All in all Q2 results will be better and this is partly discounted in the prices. If the recovery as seen by the results and commentaries is much better-than-expected, then the results could set the direction of Nifty for the near future, said Deepak Jasani, Head of Retail Research at HDFC Securities, in interaction with Moneycontrol’s Sunil Shankar Matkar.
Q) The market has gradually been inching higher amid volatility and consolidation. Do you think the Nifty will hit record high by December-end?
A) Going by the current momentum, Nifty could keep inching upwards. A new high for the Nifty is barely 5 percent away. Though it seems very much achievable, the underperforming sectors like Oil & Gas, PSU, Capital Goods etc will have to start performing for the Nifty to reach the previous high.
A lot will depend on the results from these sectors and the management commentaries from the companies in these sectors. Also, we have the US Presidential elections on November 3. If the process of elections is smooth, we may witness a small rally post the results. At that time, Nifty has a fair chance of reaching the previous high.
However, post this rally, an across the board unwinding/profit-taking seems likely ahead of the calendar year-end.
Q) Going ahead, what could be the triggers for the market, and also what are major risks both globally and domestically?
A) As far as the local triggers are concerned, the speed with which the lockdowns are lifted and the economy gets back on track could be the biggest one. The sooner this happens, the better resolution to many of the issues faced on the macro and micro level (NPA formation, revenues of the Government, micro-financial improvement etc), will happen. Also, inflation and interest rate trajectory in India and an easier and wider availability of credit to businesses are some other triggers.
On the other hand, the risk factors globally include the resurgence of COVID and delay in restoration of normalcy, prolonged US election results, geopolitical issues in the Middle East, more belligerence by China, rising bankruptcies across the globe, and end of monetary easing policies by the Central Banks across the globe.
Locally, in addition to the above, our markets could react adversely in case the macro situation worsens or interest rates start to spike due to huge borrowings or NPA levels shoot up post end of the moratorium.
Q) Do you think the US elections will have an impact on Indian equities and what is your strategy?
A) Impact of US elections on Indian markets will be more a function of changes in global risk-on sentiments rather than who becomes the President.
In case the election is smooth and non-litigious (largely due to mail-in ballots), the event may not have any major impact on the Indian markets (barring the 2-3 days of anticipatory volatility and post unwinding). However, if there is no clear winner due to litigation and controversies, US markets may be negatively impacted and this may have some effect on Indian markets too. Also, a Democratic President with Republican-controlled senate may lead to blocking of all major legislation. In the end, the outcome of the polls may be less important. Investors should focus on how the poll outcome will impact the scenario of low-interest rates, improving earnings and a new economic cycle.
Historically Democrat rule brings in higher average GDP growth around 100bps higher. They are also more trade-friendly, with US imports showing faster growth. Corporate profits, employment and wage growth show better growth rates under Democrats. On the other hand under Democrats, inflation and interest rates are higher due to better economic growth. To a market that loves low/negative interest rates, this may sound negative.
Irrespective of the election outcome, once the dust settles, we may see gradual unwinding of positions in the US markets resulting in a correction, with Indian markets following the course. This is more relevant as we are approaching the calendar year-end which coincides with year-end profit-booking and tax selling.
Q) What are your thoughts on IT earnings announced so far (TCS, Infosys, Wipro, HCL Technologies, Mindtree, Cyient) and have you made changes to your IT basket after earnings? What is your outlook on the sector?
A) Results of IT companies were incrementally better in Q2 FY21. The commentary from the management has been positive. Margins have expanded and the outlook on margins has also been upped. Free cash flow or cash conversion has improved sharply. Deal wins have been great and some industry verticals (including BFSI) have recovered quite well. The management commentary suggests that this is a multi-year trend due to pressing digital transformation needs from a large number of customers.
Post results and ahead of the buyback in a few cases, stock prices have run up sharply and valuations in some companies are at 10-year highs. Though IT stocks may not be buys at these prices, existing investors can continue to hold them and fresh investors could accumulate them on significant dips.
Q) In light of the recent developments, should one add real estate stocks to portfolio? What is your pecking order?
A) Real estate sector has been under consolidation ever since the introduction of RERA. We have a limited number of listed players. Some of them are reeling under too much debt and are not able to unlock the value of land owned by them. However, some others have seen a revival in residential sales, especially in key cities/metros, while some others have tied up with PE funds for REIT to unlock value in the commercial complexes.
Although the loan-to-value (LTV) has been raised to 90 percent, banks may not be willing to lend to such an extent to ensure their margin of safety. For the sector to revert to structurally better situation, we need developers who do not overstretch themselves due to greed, who don’t overpay for land/TDR, we need local authorities who scale back the premium and other charges payable on development of property so as to make them more affordable and buyers who don’t buy individual properties for investment, but for self-occupation.
Real estate as a sector may not have a large downside from here, but for upside, sustained sales and steady prices are two essentials which are not yet fully in place.
Q) What are value buy sectors now which can double investors’ wealth by 2022?
A) Value as a theme has underperformed globally over the past two odd years. Growth has remained in favour and investors are willing to pay valuations that seem very high by traditional standards to participate in growth stories. This situation may not reverse in a hurry. Value stocks traditionally have done well when the markets remain sideways for long or are in a downtrend. Even in a downtrend they may not generate absolute returns but may relatively beat growth stocks. A lot of sectors seem to be value buys including PSU, Oil & Gas, select private Banks, holding companies etc. however, each of them has reasons for underperformance so far and there is not enough confidence that those reasons are no longer applicable.
Q) What are your expectations from September quarter earnings and do you think September quarter earnings will set the direction for the market going ahead?
A) Q2 FY21 corporate earnings are likely to recover well after we saw a sharp revenue and earnings contraction in Q1 because of the virus-led lockdown. Various broad macro indicators suggest that normalisation of demand/supply continued in Q2 FY21. Infections rate seems to have peaked and activity levels are improving just before the festive period.
However, if a large part of demand recovery is due to pent-up demand, we would need to watch its sustenance post the festival period.
The fact that rainfall for the southwest monsoon in 2020 was above long term average and food stocks at the end of September are about 10 percent higher YoY means that the spending power in Q3 could be higher and there need not be too much worry about inflation.
All in all, Q2 results will be better and this is partly discounted in the prices. If the recovery as seen by the results and commentaries is much better-than-expected, then the results could set the direction of Nifty for the near future.
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