Markets to look beyond second Covid wave, say analysts; bet on cyclicals

Markets are likely to look beyond the ongoing second Covid wave in India, say analysts, who believe the cases could taper off over the next couple of months. In this backdrop, they suggest stocking up on cyclical stocks in a hope that the economy will be on the mend soon.

“Maharashtra’s stabilising Covid cases could be a precursor to India's curve flattening over one-two months. While the ongoing earnings season could see the Street cutting its estimates, we think markets are likely to look beyond the short-term pain,” says Amish Shah, India equity strategist at BofA Securities.

A similar view is shared by CLSA, whose analysts say the surge in Covid cases, especially in Maharashtra, which is at the epicentre of the coronavirus second wave, may taper in May as the state is in its fourth-month of the second wave. This, they believe, will be positive for the markets.

“With the various parameters suggesting a second wave peak in Maharashtra anytime from now to the end of May, we foresee chances of some relaxation of the current lockdown measures sometime around mid-May and mid-Jun 2021,” said Vikash Jain, analyst at CLSA.

Maharashtra, the country’s largest state in terms of contribution to the national economy, has been under a strict lockdown since April 14. The state’s economy contributes nearly 15 per cent to the country’s gross value added, as per CARE Ratings, which expects the lockdown to hit India’s economy by Rs 40,000 crore in FY22.

According to Jain of CLSA, the market may start seeing some positive signs on the Covid-19 front in the coming weeks. The opinion is built on the belief of the success of the accelerated vaccination program across the country starting May 1, which analysts believe can put a lid on the rampant rise in Covid cases.

BofA Securities' sector preference

“Along with a pick-up in vaccinations and not so bad management commentary during the ongoing results season may allay the worst fears for investors regarding the impact from a second wave of the virus,” Jain says.

Case for peak

As per CLSA, a study of 12 countries, which were hit by the second wave of Covid-19, shows that the 7DMA of daily case addition peaked when reported cumulative infections hit a median level of 2.5 per cent of the population in the respective country.

“In these countries, it took a median time of nearly four months for the second wave peak from the bottom of the first wave (range of 2 to 6.5 months). At the peak of the second wave, the 7DMA of percentage positive cases in these countries hit a median level of 14.4 per cent,” the report notes.

Given this, CLSA infers that India may get to this median mark of four months by mid-June 2021 and India ex-Maharashtra by end-June.

Investment strategy

In the backdrop of these estimates, brokerages remain bullish on cyclical sectors and stocks. Shah of BofA Securities has cut his positioning towards defensives by downgrading Staples to neutral weight and trimming their overweight positioning for the information technology sector (IT) sector. 

“We further increase our overweight in favor of financials, industrials and materials sectors; while maintaining overweight in Pharma, as it would continue to see traction from ongoing Covid wave/vaccinations,” he said.

Mahesh Nandurkar, managing director at Jefferies, too, prefers global cyclical plays (IT Services, metals and Reliance Industries) over banks.