The worries over unfold of the virus have created mayhem in inventory markets globally. Here is what lies in retailer for fairness traders in the yr to return
There has been a massacre in inventory markets globally. Indian fairness indices aren’t any completely different. The set off is the fast unfold of coronavirus that’s resulting in shutdown of companies, lockdown of huge industrial cities, even complete nations (corresponding to Italy), aside from snapping of provide chains, throughout continents. An additional unfold will set off a fair sharper correction, say specialists. “At the beginning of the yr, solely firms with dominant China publicity had been affected. Later, because the pandemic unfold, inventory costs of Indian exporters additionally corrected, totally on demand issues.
If the virus continues to unfold and outcomes in a contagion in India, inventory markets might face a sharper correction relying on the depth of the unfold,” says Nimesh Chandan, Head Investment Equities, Canara Robeco Mutual Fund. As we go to press, the BSE Sensex and the NSE Nifty are down over 17 per cent this yr. Small and Mid-cap indices, thought of extra risky, have additionally corrected. BSE-Mid-cap and BSE Small-cap indices are down 15.56 per cent and 14.14 per cent, respectively, this yr.
Though coronavirus is the rapid set off, it has come on prime of different worries, albeit not as lethal because the pandemic that has killed four,000-plus individuals globally. The Indian economic system has been experiencing a pointy slowdown for a number of quarters now with GDP progress touching four.5 per cent in the September 2019 quarter, the bottom in six years. Despite this, inventory indices stored rising, with the Sensex closing at a file excessive of 41,952 on January 14. “India has been trading at extremely high valuations. Hence, the correction is justified, with coronavirus being the scapegoat,” says Umesh Mehta, Head of Research, Samco Securities. “The fall is panic driven (due to coronavirus) and is causing pressure on D-Street,” he says.
The virus preyed on the nervousness that was already there amongst market members. “India is part of the emerging market asset class. Significant money comes into India from Emerging Market Exchange Traded Funds (EM ETFs). China has the largest weight in EM ETFs. Hence, if the Chinese economy is seen to be suffering, money moves out of these ETFs. The selling is across the holdings and, hence, Indian stocks also see selling pressure,” says Prateek Agrawal, Business Head & CIO, ASK Investment Managers.
Blessing in Disguise?
As coronavirus fears fade a number of months into the brand new monetary yr, as is being hoped, can India flip this disaster into a possibility? Experts say as world firms study from the present disaster and cut back their dependence on provide chains with origins in China, can India present them an alternate as a provide base contemplating its low cost labour and expertise base? “In many sectors, Indian companies have strong capabilities to compete internationally. In the past few years, due to rising costs in China, Indian competitiveness has improved,” says Chandan of Canara Robeco Mutual Fund.
In September final yr, the federal government had introduced tax incentives for establishing manufacturing services in India. “There will be quite a few global players who would want to diversify their sourcing base and add Indian suppliers to mitigate (country specific) risks in the future,” he provides. Others agree. “There has been an enormous world provide chain disturbance. China accounts for 24.eight per cent of world manufacturing capability whereas India’s share is simply three per cent.
In the long term, India can see a provide chain shift if the federal government is proactive,” says A.Okay. Prabhakar, Head of Research, IDBI Capital. “India is likely to be a prime beneficiary of this shift. However, this will happen over the medium to long term. Also, in case of India, a lot will depend on how quickly the government can address land and labour issues (biggest impediments to manufacturing in India) and woo global manufacturers,” says Alok Agarwala, Head, Research & Advisory, Bajaj Capital.
“We expect current issues in China to be a double-edged sword. On the one hand, India has to rapidly shed dependency on Chinese imports, and on the other hand, it has to strategically ramp up production to cater to the cost-effective global raw material demand/needs. We believe India is strategically placed to cater to excess demand in certain sectors,” says Mehta of Samco.
Some see issues otherwise. “It is difficult to say if a slowdown in China is a blessing in disguise for India as shutdown of manufacturing plants there is creating supply chain rifts across the globe,” says Ajit Mishra, VP Research, Religare Broking. He says India’s auto and metallic industries additionally rely upon China for key elements and are getting hit. “A few pockets can benefit. For instance, textile, sanitaryware and ceramic players may gain as exports increase due to supply constraints in China. Also, decline in oil prices due to outbreak of the virus could benefit India’s oil marketing, paint and aviation companies by reducing their input costs,” says Mishra.
Investment Opportunities
The Indian economic system has been going through a slowdown for lengthy. However, issues began wanting up after the company tax price lower in September 2019. The Index of Industrial Production rose 2 per cent in January. It had contracted zero.three per cent in December final yr, after recovering in November submit three months of contraction. Transmission of decrease rates of interest, too, had began, as famous by the RBI in its financial coverage assertion on February 6, whereas credit score progress was nearly to show the nook, when coronavirus struck.
While markets will stay below strain in the subsequent few months, the supportive fiscal and financial insurance policies will begin exhibiting outcomes in the second half of 2020. The authorities and the RBI have taken a number of steps to stimulate demand and investments. “The headwinds that had slowed the business cycle in the past few years are turning. The banking sector has provided for historical NPAs, GST has stabilised, liquidity is back in the system, and the worst seems to be behind for the NBFC sector” says Chandan.
Globally, too, governments and companies are taking measures to stabilise the state of affairs and restore investor confidence. Last week, the Federal Reserve lower charges by 50 foundation factors. The different central banks are prone to observe swimsuit. “This is a well-timed move that should underpin financial market confidence. Investors were expecting a response from the US central bank, and the Fed showed itself ready to act promptly and decisively,” says Sonal Desai, Chief Investment Officer (Fixed Income), Franklin Templeton Mutual Fund.
