Indian share market to outperform economy; IT, pharma stocks in good spot, but stretched valuations a concern

Classes learnt from the second wave will (hopefully) speed up the vaccination drive and stop a extreme third wave.

By Unmesh Sharma

An oft-asked query lately by buyers and market individuals is “what explains the disconnect between the tragedy enjoying out in India versus the euphoria within the markets? How does one reconcile the 2 and extra importantly, how does one make investments on this situation?” It could sound counter intuitive however the actual fact that issues across the virus haven’t receded is a assist to the market. Globally Central Banks are in no place to withdraw liquidity assist. Within the trade-off between inflation and progress, financial and monetary coverage is more likely to err on the aspect of progress within the present setting.

Certainly, inflation fears have emerged in the previous couple of months, inflicting some volatility in markets particularly the commodity-consuming Rising Markets corresponding to India. Making an attempt to foretell brief time period traits in markets is a mug’s sport given the complicated inter-play of those elements. At HDFC Securities, we see no benefit in making an attempt to foretell ultra-short time period traits by second-guessing the Fed and look past.

It’s our conviction that the macro pattern particularly on international liquidity is supportive from a 12-15 months situation. We imagine we’re in an period of multi-year (if not multi-decadal) international deflationary traits, pushed by know-how amongst different elements. Inflationary issues are due to this fact more likely to be transitory. There shall be pockets the place inflation will damage will however normally, a immediate and sufficient provide response will allay issues. This additionally explains the subdued response of bond yields within the latest previous. We due to this fact don’t see a re-emergence of the widespread panic we final noticed in 2020 when Covid-19 first emerged.

This isn’t to say there aren’t any imponderables. For many buyers in India, belonging to the higher financial echelons in tier-1 cities, the second wave has hit very near house. As well as, the second wave has been extra extreme within the rural areas. The agricultural economic system has seen an influence on remittances as a result of reverse migration and the well being disaster. Market individuals would wish to maintain a more in-depth eye on the monsoon to pre-empt any emergence of financial misery in rural India. Will demand endure from PTSD? It could take months and even years earlier than issues get again to regular and it’s robust to agency up a view presently.

However this, what we do know is that the influence of the phased and calibrated lockdown within the second wave has not impacted the economic system as a lot as the primary wave in 2020. Classes learnt from the second wave will (hopefully) speed up the vaccination drive and stop a extreme third wave.

Certainly, we expect the markets will outperform the economic system. As we’re mid-way by way of the earnings season, our analysis workforce has analysed the rising earnings image. ~70% of our protection shares have overwhelmed estimates within the fourth quarter (January to March 2021). We acknowledge that that is backward trying. Nevertheless, regardless of the muted outlook as a result of second wave, NIFTY earnings’ estimates for FY22 / FY23 are largely unchanged. It’s because the sectors impacted by the second wave have a low weight in mixture earnings. Among the many giant contributors, our workforce factors out that banks (particularly the massive banks with sturdy deposit franchises) have navigated the disaster nicely so far- we stay sanguine concerning the NPA and provision situation.

We imagine this may stay a inventory pickers’ market in FY22 and like economy-facing sectors and mid / small caps (in sectors the place ‘winner-does-not-take-all’) as markets begin FY23 and past. Our most well-liked sectors are giant banks, cement, client durables, infrastructure, gasoline, insurance coverage and capital markets. We stay underweight on consumption (staples, discretionary and autos), NBFCs and oil. We stay bullish on IT, Pharma and Chemical compounds however have grow to be selective given the stellar run-up and stretched valuations.

(Unmesh Sharma is Head of Institutional Equities at HDFC Securities Ltd. Views expressed are the creator’s personal.)