The global equity market has been consolidating during the last one-month, posting a record performance from March lows backed by the highest amount of liquidity pushed in the US financial market. This capital averted a collapse in the market by providing resources to the economy when business and confidence were low. During the bounce back, optimism built up, hence risk of bankruptcy has reduced, the re-opened economy is adding continuity in business and CY21 is emerging as a virus-free world due to the development of vaccine. In the last one month, the global market has turned a bit cautious, especially in the near-term, since the second wave of the virus is impacting the trend of the economy, leading to weak data in Q2CY20 and valuations not being cheap.
In India, the Q4FY20 results were much below expectation and the preview of upcoming Q1FY21 is weak too. Analysts have hugely downgraded the forecast for FY21. But the market has done well in the last three months- led by inflows from Domestic Institutions and Retails later followed by FIIs as the global market improved during Q2CY20. Valuation of the broad market, on a one-year forward basis, had reached a near-decade low in March of sub 15x, funds pumped in assuming that the worst has been factored. In the last three months valuation has come back near to pre-Covid level of above 19x. It will be difficult to maintain the momentum of the last three months since room for an increase in valuation is capped unless fundamental jumps are substantial.
This week we are going to see the results of the Indian IT sector which is maintaining its buoyancy with the recent rally in spite of weak forecast in Q1, expecting QoQ degrowth in financials. Q1FY21 is expected to be the worst for the sector, which is believed to be factored in the prices during the fall of February and March. The near-term risk is with respect to client-specific concerns for segments like retail, travel, and oil and gas from the covid crisis. QoQ growth is expected to improve from next quarter onwards as the outlook for digital has improved, economy is open and INR is depreciating. Valuation of Nifty IT index on one year forward PE had touched a low of 12x in March which has subsequently increased to 18x, near the pre-Covid level. The outlook for technology is stable with a better outlook especially from CY21 onward and QoQ improvement. The performance of stocks may be volatile in the near-term but we are positive on a long-term basis.
During the week, the market has maintained its buoyancy supported by the financial sector, Auto, and RIL. Banks are catching up, due to improvement in outlook, in expectation of a reopened economy leading to better asset quality and fall in NPAs. Banks were amongst the weakest performer in Q1 since they were expected to be worst hit as the economic activity came to a standstill even as they were already reeling under NPA problem. But the preview for Q1FY21 result has improved compared to what was thought earlier due to lending to corporates, MSMEs and reduction in cost, especially in the latter part of the quarter which is expected to be increased in Q2. Auto also benefited by decent MoM data leading to improvement in near-term outlook. Meanwhile heavyweight RIL supported the market. It benefited due by good telecom demand as shown by TRAI monthly data and it was a pleasant surprise post Jio deal announcements leading to a decrease in debt.
Broadly the market, mid & small caps are maintaining its positive trend.We expect this strength to be tested in the coming month since the overall outlook for Q1 is weak and prices have increased from the low of March leading to high valuations. We expect some consolidation in the near-term, not a big fallout,and suggest accumulation as the best strategy in this situation, consistently buying with small amounts in the next 6 months. This strategy builds-in the benefit of upside and downside in the market, which is evenly built today given the situation where there is a possibility of a large upside if economy prospers or otherwise if there is a second wave & vaccine development slows down.
Auto & Ancillaries sector can be considered as a contra bet in the current market with high return in the long-term with high risk in the short-term of less than 1 year. The performance of auto may be volatile in the near-term due to pullback of the last 3 months and fundamentals continue to be weak with high valuation. Ancillaries like Tyres may continue its positivity since they are yet to catchup in the sector given better MoM volumes & cost benefits. We expect auto demand to be supported on a QoQ basis by social distancing norms, reopening of economy, pre & post monsoon demand, easy funding, low interest cost and festive demand. In the near-term, utility & two wheelers are expected to see better demand.
We are very positive on pharma sector given solid outlook in India & abroad. The demand is expected to increase given the health crisis, leading to much better valuation than it had in the last 3-5 years. The outlook was impacted by regulatory fallout in USFDA observations and pricing issue. This concern has reversed into an opportunity in today’s situation.
We have a negative view on Metals & Realty sector due to fall in infra spending, funding issue and cautious view of consumers, especially in the near to medium-term. We suggest to wait for consolidation in the next 1-3months and then add to your portfolio, accordingly.
The outlook for telecom sector is very stable post the industry consolidation with trio monopoly. While Covid has added more demand due to digitalization and WFH leading to higher data requirements. The ARPU has started to improve and expected to increase further while government is also interested in maintaining the strength of the industry adding sustenance in outlook. Though in the medium-term high valuation, high debt, cash requirement & capex requirement may impact performance.