The equity markets have been volatile with movements on both sides, mainly occasioned by developments abroad. The prospects of the US recovery, the rise in inflationary expectations and the rise in bond yields have all been factors that influenced the markets in the final two months.
One factor that has attracted attention of the markets has been the exit by foreign investors compared to the inflows that were seen earlier in the year. The factors that could prompt the overseas investors to become light on their exposure would be the weakening rupee, the expanding fiscal deficit and high commodity prices, especially the price of oil, which India imports more than any other country except China.
Earlier in the year, a perspective had emerged that the high commodity prices were going to impact sectoral performance in certain segments of the manufacturing and industry. The conclusion was that due to this factor, the Q1 performance probably might be a shade weaker than expected for some corporates.
But a factor that may weigh upon the market in the coming weeks is the second wave of the pandemic, the spread of which is not halted as yet as it is not showing any signs of abating. Many analysts have revised the growth projections downwards against this background on an average of 1-2%. Some have revised the GDP growth down to high single digits too. The likely rate of growth for FY22 will be in the vicinity of 8.50-9% under the current set of circumstances. The level of corporate profitability and earnings growth is a function of the GDP growth, and any revision downwards may be of certain consequence for earnings too.
The monthly output loss due to the pandemic is estimated to be approximately Rs 1.25 lakh crore. With stringent lockdown in larger parts of the country, and the likelihood of the lockdown getting prolonged for an unspecified time in future, the losses are going to accumulate. This, as explained earlier, will result in a slowdown of the economy, contrary to the swift recovery envisaged earlier. Even these projections assume the re-establishment of normalcy over a three-month time period.
There were several reasons why it was felt that the impact of the second wave could be contained quite well. The first was that the corporates already responded to the first wave quite efficiently and took advantage of the operational efficiencies and reported better numbers in Q3 and Q4 of FY21. This added to the level of preparedness on the part of corporates.
The second and more important reason is that the RBI is continuing with its accommodative policy and taking all necessary actions well on time. The recent announcement of the Rs 50,000 crore special facility for three years for the healthcare sector, and the Rs 10,000 crore for small enterprises would further add to the comfort of the industry in enhancing its efforts to combat the adverse effects of the pandemic. The central bank has also initiated G-SAP 1.0, a plan to buy gilts in the secondary market to the tune of Rs 1 lakh crore. The scope of G-SAPS may be widened over a period of time based on the experience of the first program. The fact that sufficient liquidity will be available to businesses and industries is a matter that will add to their comfort and also their confidence to tide over the critical period.
The Nifty Dividend Opportunities is still available at a discount to the Nifty as can be seen from the above chart. The theme was highlighted in the earlier issues, too, as an opportunity, which could be availed of by traders with a long-term funding horizon. The sectors that had actually done well in terms of the performance through the first wave like pharma and healthcare, technology, private banks and select larger NBFCs and some from the consumer segment, apart from agri and specialty chemicals, are likely to retain the advantage during the current phase also.
A relatively weaker rupee may likely aid some of the companies in the exports segment. The PLI Scheme introduced by the government will go a long way in helping corporates in some of the sectors that have received support to hold up well against all immediate odds, like food processing, telecom, electronics, textiles, specialty steel, automobiles and auto components, and white goods, etc.
This is the time to focus on well-managed funds, the midcap segment, and to some extent smallcap funds should get precedence in the scheme of allocation. Carefully selected midcap funds will be the better vehicles to invest. Systematic investments, a phased approach, over a period of 6 to 12 months is a worthwhile approach for creating investment portfolios.
Dr Joseph Thomas is Head of Research, Emkay Wealth Management
Disclaimer: The views and investment tips expressed by the expert on are his own and not those of its management. Emkay Global Financial Services Limited and Emkay Wealth Management advises users to check with certified experts before taking any investment decisions.
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