Two Factors Harsha Upadhyaya Thinks Can Shape India’s Market In Near Term

India's equity market, propped up by positive cues and excess liquidity, is likely to be shaped by two factors in the near term: rural economy and consumer demand after the lockdown.

That's according to Harsha Upadhyaya, chief investment officer at Kotak Asset Management Co. Ltd., who said that both these factors cannot be assessed accurately at present.

The revival in demand seen in India so far has been supported largely by tier-II and III cities, but rising cases of Covid-19 infection in rural areas may hamper that, Upadhyaya told BloombergQuint in an interview. “We need to see whether it will lead to some administrative impact such as a lockdown or consumers themselves will stay at home and not venture out,” he said.

The stock market, on the other hand, expects some pent-up demand from urban consumers who have been under a stringent lockdown for more than two months before the government began easing curbs from May-end. But whether that translates into anything material remains to be seen, Upadhyaya said.

India's equity market has mostly recovered from its March-selloff, the worst in more than a decade, triggered by the coronavirus pandemic as several monetary and fiscal stimuli by the central bank and rescue packages by the government buoyed sentiment. While the economy is still headed toward a rare annual contraction in more than four decades, the government sees rural India as the lone bright spot.

On the ground level, “overall activity level has improved,” Upadhyaya said. “The only caution here is that the market is driven by a lot of liquidity by retail in the recent past and the institutional activity has been quite less. To that extent, if there is any reversal of sentiment, there could be volatility on the downside.”

Here's what Upadhyaya has to say about various sectors.

Industrials

• Overweight on capital goods and engineering.
• They aren't as bad as airlines and hospitality but the recovery in these sectors will be delayed by a few quarters.
• Things have started to pickup but there has been a deferment of a quarter or two in terms of top line or cash flow.
• Kotak AMC continues to hold a few stocks which are not leveraged and are likely to win bids if they survive the pandemic.

Pharmaceutical

• The portfolio had stock-specific positions in pharmaceuticals.
• Underweight to neutral on the sector.
• Rally in the sector isn't fully backed by fundamentals for all stocks.

Information Tenchnology

• Large-cap IT names have conveyed better than small and mid caps because the impact of vendor consolidation will be against the latter.
• Institutionals were underweight in IT, same as pharma.
• IT might be a vast space to see some relative outperformance.

Auto

• Tractor sales will remain positive because of agri business.
• Evading commercial vehicles.
• Passenger vehicles and two-wheelers will see reasonable demand.

Banks

• Underweight on public banks and non-bank financial companies as financials will be affected by the national lockdown and moratorium.
• The fund house has consolidated its positions in private sector banks into a few top names which have already raised capital or will do so in a week or two.