There will be a ‘K’-shaped outcome for businesses too in every sector - the good operators will gain share at a faster clip. It creates a fertile ground for stock picking but investors should also be mindful of the ensuing value traps, Nitin Sharma, Head of Research - India, Fidelity International said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpts:

Q) Market hit fresh record highs in the run-up to Diwali. It looks like the rally is narrow - will the momentum sustain?

A) The rally base has actually broadened over the last few weeks based on improving domestic consumption and expectations that the worst of the COVID-19 lockdowns are behind us. Apart from structural growth names, leaders amongst the traditional cyclical sectors such  as Financials, Energy, Cement, and Transportation have also done well.
Sustenance of this momentum will require visibility around the COVID-19 path, continued higher government spend, and an eventual revival of private capex.

We must remember, though, that it is going to be a new normal in many ways and companies that adapt well to it will be rewarded through higher market shares and profitability, which will also support their stock price.

Q) What is your call on US elections? How will it impact Indian markets?

A) Indian capital markets are largely pivoted to domestic variables and to that extent the US Presi

Presidential elections should not be a major performance driver.

While a Biden White House will likely pursue some major themes such as around environment, healthcare, and better international engagement for the US, their direct impact on India is unlikely to be pronounced, at least in the near term.

The new administration’s stance on various global trade and economic matters that could have a rub-off on select Indian business sectors will take a while to be apparent.

Importantly, investors will also need to wait for the US Senate election outcome in early January to see the manoeuvring room that will be available to President Biden on fiscal position and the proposed size of a stimulus to help cope with the impact of the COVID-19 pandemic.

For global capital markets, including India, it is the Fed’s stance that will continue to be the key in the near term.

Q) Most investors would want to write off 2020 from their portfolio. Even after rallying more than 50% from March lows, most portfolios is negative or at best single-digit returns. What are you advising your clients?

A) Well, single-digit positive returns in a year like this is quite great! There will always be periods, including years, with negative returns and we cannot always predict those.

As investors, you should simply aspire to keep your investments for as long a period as possible. This maximises your chances of favourable returns over the entire holding period. Basically, put both your money and time into the investments!

Q) Green shoots are clearly visible be it in auto numbers, GST numbers, stable earnings and the macro data. Do you feel that much of it is already priced in which would cap the upside?

A) There are clearly multiple green shoots visible, and that has excited the markets. However, certain other metrics such as credit growth and private capex are still relatively subdued.

This would be expected as businesses are not yet adding capacity and several Services sectors are still constrained. Markets will definitely keep a watch over a broader set of variables tracking economic revival from here.

Q) What is your call on September quarter earnings? Some brokerages have already upgraded their EPS estimates for Nifty. What is your view – do you think numbers warrant an earnings upgrade and why?

A) It has been a great set of numbers overall, with several companies across sectors reporting positive surprises. The good performance was driven off both better than expected revenue and improved margins. It has led to FY21 EPS estimates going up, but it is to be seen in the context of a sizeable cut in the estimates previously (6 - 40% across sectors).

FY21 estimates will remain volatile based on how the recovery holds. Tapering of pent-up demand and uncertainty around in Covid19 trajectory mean that it may not be prudent to extrapolate the September quarter performance across the board.

However, at a broader level, building blocks for a structural uptick in economic activity - higher and more efficient infra spending, Make in India initiative, churn in global supply chains, improved regulatory environment - are clearly getting in place. It will support earnings in FY22 and beyond.

Q) As we approach the festive season – what would be your message to investors on Diwali 2020?

A) Focus on identifying long-term winners. Times like these lead to gap rising between winners and losers in every business segment.

Like the economies, there will be a ‘K’-shaped outcome for businesses, too, in every sector - the good operators will gain share at a faster clip. It creates a fertile ground for stock picking but investors should also be mindful of the ensuing value traps.

Q) What should investors expect from SAMVAT 2077? After the super rally we have seen, we are just 400 points shy on Nifty to hit fresh record highs. Any target that you have in mind for the next 12 months?

A) Fidelity’s investment style is driven by bottom-up stock-picking rather than a top-down view. To that extent we do not bother having index-level targets.

Just to reiterate though that these are interesting times that will lead to a wider operating and financial performance dispersion within most sectors.

Markets will absorb the same in due course and reward good business operators. The customer behaviour reset as a consequence of the new normal will generate winners even if the wider economy takes a while to go back to the pre-COVID trajectory.

Q) What are you views on small & midcaps for the next 12 months? Do you think the outperformance will continue?

A) At an aggregate level, the valuation differential between the Nifty and small/midcap indices is now in-line with long-term averages. However, there are plenty of stock-specific opportunities.

We are seeing emergence of innovative companies with solid moats/competitiveness at a global level in several sectors including Technology, Healthcare, Materials/Chemicals, and Financials.

Such names have a long growth runway ahead of them and will provide an excellent opportunity to outperform the markets.

A related factor has also been the rising participation by newer, first-time investors coming in the equity markets driving retail participation higher. Small and midcap names will find trading support if this trend continues.

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Please note the article was originally published in the in November 2020.

The opinions expressed are author's own. Fidelity International is not responsible for the author's opinions.