Experts say most of the weak point in macro circumstances had been priced in and it was coronavirus that had taken everybody without warning. “We believe with India’s slowdown bottoming out and government announcing growth revival measures, we could see revival of demand in the coming quarters,” says Mishra of Religare. All inventory market indices, together with the massive-cap index, have fallen sharply, led by cyclical sectors corresponding to banking, car and power, as a consequence of fears of sharp slowdown in progress. After the correction, valuations look engaging throughout the broad spectrum of the market. “We believe that while there is a growth slowdown, the valuations are sustainable if one takes into account the reduced interest rates,” says Prateek Agrawal of ASK. He believes the economic system is bettering incrementally with restoration being led by agriculture and associated areas. This shall be aided by improved present account deficit and decrease oil costs. “We believe current market levels should be sustained. Given the sharp correction in valuations of the high quality part of the market (on account of earnings growth), we believe investors should focus there, particularly when the overall global situation is weak,” he provides.
Falling oil costs may even be a boon for India. “The drop in oil prices will counteract some adverse effects of the virus shock by lowering input costs for businesses. Any inflationary impact from potential supply disruptions ahead is likely to offset by the disinflationary effects of lower gasoline prices. Additionally, sharp decline in global bond yields are also supporting lower domestic borrowing costs,” Bloomberg has stated in a current report.
“We believe India’s economy is bottoming out with expected FY20 GDP growth of 5 per cent likely to mark the bottom. However, recovery is likely to be weak and gradual as multiple segments of the economy are still in a difficult phase. While FY21 GDP growth is expected at 6 per cent, it is still lower than potential. Improvement in strained segments such as real estate, SMEs, autos, NBFCs is imperative for sustainable recovery,” says an HDFC Securities report.
The Beneficiary Sectors
Here are some sectors that specialists consider are prone to do effectively. “Given the impact of coronavirus on the global front, sectors such as textiles, tyres and specialty chemicals may experience higher demand,” says Mehta of SAMCO. He says a number of gamers corresponding to Raymond and Trident could profit in the textile house. Also, gamers with big dependence on crude oil will profit from declining crude oil costs. One such firm is Asian Paints.
FMCG: Experts say India’s financial slowdown is bottoming out and announcement of progress revival measures might revive demand in home-pushed sectors. FMCG is one such sector. “Sectors like FMCG should do well as they are not impacted by the virus-related slowdown, if any. Moreover, they stand to benefit from lower input prices. Commodity prices are falling on expectations of lower global growth,” says Agrawal. Also, oil costs have fallen sharply of late. This ought to permit FMCG firms to compensate for any quantity strain with margin growth.
Banking and monetary: Rate-sensitive sectors corresponding to retail banks with deep penetration and NBFCs with correctly managed ALM (asset-legal responsibility mismatches) are anticipated to do effectively as credit score progress picks up. Given the worldwide financial easing, decrease inflation and world slowdown, specialists count on rates of interest to fall additional. “Lower interest rates will enable this space to deliver a net interest margin increase that can compensate for any decline in AUM growth,” says Prateek Agarwal of ASK. The current market fall means many high quality shopper and retail financing companies can be found at engaging valuations. “In the banking space, one can buy Axis Bank as it posted decent numbers for Q3FY20. Its loan growth, as well as asset quality, improved. We remain positive on the bank’s long-term plan,” says Mishra.
Chemicals: Chemical firms are anticipated to profit as consumers develop a second supply after China. A small swing in purchaser choice might imply a big share acquire for Indian companies.
What You Should Do
Don’t Panic: Let the mud settle earlier than taking a choice. “It is good to see that midcaps and smallcaps havent underperformed largecaps in this correction. This shows valuation support in these segments. As growth recovers, these segments may lead the rally” says Alok Agarwala of Bajaj Capital.
Stick to high quality: At this level in time, when world markets are in a selloff mode, “a prudent approach will be to stick to quality stocks, strong promoter record and good growth prospects. Further, considering the volatility, invest in a phased manner,” says Mishra. “Invest in companies which have resilient balance sheets and operate with sufficient cash. Hunt for companies where conversion of sales into free cash flow is easy and visible. Investors should cherry-pick quality stocks in a staggered manner as every dip seems to be a good buying opportunity. Selling stocks in this fall will turn out to be more harmful than anticipated,” says Mehta.
Scout for higher valuations: The volatility will proceed in the close to time period. This, nonetheless, presents a possibility for traders to construct a portfolio of shares that aren’t richly valued. “This strategy should result in a good upside once the fear around coronavirus subsides,” says Harsha Upadhaya, CIO Equity, Kotak Mutual Fund.
Look past massive caps: Some specialists consider the restoration, as soon as it begins, goes to be broad-primarily based. “The last rally was highly polarised with only a few stocks from the large cap space participating. We believe that when the market starts recovering, it is going to be a broad-based rally,” says Deepak Jasani, Head of Retail Research, HDFC Securities. Given this example, it is sensible to take a position in high quality shares from the mid- and small-cap house. Historically, mid- and small-cap areas have rewarded traders handsomely after a serious fall, which is the case now.
Make volatility your buddy: Volatility goes to be the norm. If you might be planning to take a position for 3-5 years, take the profit of subdued market sentiment and purchase firms with good progress potential and managements.
You ought to stagger your investments over completely different worth factors or take the SIP path to common out the price of acquisition and stay invested for the remaining of the funding interval to maximise returns. An ace investor has rightly stated, “Time in the market is more important than timing the market”. Do an intensive analysis earlier than zeroing in on the shares or take assist from specialists earlier than committing severe cash.