Indian equity market benchmarks Sensex and Nifty have retraced more than 36 per cent from their worst day ever, recorded in March, following the announcement of a nationwide lockdown to curb the spread of the coronavirus pandemic. However, the indices are still more than 17 per cent away from all-time highs logged in January. If you missed out on the all-time lows to take long positions in the markets, is it still a good time to buy stocks, especially when many economists have warned of India's worst recession in recent history? Analysts say those with an above-average risk appetite can look at large-cap stocks in select areas to enter the markets on declines.
"Investors with an average risk appetite should not venture aggressively into the markets at this point of time... The recovery is likely to be 'W' shaped rather than 'V' shaped and there will be another leg down which can be used to build more aggressive positions," Mumbai-based investment adviser Sandip Sabharwal told NDTV.
"Best areas are where the growth revival should be faster, like agriculture-focused sectors, select auto companies, fast-moving consumer goods (FMCG) and pharmaceutical companies... Even in these, the valuations have expanded in the near term," he added.
Rusmik Oza, executive vice president and head of fundamental research, Kotak Securities:
"If investors have long term perspective (three years and above), they can invest even at current levels. It is ideal for first-time investors to avoid mid- and small-cap stocks and purely focus on large or mega caps, normally start investing in Nifty companies and then try to venture into lower rung market cap companies."
"Since Nifty-50 is trading at peak valuations, the risk-reward ratio may not be favourable for medium-term investments."
"For first-time investors who don't understand fundamentals and valuations, and also don't have the time to research or study companies, it is best to invest through mutual funds."
His preferred sectors in order of preference (based on valuations and 2021-22 earnings growth potential):
- Oil and gas
- Capital goods and engineering
- Banks and non-banking financial services companies
(The weightage of financial stocks has been dropping in the 50-share Nifty basket since February)
The focus appears to be somewhat shifting from financial stocks, and this is reflected in the Nifty 50 index. The weight of financial services stocks in the benchmark index has come down to 33.33 per cent in May from as high as 41.89 per cent in February:
- HDFC Bank: 10.34%
- HDFC: 7.20%
- ICICI Bank: 5.39%
- Kotak Mahindra Bank: 4.11%
- Axis Bank: 2.18%
- SBI: 1.55%
- Bajaj Finance: 1.30%
- Bajaj Finserv: 0.67%
- IndusInd Bank: 0.60%
Prasanna Pathak, head of equity and fund manager, Taurus Mutual Fund:
"First-time investors with a 2-3 year investment horizon can invest in the markets now. However, I would suggest a Systematic Investment Plan (SIP) to invest in mutual funds through a good advisor."
"It is difficult to find a bottom and hence invest systematically. Use the next 3-6 months to invest in good stocks, mutual fund schemes etc. A patient investor with a 2-3 year time horizon is bound to generate handsome returns by investing in these times of uncertainty and fear."
Focus Shifting From Financial Stocks?
However, analysts say that even after the recent correction, the banking and financial services stocks will continue to enjoy maximum weightage in the index going forward.
"In India, we do not have big companies focusing on next generation technologies... Reliance (Industries) is one of the few large companies which is getting its strategy right in the next generation business under Jio and the retail platform. For this reason, the weight of Reliance Industries has now increased in the Nifty 50," explained Mr Oza of Kotak Securities.
Financial markets back home as well as around the globe have factored in a gradual reopening of economies.
"There is a consensus belief that the economy will take longer to recover and hence investors are shifting from banks and non-banking financial companies to other sectors which may be impacted to a lower extent," said Mr Pathak, who expects banks and NBFCs to continue to underperform for at least the next six months.
"As we are in the middle of a health crisis, accumulation will be the best strategy for long-term wealth creation through direct equity and mutual fund investments," Vinod Nair, head of research, Geojit Financial Services, told NDTV.
"Given the weak economic outlook, especially in the coming quarters, only stable and attractive valuation stocks and sector will do well," said Mr Nair, who has a slightly different order of preference at the current juncture. Segments such as telecom, chemicals, IT, fast-moving consumer goods and pharmaceuticals are likely to do better, and are more stable and more safe to invest, he said.
"These sectors have positive growth outlook in these times too when (India's) gross domestic product is expected to be negative in FY21... Indian market has done well in the bear rally which may consolidate in the short term, and these stock will add defensiveness and outperform the market," he adds.
Market experts say the prospects of improvement in the country's economic situation in the second half of the current financial year are factored in.
According to Mr Nair, investing in top three companies of FMCG, IT, pharma and chemical sectors is a good strategy. "Telecom can also be considered as a high-risk call with limited exposure. Some contra bet will be autos and auto ancillaries like the tyre segment as a high-risk and high-return category with limited exposure at the current price and valuation... Stocks with high export revenues of more than 50-60 per cent is also safe and better to invest in this situation," he adds.
"Our short- to medium-term strategy has been to invest in sectors or stocks which may be lesser impacted by the COVID-19 situation and may be the first to bounce-back," said Mr Pathak of Taurus MF. "Our preferred sectors are IT, telecom, pharma, agri-related sectors/companies, two-wheelers and metals in that order," he said.