Market

Notes for an investor looking for investment opportunities in equities

Updated : December 15, 2020 08:08 PM IST

Year 2020 has been historic on several counts. The onset of one of the worst pandemics known to mankind in the modern era followed by a vaccine formulation in record time to contain the pandemic will soon be a part of scientific folklore. When it comes to finance, the events take a much more interesting turn. Equity markets globally witnessed one of its sharpest corrections in March 2020, only to recover all of its lost ground in record time. More specifically in India, the benchmark indices rallied sharply off its lows and galloped to new highs posting gains of nearly 11% on a year–to–date basis. In effect, the markets today depict a picture of strength and human resilience. This begets the question, has equity markets run ahead of its fundamentals?

Tracking Fundamentals

Various data points suggest that COVID-19 led economic slowdown appears to have almost run its course. To begin with Q2FY21 GDP came in at -7.5% (Y-o-Y) Vs. -23.9% in Q1FY21. This reflects a significant rebound in growth even while several parts of the country continued to be under partial lockdown. In terms of corporate profitability as well, the trend has been encouraging. Earnings Growth was positive post 2 quarters of negative growth with net profit growth gathering pace in Q2FY21. Another important set of figure which attests that the worst is behind us is that GST collections crossed the Rs. 1 Trillion mark for two consecutive months, which is another very encouraging sign.

When it comes to the macros, along with all these, India’s foreign exchange reserve too has improved substantially. Today, India has sufficient reserves to cover more than 12 months of imports. Also, India’s Current Account Deficit turned into surplus in Q4FY20 and has reached 3.9% in Q1FY21.

Owing to all of the above-mentioned factors and recognising the strong structural story that India has, FIIs too have been heavily investing into India. In the month of November alone, FIIs have pumped in Rs. 65,000 cr which is a single month record in terms of FII inflows.CNBC

Pockets of Opportunity

Because of the runaway rally see in the benchmark indices, most of the investors are in two minds. Whether to book profits or to stay invested. There is no easy answer to this question. However, there are a couple of points which is missed when one if optically looking at the market rally. First, the rally is led by a handful of stocks and cannot be said as broad-based in nature. Second, mid and small caps are still far away from their previous highs unlike Nifty or Sensex. That said; let us look at the pockets of opportunity in the market.

The first opportunity that the market continues to present is the value pocket. There are several names available, even today, which are fundamentally strong, are considered among the segment leaders but have not participated in the market rally. We believe these are pockets which will be actively participating in the days ahead as the economy is on the path of a rebound.

The other opportunity lies in broader markets in general. Mid and small caps have underperformed large caps in the last couple of years and that trend is expected to reverse. Given the low-interest rate environment, small and mid-cap companies stand to benefit the most. In the quarters ahead, it is very likely that the profitability of most of the companies in the broader markets is likely to improve and soon enough the same will be reflected in the stock price as well. So, if an investor is ready to stay put for the next five years, now is the time to consider investing into broader markets.

If an investor is looking at thematic bets, then banking and pharma can be a good starting point. Banking is considered as a barometer of the economy. So, with the economy on the mend, the exuberance is very likely to reflect in the banking sector as well. In fact, some of it has already visible in the banking space. When it comes to pharma, it is a well-accepted fact that even in the post-Covid era, there will continue to be focus on healthcare. So themes related to healthcare services will continue to remain in focus at least in the near to medium term.

Note: This article is authored by Pravin Bhalerao, Founder and Managing Partner, Pranitya Wealth LLP.

This is a partnered post.

Notes for an investor looking for investment opportunities in equities

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