Choksey: money is looking at arbitrage opportunities. Photo credit: Sanjay Borade
Not the time for taking head-on risk, stay on the traditional path – is the expert mantra.
“While the main benchmark indices may grow between 5 and 10 per cent, individual stocks can easily give between 18-24 per cent returns,” says Aniruddha Sarkar, CIO & portfolio manager, Quest Investment Advisory. Sarkar manages a fund worth around Rs1,600 crore. He has experience of nearly a decade-and-a-half in managing funds, and has spent eight years with the IIFL group. He joined Quest in January earlier this year.
He points out: “Many things have changed during the pandemic. The way businesses are looked at, the way businesses are done and how business cycles will do. Ahead of the US elections, there is a fair amount of uncertainty. The black swan event is the reaction of China’s president. This cannot be factored in the prices.”
Sarkar feels that the best strategy is to be sector-specific and company-specific. He likes pharma, auto and speciality chemical sector. “I am quite bullish on the IT sector which I feel is headed for a multi-year upside. Earlier, pharma stocks were riding high on a hope rally. Now, investors are looking at companies with maximum API and those which have completed their capex plans and are geared for expansion in a big way.”
The pharma sector has been one of the few beneficiaries of the pandemic. The BSE pharma index has gone up by 35 per cent since Diwali. Most pharma shares have performed very well. Shares of Dr Reddy’s have moved up by 76 per cent from the 2800 level last Diwali to Rs4,942, in exactly a year.
Funds will continue to pour in till global interest rates start to move up sharply
The news that it recently signed up for providing advisory services to the clinical trials for Sputnik vaccine has seen its share prices surge. Jubilant Life Sciences has gone up by 40 per cent. Even multinationals like Pfizer, AstraZeneca, Sanofi and vitamin makers P&G Healthcare have benefitted. While initially it was formulators for vaccine and those involved in contract manufacturing and clinic trial conductors, investors now feel that the next wave will be driven by Active Pharma Ingredient (API) holders.
Go for leaders in the respective sectors
“It is certainly not a time to be adventurous,” says Prakash Kacholia, co-promoter and MD, Emkay Global, a full-service brokerage house. He rationalises that while the fear factor on the Covid front has receded from the levels seen in March, uncertainty still persists. How will the results of the US election play out? Also, China-India problems still remain.
“I would advise investors to go with the leaders in their respective sectors. Companies which have pricing power and a dominant market share like, say, HDFC Bank, Asian Paints or Pidilite. Companies which will not give you sleepless nights even in the worst-case scenario. Sectors which are avoidable are hospitality, aviation and travel.
Kacholia says that while sector rotation is happening, he is extremely bullish on the consumer sector and the IT sector. “Going by the huge response to Ant’s IPO, I think there will be a demand for tech companies. Data mining, cloud computing, analytics and AI will be the new sectors to watch out for.”
Singhania: Nifty may return around 8-9 per cent by next Diwali
“The other sectors I like are building materials, cement, tiles, etc. I would avoid property. Millennials are not buying houses and the trend is to buy houses in the range of Rs1 to 2 crore, even if it means going outside the metropolis. Steel will also be in demand with infra spend likely to increase in the coming years. Agro-chemicals is also a good sector in which to stay invested.”
IT – the other sector which has seen growth
Information Technology is the other sector which has seen decent growth in the pandemic as the companies impacted are now pursuing growth through outsourcing. This sector seems to have endeared itself to most fund managers. Infosys has gone up by 65 per cent in one year. TCS, the second most valuable company, is up by 17 per cent and Wipro by 31 per cent. Tech Mahindra has been a laggard, going up by just 6 per cent. HCL Tech shares have gone up by 46 per cent but the company had given a 1:1 bonus in December. The wealth of the shareholders has more than doubled.
Outliers will be the non-index shares
Sunil Singhania, founder of Abakkus Asset Manager LLP, also shares this view. He says: “I am quite bullish. Nifty may give around 8-9 per cent by next Diwali.”
