A rally of 50 percent in benchmark indicators in just four months. It indicates that the market is in a strong phase despite the risk of COVID-19. And also geopolitical tensions, and property quality concerns.
Brokerage houses believe that an adequate inflow of liquidity was a key factor behind this outstanding rally. Following the stimulus announced by the World Central Bank to revive their economies. Consumer and recovery in the rural economy and improved or line corporate earnings in the June quarter. and also supports the market.
The rally seems to have already discounted a lot of negative news regarding FY21 earnings, with experts expect the market to look towards FY22 and outperform earnings.
“We believe markets are driven by liquidity even as FY21 and FY22 EPS has been cut by 14.4 percent and 12.1 percent respectively. Markets have already discounted a washout FY21 and have started looking beyond FY22. However, the pace of liquidity led rally suggests markets running ahead of fundamentals on hopes of recovery.” said Prabhudas Lilladher. Which cut its 12-month Nifty target by 6 percent to 11,919.
Brokerage is now forecasting a 3% decline in Nifty EPS, 34% growth in FY22, and 18% growth in FY23 (auto, telecom, BFSI, and metals are key to earnings in FY23). “FY22 is one year older than a COVID-19 base so FY23 will be the first year of normal growth.”
“Although markets have seen a sharp run-up post the bottom of March 2020, the near term outlook is uncertain. We see little probability of a similar correction in the coming months, sans COVID-19 pandemic going out of control,” it said.
Kotak Mahindra Asset Management Company President & CIO Harsha Upadhyaya also said that the market seemed to be looking forward to FY22 and above, which is expected to be a normal year for businesses.
“If we look at the immediate term, definitely the earnings decline is going to be significant. For example, most estimates are pointing to around a 40 percent decline in aggregate earnings during the April-June quarter. Even July–September quarter is unlikely to be a normal one,” he said.
Prabhudas Lilladhar opined that while positive consumer demand and rural growth were positive. Markets were ignoring the effects of re-imposing local lockdowns, a decline in economic conditions. And the purchasing power of large segments of the population.
The rural economy not widely affected by COVID-19. And this year is also supported through strong monsoon forecasts and strong Kharif season hopes. As a result, we have seen a strong rally in all sectors directly or indirectly linked to the rural economy such as tractors, FMCG, two-wheelers.
Many experts believe that each crisis gives new opportunities for investment and new leaders to the market. As we have seen in the past such as the dot com boom, the global financial crisis.
Prabhudas Lilladhar believes that COVID-19 will change the way people live, spend, and enjoy the mentality of the generation.
“While every major shakeout like this in the past has seen new leaders (the nineties was consumption, followed by dot com. Then infra and then BFSI and consumption), the current rally has same old legs of BFSI and consumption so far. Technology-led by Reliance and Insurance seems to be leading the rally,” the brokerage said.
The brokerage added Hero MotoCorp, Voltas, and Lupine Labs to its model portfolio. And weighted tinkering as well as eliminating Inox Leisure and VIP Industries. Kalpataru Power Transmission has added Indraprastha Gas, Bajaj Electricals, and Lupine Labs to its list of top picks. While clearing IPCA Labs and Cholamandal Finance.
In its model portfolio, Prabhudas Lilladhar weighs heavily on the cement, consumer, healthcare, and oil & gas sectors, while it weighs less on the automobiles, banks, IT, metals, and NBFC segments.
In the case of banks and the NBFC, are generally regarded as the backbone of the economy. The brokerage believes that the impact of the lockdown and its effects on the bank’s NPA and balance sheets will be reflected in the Q2 and Q3 results. “Similarly the pressure on consumer purchasing power affects NBFCs and HFCs, although reducing the suspension early is encouraging.”
Among large-caps, its top picks are HDFC Bank, ICICI Bank, Bajaj Finance, Maruti Suzuki, L&T, UltraTech Cement, Britannia Industries, Dr. Reddy’s Labs, Petronet LNG, Lupin and Indraprastha Gas.
Crompton Greaves Consumer, Kansai Nerolac Paints, and Bayer CropScience are its picks in the midcap space. While in the smallcap space, they like Bajaj Electricals, JK Lakshmi Cement, KNR Constructions, and Inox Leisure.