Despite the gradually evolving signs, it is almost certain that the global and domestic economy will fall sharply in FY21 due to COVID-19.
Foreign brokerage Nomura said on July 21 that economic activity continues to be weak, leading to a 6.1 percent contraction in India’s GDP in the current financial year.
Economists and analysts expect a contraction in GDP due to the COVID-19 pandemic, which has had an impact on supply and demand forces in the economy since March.
Official data also indicate an increase in inflation, which in fact will further reduce GDP.
In recent times, markets have fallen sharply due to the uncertainty of economic growth as a result of the pandemic and shutdown.
Equity markets are seeing volatility as economic growth opportunities weaken.
However, gradually the market started to move higher on liquidity push and hopes that growth is likely to look up in FY22 and this revival will push up corporate profitability also.
How to turn it for benefit?
At this point, investors are trying to figure out how to turn a falling GDP scenario to their advantage, as GDP growth and revenue growth are closely linked and revenues growth and overall growth in the economy are intertwined.
When the GDP growth outlook is poor or when GDP growth is likely to fall, the markets trade lower.
Experts believe that the best time to invest in equity is when growth is slow and earnings are low, with low values available.
“For investors, the best time to invest is when growth falls and earnings decline. This makes the markets cheaper to buy. The best thing would be to accumulate as growth gradually comes back and markets start moving up. So any fall in growth and decline in prices is an opportunity to invest. It is when earnings peak that one should book some profits,” said Joseph Thomas, Head of Research, Emkay Wealth Management.
Investors can also look at sectors that were resilient during such stressful times and suffered losses and now look upside down.
Arjun Yash Mahajan, Institutional Business Head at Reliance Securities, advises booking profits as the market-economy dichotomy expands.
Mahajan stressed that the vast majority of companies adversely affected by the COVID-19 lockdown have not yet reported their Q1FY21 earnings and it would not be surprising if we see some reporting losses for the first time or many decades later.
“In the continuing background of the dichotomy between the underlying economic fundamentals, falling GDP scenario, and the current stock market rally, it will be prudent to book profit at every rising level and take money home,” Mahajan said.
“We have seen in the past that the market does give a better entry opportunity and this time also we should see a better and lower entry point. The other argument is why miss out on the rally and that one should continue to ride the wave. Well, in that scenario, it will be advisable to take the initial capital home and keep the gains invested until an investor’s comfort level.”
Cheap buying, reviewing the portfolio, and booking profit are the three most important things that investors need to remember in order to make a profit in the current market and financial conditions.
Sectors and stocks that look attractive:
MK Wealth Management Thomas believes that some sectors, such as pharma and healthcare, telecom, technology, specialty chemicals, etc., are doing well.
Rusmik Oza, executive vice president & fundamental research head of Kotak Securities, said agricultural growth would be sustainable in FY21, while the service sector and manufacturing could have an impact on FY21, but could recover in FY22.
impacted in FY21 but revive in FY22.
“Based on March quarter results and management commentaries, we can infer that many companies servicing global clients and selling daily essentials are faring well. For example, telecom, IT, specialty chemicals, agrochemicals, FMCG, insurance, and pharmaceuticals are few sectors that are doing well even in these bad times and are likely to see earnings growth in FY21 when others could see huge profit erosion,” Oza said.
“Investors can focus on stocks from these sectors in any near-term correction. Apart from these sectors, investors can also look at a few beaten-down sectors from a two years perspective. These are banks, oil & gas and capital goods,” Oza said.
Oza finds value in few banking stocks such as Axis Bank, ICICI Bank, DCB Bank, and Federal Bank.
In addition, Oja believes that the capital goods sector also adds value, as the average of 15 companies in our offers falls to almost 37 percent.
“Within capital goods and related ancillary sectors we like Larsen & Toubro, Kalpataru Power Transmission, and KEC International,” said Oza.
“Oil marketing companies still offer upside on the back of renewed interest in BPCL. We like IOC in this space. We continue to like Bharti Airtel in the telecom sector. Other stocks we like are Hindalco, Titan, GAIL, and ITC. In any near-term correction, investors can look at few auto stocks like Bajaj Auto, Mahindra & Mahindra, and Escorts,” Oza said.
Reliance Securities Mahajan has been recommending sectors and stocks on the horizon for 2 years and said he would like to book profits and take both capital and profits.
Among the sectors, Mahajan expects IT, FMCG (not covered by Reliance Securities), selected auto and auto components, City Gas distribution companies, asset management companies, capital goods, and pharma (not covered by Reliance Securities).
Among the stocks, he owns Emphasis (TP: Rs 1,200), L&T Infotech (TP: Rs 2,550), Ashok Leyland (TP: Rs 101), Bharat Forge (TP: Rs 551), Indraprastha Gas (TP: Rs. 602), Petronet LNG (TP: Rs. 335), HDFC AMC (TP: Rs. 3,250), KEC International (TP: Rs. 328). The target price of stocks with a two-year horizon.