Play markets for medium-term, diversify across asset classes: Amit Khurana

IT Services has been the biggest beneficiary of Covid-19 pandemic and is now a mainstream growth driver rather than a one-off line item

Indian markets have been on a roll after Joe Biden’s victory in the US presidential election and hopes of a successful coronavirus vaccine lifted expectations of a swift reopening of the global economy and increased investors' risk appetite. While sustenance of the up move will depend on consistent liquidity flow, AMIT KHURANA, head of equities at Dolat Capital tells Nikita Vashisht that such a sharp uptrend may bring bouts of equally sharp corrections. Edited Excerpts:

What is your market outlook for the Samvat 2077?

The year 2020 will go down as one of the most unprecedented and volatile for all asset classes. The market recovery after a sharp fall earlier this year was led by a few select names and now we are witnessing this broadening to other sectors as well. We expect this to be the key theme for next year.

As things stand, factors are supportive of the uptrend – hence the markets hit new highs recently. How far the momentum will go will depend on how strong the liquidity flow sustains. We think it will. Also, it is important to be aware that such uptrends also bring along bouts of equally sharp corrections.

What could be the key global triggers for markets now?

Two key factors – one how aggressive is the stimulus package initiated by Joe Biden’s administration. That will determine the USD direction for the medium term, as well as allocation to other asset classes. Second, what is the stand taken on geo-political and trade issues. Here, we expect a less confrontationist approach and lowering of temperatures which will assuage investor apprehensions.

Are defensives like pharma and information technology (IT) still an attractive space?

Yes. We have been tactically in favor of domestic plays especially autos, metals and cement. Pharma and IT will attract allocation at certain levels and there will be stock-specific action here. We are structurally positive on both, with preference for pharma.

The recent rally has largely been account of banks. What's your view on this sector?

The performance so far has indeed surprised us. The overhang is around still, but not as much on the negative side as it was in Q1FY21 earnings. Also, the lead indicators are suggestive of a good recovery in a lot of economy-driven sectors, and that's helpful to get investor interest back in the sector. Whether the non-performing assets (NPAs) will show up subsequently is anyone's guess, but our base case is definitely not as negative as it was during Q1FY21 earnings. And even if some slippages do show up, the impact will be minimal from a profitability and capital adequacy angle – fair amounts of provisions have been made by most of the banks and substantial capital has been raised.

What's your view on the public sector enterprises in the backdrop of government's divestment agenda?

We have, in general, not been fond of PSU stocks. Our big concerns have been poor capital allocation and regulatory / policy risk. That said, some PSU stocks are trading at extremely attractive valuations and dividend yields, which makes them relatively safer bets in a volatile environment.

Your overweight and underweight segments?

Overweight sectors include Metals (tactical), Cement, Telecom, Pharma, Chemicals and IT. Remain underweight on PSU banks, Consumer (more neutral than negative), capital goods, Banks (Neutral), Energy and Autos (Neutral). Amongst the most likely sectors that may attract flows, we believe pharma, metals, and chemicals will be the ones to watch out for.

Consumer staples have not gone much either way after the re-rating in the earlier part of the New Year. Valuations here are fairly rich and hence may not leave much scope for a major move. IT Services has been the biggest beneficiary of Covid-19 pandemic, as digital investments have gone up across the world - it is now a mainstream growth driver rather than a one-off line item. We see this continuing to drive earnings and margins for the companies.

Any contra-bets in this market?

Not right now, but if the divestment program does go through for a couple of cases, the re-rating for PSUs could be material.

Covid-19 pushed many savers towards stock markets in the hope of a better return. What advice would you give to these new investors? 

Play for the medium-term, and allocate across asset classes to diversify. Aim to optimize returns rather than maximize them over the long-term.