Fundamental Market Update
Economic recovery led rally expected to continue
Expectations of further improvement in economic activities along with the
possibility of a vaccine sometimes by end of 2020 or early 2021 has led to the
rally becoming more broad based recently. While we see continued momentum in
sectors with strong revenue visibility like IT, Pharma and Telecom, beaten down
sectors like aviation, hotels and retail have also started out performing the
markets. We expect the recovery theme to play out over the next few quarters and
are adding Chalet Hotels, Inox Leisure, Hawkins cooker and VIP industries to the
portfolio. These companies belong to the worst impacted sector but are market
leaders with strong business franchises and available at prices which are
significantly below their pre Covid levels.
Sectors with revenue visibility will continue to outperform markets
Though the rural, essential and digital theme have played out along expected lines
since the beginning of the crisis we believe that there are is a clear case for further
upsides in most sectors given revenue visibility and strong growth prospects. We
expect rural focused sectors like Agrochemicals, two wheelers and tractors along
with IT Pharma and Telecom will continue to do well given strong demand
Current phase of global rally led by improvement in economic activities
Global markets have recovered sharply from the lows in March with the S&P 500
at all time highs and is currently trading ~8% higher than its Jan closing levels.
While the initial phase of the rally from the March lows was led by fed induced
liquidity the second phase of the rally from July was driven by improvement in the
While India too has witnessed improvement in economic activities from April lows
we are still well behind most developed countries in terms of recovery to pre Covid
levels. However pent up demand along with inventory buildup prior to the festive
season and gradual opening up of the services sector should lead to further
improvement in economic activities over the next couple of months.
Increase in recovery rate coupled with improved visibility on vaccine is positive
While there has been a surge in new cases in India post unlocking there has also
been a sharp increase in recovery rates to over 75% along with drop in mortality
rates. Moreover there has been positive development on the vaccine front with
three promising vaccine which are at various stages of development and markets
are building in the possibility that vaccination could start in the beginning of 2021.
Leading to rally in cyclical and beaten downs sectors on recovery hopes
Market rally has become broader based due to positive news flow on vaccine and
expectations of continued economic recovery due to pent up demand and further
opening of the services sector. While we expect that cyclical and beaten down
sectors will continue out performing markets for some more time we believe that
one should take a stock specific approach and buy into the leaders in the sector
which have strong business franchises.
Key risks which can derail the recovery rally are 1) Delay in vaccine production as
compared to timelines expected by markets 2) Growth faltering significantly as
compared to market expectations post festive season.
Source: Company, Angel Research
Note: Closing price as on 27th August,2020