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Sectoral stocks to be on: Five sectors to bet on from a risk-reward ratio perspective


The management commentary which is coming out is good compared to what the initial fears were in the market, says Atul Bhole, Senior Vice President – Investments, DSP Investment Managers.

What do you make of the sharp rebound in the entire lending space? Almost everything from smaller companies like Magma Fincorp to Bajaj Finance or largecap banks like Axis have come back. It was just in mid March or April we were almost writing an obituary for this sector.

Financials in March and April got oversold. The market took an extremely bearish view on the financials basis the possible NPAs which could come. But as we are seeing now, many of the financials are reporting that the number of customers who availed the moratorium is coming down and incremental commentary from these managements is that the damage which was feared by the market initially would not be to that extent. That is actually resulting in financial bouncing back very sharply from those oversold levels. So it is a combination of these two things. To start with, the stocks were oversold and secondly, the incremental commentary which is coming out is particularly good compared to what the initial fears were in the market.

Let us shift focus and talk about the global-related sectors. Just a few days back, Chinese markets came back almost to pre-Covid levels and we understand that factories over there are chugging once again. Could that be the reason metal stocks have come back very sharply? How are you analysing the fundamentals of the metal space?

Let me first answer your first question about global markets. Globally markets are actually doing very well because of the liquidity which was infused by the central banks and governments and to that extent, the damage to the economies ultimately is arrested. Simultaneously, the economic activities globally are coming back and I think that is helping the markets or the stock markets.

In terms of metals, what we have seen is something similar to what we saw in the financials. I think similar things are happening there. The stock also got sold necessarily in March and April fearing complete loss of demand for metals. Now with the economic activities resuming, the stocks started to do well. On top of that, we have seen news coming in terms of a border adjustment tax from the government, which helped the domestic steel manufacturers. So those kinds of protective measures are also coming into the picture and helping the metal stocks.

From a risk-reward ratio point of view, which is the space which you are researching and looking closely? What is on your drawing board right now in terms of taking a deeper look and looking at the numbers how they could be in 12 to 18 months from here?
In terms of the upside potential, I am still overweight on financial stocks and I think financials is the space I would still maintain is a space where upside can be expected. This is what I had mentioned one month back and I still continue maintaining that stance even after this rally. If you look at actually the stock prices, they are still below Covid levels by at least by 35% while other sectors like IT, FMCG, pharma are actually at pre-Covid levels or even beyond pre-Covid level. So this pack of financials is still possibly factoring in lot of damage in terms of NPAs and growth and if I think the stock selection is right, which I believe we have, those financials possibly will report much lesser damage and they will actually capture the growth which will happen eventually when all the things bounce back to normalcy because they have adequate capital with them. They have liquidity on their side and their cost of funding is also coming down.

So all these things will help the companies to capture the growth whenever their normalcy comes back. So I would say I will stay with this kind of top quality financials where I still think the upright potential is much better. Apart from financials, I am also looking at some of the agro chemical and fertiliser companies. I think those companies will also benefit because of good monsoons. Rural areas were affected to a much lesser extent than urban areas and these companies are very well in terms of their chemistry skills. On the basis of those chemistry skills and better management, they are gaining more share at the world stage also and there is a shift which is going on from China to other countries. So I think these companies are going to benefit from that trade also. I am also bullish on other sectors like cement and telecom which are benefiting from the sector consolidation which has happened in the last two-three years and are getting the pricing power back. The outlook in terms of volume growth is also pretty okay.

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