The surge in the pandemic and the rise in the number of cases is not a good signal for the equity markets. This has resulted in limited lockdowns in many parts of the country, and some are more stringent than the rest. If such conditions persist it is bound to impact growth adversely and we may realize a less than expected economic expansion. But one thing that brings a ray of hope is that the massive vaccination efforts are still on, and this may help containing the pandemic to a large extent along with other reasonable safeguards. It is also relevant that there is significant experience gained during the course of the first wave of infections that our level of preparedness is much better and the pandemic will not be able to cause the kind of damage that it had done last time. This preparedness is there on the part of the governments as also the private corporates. This brings in some creative efficacy in the thinking and actions of the market participants. As far as the markets go, it is likely that some correction may happen if the severe conditions of the pandemic persist, but the scope for very deep corrective downward movements, of the proportions seen in last March, can be safely ruled out.
The RBI is likely to continue with its accommodative stance, which it may not dilute at this point of time, due to the changing ground level situation. This is despite the uptick in inflation and the rise in bond yields in developed markets in the last two months. While inflation could moderate due to changing demand conditions consequent to the widespread lockdown, there is a respite in the upward movement in bond yields in the recent past. There has not been any significant growth in credit so far though on the manufacturing and services PMI the readings were better than expected. The consistently accommodative and pro-growth stance of the RBI will be the single determinant factor as far as the market’s ability to withstand any external shocks are concerned. Because the response from corporates would also be open and measured to the extent the support from the system is going to be in case of major developments. At the same time, any deceleration in GDP growth and a fall in output and employment may affect the earnings estimates for the coming quarters specifically because the markets have been pricing in a significant amount of sunshine after the drastic fall seen in the first two quarters of the last year.
As far as the sectoral performance is concerned, the sectors which had actually done well in terms of the performance like Pharma and Healthcare, Technology, Private banks and select larger NBFCs and some from the consumer segment, apart from agri and specialty chemicals. A relatively weaker Rupee is likely to aid some of the companies in the exports segment. It is also worth mentioning that the PLI Scheme introduced by the government in the aftermath of the first wave will go a long way in helping corporates in some of the sectors which have received support to hold up well against all immediate odds, like food processing, telecom, electronics, textiles, specialty steel, automobiles and auto components, solar photo-voltaic modules, and white goods such as air conditioners and LEDs etc. The twin objectives of replacing China as a supplier for other destinations and also substituting Chinese imports in some critical areas is going to help some of the sectors in the PLI in the long run. As far as the choice of the segment goes, the midcap segment and to some extent small cap funds should get priority in the scheme of allocation, and carefully chosen mid cap funds may be the better vehicles for entering the market. The importance of systematic investments over a period of 6 to 12 months should be a worthwhile approach to building investment portfolios.
