Markets at inflexion point; analysts bullish on consumer, telecom, pharma

Even though the indices are trading much below their January 2020 highs, the recovery seen in the markets from their March 2020 lows has been quite sharp, with the S&P BSE Sensex and the Nifty50 indices gaining 27.61 per cent and 27.18 per cent, respectively, since then. Against this backdrop, analysts at Morgan Stanley believe that Indian markets may be at their inflexion point given what valuations and sentiment were then, and could be forming base for the next bull phase.

“The road ahead for the markets will depend on fiscal response by the government, progression of Covid-19 – which so far appears to be encouraging, and the age of the current bear phase,” wrote Ridham Desai, head of India research and India equity strategist at Morgan Stanley in a note with Sheela Rathi.

Every time markets have undergone massive corrections, the up move from the toughs has been driven by new leaders. Market movement in the 1990s, for instance, was led first led by consumption in the post liberalisation era, followed by dotcom, then infrastructure and then banking, financial services and insurance (BFSI). Given this, analysts at Morgan Stanley believe that the financials and consumer staples could pave way for and consumer discretionary and healthcare as the leaders in the next bull market.
 

“Since the ‘taper tantrum’ sell-off in 2013, financials have reported their best revenue growth relative to the market overall. Given this and the emerging issues around Covid-19, it appears that the breadth of performance in this sector could narrow considerably and be concentrated in the top two or three names,” they argue.

Notably, the sector has underperformed the market rally that started on March 25 despite being the leader of the preceding bull market – which they say, is a sign of reversal in sector leadership.

As for consumer staples, Desai and Rathi say that the sector’s market capitalisation is near its historic high but the margins could be peaking. In terms of valuation, too, Morgan Stanley highlights that on the basis of relative EV/EBITDA, consumer staples and energy trade above historical averages, whereas materials, industrials, healthcare, and consumer discretionary are trading below historical averages on EV/EBITDA and price-to-book (P/B) combined, indicating attractiveness in the sectors.

“With a share in market capitalisation of 6 per cent and 3 per cent in Nifty 50 index, respectively, consumer discretionary and healthcare sectors are at the bottom. They merit attention from investors as sectors that could shape the next bull market,” they say.

For Amnish Aggarwal, head of research at Prabhudas Lilladher, sectors with very high PE multiple sectors could take a slight breather after a while and the next wave will see increasing participation from insurance, asset management companies (AMCs), telecom, healthcare, chemicals and select service utilities.

Another way to look at investing opportunities in the current market or when the lockdown starts getting lifted gradually, according to analysts at Motilal Oswal Securities, is to look for sectors and companies that can withstand the economic hit and show earnings visibility despite the pandemic.

“We expect revenue decline for metals, auto, oil & gas and cement in financial year 2020-21 (FY21). Sectors where we estimate double-digit growth in top line are telecom / financials / healthcare at 18 per cent / 10 per cent / 10 per cent respectively,” says Gautam Duggad, head of institutional research at Motilal Oswal Securities.