Markets may look at bigger picture, bet big on cyclicals
The markets are likely to look beyond the 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 from a medium- to long-term perspective in the 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,” said 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 off 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 lockdown measures sometime around mid-may and mid-jun 2021,” said Vikash Jain, analyst at CLSA.
Maharashtra has been under strict lockdown since April 14.
The state contributes nearly 15 per cent to the country’s gross value added, according to CARE, which expects the lockdown to hit India’s economy by ~40,000 crore in FY22.
According to Jain of CLSA, the markets may start seeing some positive signs on Covid-19 in the coming weeks. The opinion is built on the belief of success in the accelerated vaccination programme starting May 1, which analysts believe can put a lid on the rampant rise in Covid cases.
“Along with a pick-up in vaccination 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 said.
Case for peak
According to CLSA, a study of 12 countries hit by the second wave of Covid-19 shows the 7DMA (seven-day moving average) 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 India may get to this median mark of four months by mid-june 2021 and India ex-maharashtra by the end of 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 favour of the 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.