Investors should brace for long-haul investing

Chocked by the rising number of Covid-19 cases, delay in announcement of a fiscal stimulus package, credit rating worries, reports of a possible lockdown extension, impact of lockdown on the economy and earnings, and fears of renewed trade war between United States and China; the stock markets ended the week on a negative note. The benchmark indices - the Nifty and the BSE - settled the week at 9,252 points and 31,643 points, nearly 6.2 per cent and 6.5 per cent respectively. Mirroring the weakness in broader markets, the Nifty Midcap and the BSE Smallcap indices fell by 4.8 per cent and 5.5 per cent respectively. Sectorally, barring pharma, all major indices ended in the red weighed by financials, metal and auto.

Rally in RIL, after the commitment from two more investors to Jio Platform, sustained indices from notching more losses during the week. The latest macro data suggests a much deeper impact of Covid-19 on the economy than previously estimated. Merchandise exports shrank by 34.5 per cent in March, the steepest monthly fall in at least 25 years. The output of eight-core industries was contracted by a record 6.5 per cent in March, the steepest in the new series. Purchasing Managers' Index (PMI) data, giving some broad indicators for April has shown that the Manufacturing PMI declined to just 27.4 in the month, showing the sharpest deterioration in business conditions across the sector since data collection began over 15 years ago.

PMI for services declined to just 5.4 points in April, the lowest since data collection began over 14 years ago. All this shows just how bad the April-June quarter might turn out to be. Comments from Chief Economic Adviser KV Subramanian that there are no 'free lunches', and even deficit monetisation bears a cost are very disappointing in the present context say some economists.

With banks clearly showing unwillingness to lend liberally, for supporting economic revival tweaking the tax regime can be a potent instrument.For the financial year ended March 31, 2020, total GST revenues were ₹12,22,131 crore averaging ₹1,01,844 crore per month. With the reality of dwindling tax revenues sinking in and the virus unlikely to disappear any time soon and many states demanding for payment of their GST dues, Central Government is reportedly mulling a 'Covid Cess.' The government steeply revised its 2020-21 borrowing programme by 53.85 per cent to Rs 12 trillion from Rs 7.8 trillion

estimated earlier, indicating that the Centre was giving shape to an imminent and sizeable fiscal package to address the Covid-19-related slowdown. Industrial production data for March and CPI inflation for April will be released on May 12. WPI inflation will be announced on May 14.

Foreign exchange reserves for the week ended May 8 and balance of trade data for April will be released on May 15. The key earnings to look at would be Maruti Suzuki, Kotak Mahindra Bank, Dr Reddy's Labs, Cipla, Biocon, Bandhan Bank, Havells India, ABB India, Siemens, Godrej Consumer Products and M&M Financial Services.

Remember the Phillip Fisher's quote "The stock market is filled with individuals who know the price of everything, but the value of nothing."

F&O sector watch

Brisk trading was seen in the derivatives segment. As has been common, stock-specific action continued and sector rotation was seen. In the options segment, on Call side maximum activity was seen at 9,400 and 9,500 Call strikes; and on the Put side, Put writing was observed at 9,000 strike. Indicators suggest consolidation in a broader range of 9,000-9,500 in the coming sessions. The Implied Volatility (IV) of Calls closed at 34.23 per cent, while that for Put options closed at 36.65 per cent. The Nifty VIX for the week closed at 39.93 per cent and is expected to remain volatile.

PCR OI for the week closed at 1.37 down as compared to last week at 2.09, which indicates Call writing. Options data indicates an immediate trading range for Nifty could be 9,000 to 9,500 levels. For Bank Nifty 20,350-20,500 is an important resistance. Failure to cross 20,500 may trigger down-wave to 18,600-18,400. Cross over above Resistance zone above 20,500 will lead to further short covering to 21,400-21,800. For the next week, Bank Nifty Range could be 18,400 – 20,750. Among sectoral indices, Nifty Pharma is bullish, but in overbought condition; Nifty Metal is in clear downward bearish trend; Nifty IT, Oil & Gas, FMCG and auto indices are in bullish trend.

Covid-19 will trigger a reset in the mind set for a large part of the population on the idea of protection and expect this pandemic to bring about a change in Indian mind set and nudge people to pay more attention to protection against unforeseen threats to life. It will now be harder to live in denial of life's uncertainties; insurance and protection will be one place where boom in business is expected. Buy HDFC Life, SBI Life and ICICI Prudential for steady gains in next few quarters. For giving fillip to economy, GoI is expected to go on a binge on infrastructure spending. L&T's core order inflows (Rs 2.5 trillion) over the past two years reveal the benefits of a diversified engineering, procurement, construction player.

Together with the services revenue stream, such a fungible business model has helped L&T grow its consolidated top line every year over the past few decades. Buy for target price of Rs1,200 in one year time frame. Defense Ministry statement for Make in India strategy for country defense needs may see higher orders for BEL. Buy at current levels for three figure mark target in medium term. Investors should be cautious to prepare for the long haul, not to rush in (should things worsen from here), a buy on dip strategy may be suggested, given that valuations are far more reasonable now than at the start of year.

Investors should stay within the discipline of their asset allocation and use the market falls for portfolio rebalancing. Any excessive leveraging is best avoided in such times. Stock futures looking good are BHEL, GMR Infra, Idea, Jubilant Foods, Marico, RIL, SBI Life, TechMahindra and Zee Entertainment.

Stock picks

Laurus Labs Ltd, is an India-based research and development pharmaceutical company. It manufactures active pharmaceutical ingredients (APIs) for anti-retroviral (ARV) and Hepatitis C. It also manufactures APIs in oncology and other therapeutic areas. Its business units include Laurus Generics API, Laurus Generics FDF, Laurus Ingredients and Laurus Synthesis. Its contract development includes drug substance services, analytical development services and product development services. The company reported better than expected Q4 earnings with positive guidance for coming quarters. The week ended saw huge spurt in volumes and bulk deals in the counter. Buy on declines for price target of Rs750 in medium term.

(The author is a stock market expert. He is former vice chairman of AP Planning Board)