company-specific issues.

Among sectors, Mishra feels auto, banking/NBFC and FMCG stocks would outperform going forward. Even here, he advises buying stocks in a phased manner with a medium to long term view.

Q: What does the outcome of the Monetary Policy Committee meet suggest? Do you see a further rate cuts at its February meeting?

A: In a surprise move, MPC decided to hold rates against a wide expectation of a minimum 25 bps rate cut. The pause, as mentioned by the Governor, is temporary as the Reserve Bank would await more data on inflation and growth and therefore be better placed for a rate cut at its February policy.

This indicates there is some risk of inflation remaining elevated in coming months. However, a lowered growth forecast from RBI implies that the recovery in H2 FY20 is going to be muted.

We believe the policy is a balanced one and expect RBI to maintain its accommodative stance and cut rates at its February policy.

Q: What should be the investment strategy of investors at a time when the market is trading at record highs?

A: Considering the current scenario where the Indian market is hovering near peak levels while the economic growth is showing signs of slowing down, investors should be ‘cautious’.

Market participants are waiting for an economic recovery and additional measures from the government to boost sentiment.

Nevertheless, some correction at higher levels cannot be ruled out. In such a scenario, one should stick with quality companies having sound fundamentals and strong corporate governance. Also, they should buy stocks in a phased manner with a medium to long term view.

Q: Auto sales continue to remain muted in November, but some experts feel a recovery is underway. Do you concur?

A: We believe the worst is over for the auto industry, but expect the recovery to be gradual. Among segments, we expect a faster recovery in passenger vehicles and two-wheelers, led by the normal monsoon, higher minimum support prices (MSPs) and lower interest rates.

On the commercial vehicle (CV) front, we expect the recovery to be faster if the government implements the CV scrappage policy, otherwise it would be tough, given the price increase after the Bharat Stage-VI implementation.

Q: Mid and smallcaps have seen some recovery in the last few months. Has smart money started moving in some of the beaten-down names in the broader market space?

A: In the last three months, the broader market has shown some signs of improvement and has risen by around 9-12 percent.

Since the market is trading near record highs, some consolidation cannot be ruled out in the benchmark indices in the near term.

Currently, the focus is largely on the index heavyweights. But select pockets in the broader market are also attracting buying interest.

Further, many stocks have shown signs of improvement in their Q2 FY20 earnings, which provides valuation comfort as compared to their largecap peers.

Hence, investors having a horizon of more than two-to-three years can start investing in quality midcap and smallcaps with a good promoter track record, low leverage as well as healthy growth prospects.

Going forward, an earnings revival and growth forecasts could further accelerate recovery in the broader market.

However, one should strictly avoid stocks, which have run into trouble owing to mounting debt, promoter pledge or other company-specific issues.

Q: September quarter was a mixed bag, but largely on the positive side. How is December quarter likely to pan out?

A: September quarter earnings were on the positive side as expectations were low due to the slowdown witnessed across sectors.

However, it would be too early to comment on December quarter earnings. On an absolute basis, one can expect a decent recovery in earnings, led by a pick-up in consumption.

Commodity prices have also seen an uptick, which could hurt manufacturing companies’ margins.

Q: Anecdotal evidence suggests that bulls remained in control of D-Street in seven out of the last 11 years. Will 2019 be different as we are trading near record highs? Is some consolidation possible?

A: Indices touched a record highs last month, but the bias was largely on the consolidation side. This month too weak macroeconomic data, combined with not so encouraging global cues, have triggered marginal profit-taking of late, and indications are pointing towards further consolidation in the index.

RBI too kept rates unchanged and sharply lowered its FY20 GDP growth forecast to just five percent from 6.1 percent. Even though the market has not reacted negatively to the news as yet, we may witness some profit-taking in the next few sessions.

Sentiments would remain positive on the global front if the US-China trade negotiation goes through successfully by December-end.

Hence, given the mixed signals, it is likely that further upside could be capped and the market may end the month on a flat or a marginally higher note.

Q: Do you think the telecom sector has bottomed out? Should and investors with a long-term horizon adopt a buy on dips approach?

A: Price wars and competitive intensity are structural issues that the telecom sector will continue to face. Hence, pure-play telecom stocks may continue to suffer.

The deferment of spectrum payments of about Rs 42,000 crore for the next few years by the government augurs well for the telecom sector as it is likely to reduce the short term cash outflows of debt-laden telecom players.

Further, leading players have announced an increase in tariffs, which may reduce pricing pressure in the sector.

The recent developments have given a fresh lease of life to the troubled sector. However, the risk of AGR dues of around Rs 92,000 crore to the government still lingers on, which would adversely impact financials of a few large telecom companies.

We think that Reliance (Jio) is better placed as it has less spectrum and AGR dues, comparatively better financials and is supported by a continuous rise in market share.

Moreover, there could be some correction in the telecom stocks going forward as the telecom index is up around 17 percent month-on-month.

Q: Which sectors are likely to outperform or generate alpha as the economy turnarounds and why?

A: Sectors like auto, banking/NBFC and FMCG would outperform going forward.

– Auto: We believe the uptick in demand and lower borrowing cost would aid revival in consumption and volume recovery in the sector. Further, management commentary (in Q2FY20 earnings) and outlook shared by key auto companies were encouraging. However, one should be selective in auto space.

– Banking/NBFC: Many companies in this space have shown signs of improvement this earnings season with regards to assets quality, declining NPAs as well as slippages. Also, government and RBI measures such as lower interest rates, corporate tax cut, easing of FDI norms, GST rate cut and re-capitalization of state-run banks are positive for the sector, which could boost growth going forward. However, we would prefer sticking to large private banks owing to better assets quality, consistent financial performance and market share gains.

– FMCG/consumer durables – This is an all-time favourite space for investors as it is considered a defensive sector given the volatility in the market. Currently, many stocks in this space are hovering near peak levels. So, one needs to wait for some correction as well as valuation comfort. We advise investing in a staggered manner with a long-term view. – Moneycontrol