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'Expect a strong economic rebound if there is universal vaccination, no COVID third wave'

Interview / Sorbh Gupta, Quantum Asset Management Company

Sorbh Gupta, Sorbh Gupta

As COVID-19 cases in India continue to fall and many states have relaxed lockdowns, the mood in equity markets too has turned cheerful. The BSE Sensex touched a life high of 52,869.51 on Tuesday, June 15. At these record levels, how is the road looking ahead for the markets and economy? Which sectors are looking attractive and which are perhaps not? Sorbh Gupta, associate fund manager – equity, Quantum Asset Management Company, answers these questions and more in an interaction with THE WEEK.

Equity markets have touched records as COVID-19 cases have been falling and states are reopening. What's your outlook over the next 12 months?

The domestic economy was seeing steady improvement before the second wave hit us in April and May 2021. Over the next 12 months, sustainability of economic activity and improvement in corporate earnings will hinge upon whether we will have a third wave of COVID-19 infections and another round of lockdown or not. If we can achieve universal vaccination sooner than later and do not encounter the third wave, we will have a strong economic rebound. If not, the investors have to live with the anxiety of start-stop-start kind of economic activity and its impact on equity markets.

Should investors be cautious at these levels, given COVID uncertainties remain? Especially, the small and midcaps have risen sharply over last year. Is there more steam left?

Equities have welcomed the reduction in COVID-19 caseload and moved up sharply. Markets are already factoring in improvement in economic data and pent-up demand to some extent as the unlocking happens. Over the last few years, economic shocks like demonetisation, an ill-planned GST implementation, IL&FS bankruptcy induced credit tightness and lockdowns have tested the best of the corporate balance sheets and business models. Larger companies have demonstrated strong anti-fragility and gained market share. The gap between the revenue growth and capital investment of top decile companies and bottom decile companies is at the widest in the last ten years.

In this context, the sharp-up move in small and midcaps indices (they are up by 118 per cent and 86 per cent in the last one year respectively, versus Sensex return of 62 per cent) reflect some sense of complacency. Therefore, we would advise investors to exercise caution in the mid and small-cap space.

As we look ahead and hopefully infections will fall, vaccinations will pick up and economies open up, which would be your preferred sectoral bets and why?

If the economic recovery continues, and we do not face a third wave of infections, cyclicals like financials and commodities are expected to see the most earning upgrades making them a good bet in the portfolio. We also remain constructive on consumer discretionary specifically rural focussed ones and two-wheelers. Technology is a good play on the global economic recovery.

Talking of commodities, steel prices have surged and so have the stocks. What's the general trend you see going ahead?

Global commodity prices have seen a sharp upsurge over the last one year. Every commodity has had its own supply-demand dynamics, but overall, it is being driven by supply chain disruption due to pandemic and sudden surge in demand due to government stimulus around the world. Base metals like steel, have seen capacity utilisations moving up due to high demand and plant shutdowns in China. This tightness in utilisation can sustain for some more time in steel keeping the realisation elevated for steel companies.

Auto companies have warned of a washed-out April-June quarter given the lockdowns. Does the outlook remain positive though?

COVID-19 has added an impetus to demand personal mobility in India, specifically two-wheelers. As the unlock happens and employees and students move from ‘working from home’ to attending physical campuses, buying a two-wheeler for commute remains the only choice to avoid crowded public transport systems. Further, most of the companies in this sector have strong operating cash flows, solid balance sheets and decent return ratios. The valuations are also attractive for some stocks in the space. We are quite positive about the sector.

Pharma stocks have been lapped up by investors over last year as the pandemic has raged. As economies open up globally, will we see some underperformance now as investors perhaps bet on other sectors?

Pharma companies' earnings have remained resilient through the pandemic as other sectors faced demand headwinds. This made pharma stocks relatively attractive versus other sectors. As earnings growth picks up in cyclical sectors, there could be sector rotation by short-term investors from pharma names. We believe pharma companies with a good domestic presence, a strong new product pipeline for exports can generate decent returns with a medium-term timeframe.

Just like pharma, IT stocks too have been in demand as companies saw quick demand recovery and strong deal pipeline. Is the tech rally sustainable?

Technology spends by corporates and governments across the world have become part of business continuity plans during the pandemic from being discretionary earlier. Global companies have preponed their spending on digital technologies and the cloud to tide over the challenges thrown by the pandemic. The Indian IT sector is clearly benefitting from the trend, as is getting reflected in the swelling order pipeline for companies. The larger companies are also benefitting from vendor consolidation exercise by clients. With decent revenue visibility & good quality balance sheets, these stocks can be part of one’s long-term portfolio.

As the economy is opening up, would you rush to invest in sectors like multiplex, retail, aviation, hospitality etc.?

As the unlock from the second wave began, stocks representing these sectors have started factoring in the strong pent-up demand. The proliferation of vaccines will also help these companies to move towards a pre-COVID like business environment. However, valuations seem to suggest that much of the good news is already factored in the stock prices of most companies in the sector. Hence, we are not rushing into buying into names in these sectors.

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