The second wave of pandemic and selling by FIIs is spooking the Indian market. The second wave is expected to impact the domestic economic recovery while FIIs are selling because of the strengthening US economy with attractive high-interest yields for low-risk bonds. This situation may prevail and continue to drag the performance of the Indian market, but only in the short term. Medium to long-term trend is progressive supported by rising domestic demand, higher pent-up demand, and increasing share of Indian exports in the international market. We should capitalize on the correction by developing a portfolio in the context of the new normal and the stabilization of the economy.
We believe that the second wave may prevail for a period of two to three months, as per data of similar occurrences in developed economies. By that time herd immunity in India will improve and vaccination will start producing results. Cases will also reduce due to lockdown and completion of state elections.
Our understanding is that the economy will be marginally impacted during Q1FY21, the ongoing quarter. The overall economy is opened and growth is expected to revert with higher pent-up demand. Medium to long-term trend of the Indian economy is positive given a large and diversified growing domestic economy supported by government spending and increased penetration of Indian manufactured products in the world market.
Some volatility is also feared from the likely outcome of state elections, but even on a worst-case basis, it is not going to change the trend of the ongoing economic and central policies. It should not impact the long-term trend of the market. As per consensus too, the central government has an upper hand to add its political stature, which may help the stock market and economy in the future.
Regarding selling by FIIs, net inflows have been positive till March, which turned marginally negative in April as positivity started shifting to the US and some Emerging Markets. Indian market is more impacted by the dual low inflow from FIIs and DIIs. The Indian economy is expected to underperform during this period. The yield of low-risk US 10-year bond had increased to 1.75%, better than the dividend yield of S&P500 index of 1.45%, making it more attractive for FIIs. The outlook for the US economy has also become better than Emerging Marketsdue to large fiscal and monetary stimulus. The economy is on the cusp of growth with high herd immunity of (1st vaccinated + infected) which has a forecast to reach an immunity rate of 85% by 2021 end. 7-day moving average infection rate has reduced to 68,000 from the peak of 2,55,000, three months ago. World’s largest economy is expected to grow at robust 6.5% and 3.3% in CY21 and CY22, respectively.
How can Indian investors play in the situation and capitalize in the long term?
- Review your portfolio and try to rebalance it.
- Develop a balanced portfolio with a mix of equity, debt and gold.
- For a risk-tolerant investor, maximum exposure in equity is suggested at 75% with 15% in debt and 10% in gold. For a risk-averse investor, the equity component can be reduced to 50%.
- Reduce the mix of expensive stocks or book-out from high beta/risky stocks. Expensive stocks are those whose valuations are much above the historical trend. On a price movement basis, one should note stocks that have spurted in the last two to three months without enough bounce in business outlook, especially in small and micro caps. Currently, some sectors whose valuations are on the higher side are banks, NBFCs, metals, infra, transportation and IT. Investors can slowly increase mix in private banks and metals in the next one to three months for long-term gains.
- Generally, reduce mix of mid-small-micro-caps.
- Increase exposure in efficient and quality companies with strong leadership in industry, segment and/or products. Be positive on companies, which have high export or outsourcing opportunity in domestic and global markets. Some well-known sectors in India today are IT, pharma and agri.
- Increase exposure in the manufacturing sector like industrials, capital goods, auto and ancillary. This decade could be dedicated to Indian manufacturing sectors like chemicals, electronics and food. Possibility is high that India will come out of Covid-19 crisis with flying colors.
- Develop interest and space for new generation business in IT, services and manufacturing. Examples are sectors like e-commerce, digitalization and green energy, though they may be expensive on traditional valuation methods.
Concerns over lockdown in India have returned. On a positive note, India will reach the peak level of infection in the coming weeks or maximum in a couple of months, which will bring stability to the market. And, your portfolio should be well-armed to garner maximum gains in the future.