Kacholia: not the time to be adventurous. Photo credit: Sanjay Borade
Singhania, who is known to have an eye for midcaps and small caps, having made a name for himself in his earlier tenure at Reliance Mutual Fund (Now Nippon Mutual Fund) says there are plenty of stocks which can outshine the broad market returns. “Two factors which will propel investments are the interest rates which are trending downwards, and power cost which is also heading south. If power cost comes down sharply, sectors which will do well are the auto sector and home buyers. Instead of looking at property developers I would look at cement as a good proxy for homes. In the power sector I would look at companies in the steel sector where lower power cost aided by interest costs can directly add to the bottom line,” says Singhania.
Companies with good brands will do well
“I am quite optimistic about the coming year. While select index components have led to the rise in the indices, the broad market has lagged behind. It is this pocket where the opportunities lie during the coming year for savvy investors,” says S. Ranganathan, head, research & institution, LKP Securities.
Ranganathan points out that the pandemic has undoubtedly had an adverse impact on several consumer facing businesses including manufacturing entities. “Our ground reality checks and scuttlebutt approach suggest that stronger companies with top of the mind recall will have the propensity to bounce back and emerge stronger than pre-Covid days. Our top five picks across sector and market capitalisation are HDFC Bank, Polycab, IEX, Federal Bank and Raymond.”
Foreign inflows will continue; a novel disrupter in the financial sector will see heightened investors’ interest. Global markets are awash with liquidity. And investors are pumping money into equities. Deven Choksey, MD, KR Choksey Investment Managers, explains that “most of the money coming in is looking at arbitrage opportunities, borrowing at near zero per cent interest and taking short term bets on markets. ETF is one product which is seeing a lot of inflows. Leverage funds could however create a problem in case the funds are called back for whatever reason”.
Sarkar: individual stocks can easily give between 18-24 per cent
Adds Choksey: “An increase of 70 basis India weightage in MSCI Index should easily see another $2.5 billion coming in soon. The pool of money will come in any financial products, ETF, life insurance companies, asset management companies, housing finance companies or any derivative products. The other theme which could play out is the feeder companies. API companies in the pharma sector or companies in CRAMS or contract manufacturing. I particularly feel Divi’s which holds the maximum number of APIs, is a good company. Even companies which are in manufacturing intermediates in sectors like speciality chemicals will do well.”
Choksey continues: “The companies which can create the most wealth are novel disruptors. Especially those which have the potential to create disruption in the finance industry. Like what Paytm had done earlier. Two companies which I feel have this potential are Reliance Industries which has already created a platform and the environment on which it can leverage financial products. The other one which has potential is the Uday Kotak-run Kotak Bank. He is already experimenting with block chain and analytics.”
While fund managers have not been allowed to give direct recommendations as this may conflict with their investments, Business India has put together a list of a few shares which it feels will do well in the coming year. These have been selected across sectors from large caps, midcaps and small caps. The reasons why we feel they will do well are given. One basic factor guiding the selection has been the track record of the promoters and in some cases where we feel that the stocks are in a turnaround mode.
Large caps will continue to do well and there are no brownie points for recommending the obvious ones which should form the bulwark of one’s portfolio. Like Hindustan Unilever, Britannia or Dabur India if one believes in the agri growth story. Covid-19 has indeed changed things a lot and some industries which may take some more time to recover are, obviously, aviation, hotel, travel and tourism.
Having said that there are huge sums of funds which have continued to pour in and are likely to do so till the global interest rates starts moving up sharply. Industries with pools of money like insurance companies and asset management companies will do well as will companies whose models are based on taking cash in advance before delivering their goods or services.
Reliance Industries, which has done exceedingly well by converting from a commodity company to a retail and telecom warhorse is expected to do very well once it starts developing a super app. It has built an ecosystem in place in healthcare, education, entertainment and news channels. Once it gets into finance, the share will get rerated.