Expecting a V-shape recovery? You may be hoping against hope, hint experts

A man reacts as he looks at a screen displaying the Sensex results outside the Bombay Stock Exchange building, Mumbai, March 12. REUTERS

Of late, the market has been witnessing an interesting trend - it rises with strong gains for some sessions and then consolidates as if waking up to the global and domestic economic reality.

Market experts point out that Nifty has completed its 61.8 percent retracement of the entire fall of the calendar year 2020, scaling a new three-month high.

It has moved up by 37 percent from its bottom of 7,511 levels and completed a strong move price-wise and time-wise over the past 13 weeks with broad-based participation across sectors and stocks.

Investors ignored near-term growth concerns and cheered the gradual easing of the lockdown and good monsoon prediction. Hopes of a potential COVID-19 vaccine and further stimulus announcement by various governments globally kept the sentiments positive.

This fuelled optimism and some experts and brokerages started to believe that we may see a V-shaped recovery soon.

Morgan Stanley, in a note on June 14, said: ": A multitude of macro indicators show that the recovery is already underway from May and has gained further steam in early June. We expect global GDP growth to trough in the second quarter of the year 2020 at (-8.6) percent and to reach 3 percent by the first quarter of the year 2021. Based on recent growth data and policy actions, we have greater conviction that the shape of the recovery will be a V. We have been of the view that this will be a sharper but shorter recession."

Morgan Stanley's hopes and estimates must have a solid foundation, but the conspicuous economic realities raise serious questions against the probability of a V-shaped recovery.

The Indian economy faces an uphill task in its battle to recover from the COVID-19 setback and it has been once again reiterated by the IMF's latest projection - a sharp contraction of 4.5 percent in this fiscal.

IMF, however, said the country is expected to bounce back in 2021 with a robust 6 percent growth rate.

It projected the global growth at –4.9 percent in 2020, 1.9 percentage points below the April 2020 World Economic Outlook (WEO) forecast.

Pankaj Pandey, Head of Research at ICICI direct is of the view that the sharper leg of the rally has already happened, riding on economy unlock as well as global markets run-up.

"We believe that with earnings of Q1 (from next month) as well as macro-economic data will be key monitorable, in the near-term. The market is likely to consolidate in a range and the stock-specific movement will be seen in the near-term," said Pandey.

"Our Nifty target for Calendar 2020 is near 10,200. We expect the next level of movement to begin only when there is a full resumption of economy and clarity over COVID-19 receding fully and vaccine."

Siddharth Khemka, Head of Retail Research at Motilal Oswal Financial Services is also of the view that the market may cool off going ahead.

"Given the sharp rally witnessed, we may see the Indian markets consolidating or taking a breather for some-time before starting the next leg of the rally. One should be cautious going ahead as the fundamentals continue to be weak and valuations seem to be expensive at nearly 21 times FY20 P/E. As of now, we expect Nifty EPS to grow to remain flattish in FY21E with a marginal growth of nearly 2-3 percent to Rs 485," Khemka said.

Khemka underscores that the adverse economic impact of COVID-19 is expected to wipe out FY21E earnings growth.

After a highly stringent 2-month lockdown, the Indian government is clearly moving toward a step-by-step approach to restoring normalcy.

While these relaxations would help improve the supply-side situation, the underlying demand trend remains the key monitorable, Khemka said.

Khemka expects the governments (Central and State) to progressively keep relaxing the lockdown norms further. Thus, we believe that the interplay of health and economic crisis holds the key to markets in the near-term.

"Markets ignored potential fallout of geopolitical tensions and rising number of virus infections. It resumed cheering a gradual resumption in business activities and an earlier-than-expected normalization in certain consumption sectors. Going ahead, we believe, if the situation continues to constantly improve, we may reach a level of near 11,000 along with the support from the global liquidity," Khemka said.

Rusmik Oza, Executive Vice President and Head of Fundamental Research at Kotak Securities points out that if we look at February month then the Nifty peak was near 12,200 and by end of the month it had come down to near 11,200 levels. Hence, from the peak and closing of February, the Nifty50 is down by 16 percent and 8 percent, respectively.

"In between February and now, we have seen forward earnings getting downgraded by nearly 25 percent. To this extent, valuations have gone up and Nifty50 is now trading at 20 times, which is peak valuations for the near-term. Apart from liquidity factor, earnings and valuations do not portray any sharp rally from hereon," Oza said.

"In the best-case scenario, Nifty50 can go to near 11,000 levels anytime from now to the end of the year. By the end of the year, Nifty could be between 10,300 and 10,700 levels. We are yet to see the real picture of forwarding earnings which will come to the fore during and post Q1FY21 results. There is a high probability of future earnings getting further cut after Q1FY21 results which could cap the upside in near to medium-term," Oza added.

The emerging sectors

Experts say the best strategy for investors would be to accumulate good fundamental and quality stocks gradually over the next few weeks and months.

"Every crisis creates opportunities for certain segments, which often creates new market leaders. Post COVID-19 pandemic, some of the themes or sectors we believe could emerge as leaders are telecom, healthcare, speciality chemicals, while one can look at rural consumer space as a recovery play," Khemka of Motilal Oswal said.

Pandey of ICICI Direct believes that pharma, IT and private banks will be the sectors for the rally.

He expects pharma to take a higher portfolio weighing, going ahead, after the pandemic situation where health will be now in focus globally.

IT is a play on better business continuity plans amid COVID-19, coupled with strong balance sheets. Diversified loan book and availability of low-cost deposits make large private banks a good bet on recovery, he said.

Oza of Kotak Securities is of the view that any future rally may be driven by the BFSI sector followed by oil & gas.

"Close to 29 percent and 21 percent of FY21 earnings are likely to come from the BFSI and oil & gas sector, respectively. Out of the 21 percent, Reliance is likely to contribute nearly 11 percent, which will include the share of telecom also," Oza said.

"Few of the sectors like consumer staples, pharma and IT have already run up and in these sectors, valuations have become quite rich. The automobile is a mixed bag where few stocks can outperform while few could underperform," he said.

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