One sector which is expected to lose the most is finance, which had led the consumption boom
The lockdown will affect its customer profile, and it will have to deal with rising delinquencies
As covid-19 changes consumer behaviour and social norms, stock markets are shifting towards segments that are likely to be the least impacted.
One sector which is expected to lose the most is finance, which had led the consumption boom. But going ahead, business for the financial sector is uncertain. The lockdown will affect its customer profile, and it will have to deal with rising delinquencies. Therefore, it is underperforming the market rally, starting 25 March.
“It appears that the breadth of performance in financials could narrow considerably and be concentrated in the top two or three names. We reduce our weight in the sector to neutral from plus 500 bps," said Morgan Stanley India. This refers to the allocation for finance stocks in Morgan’s model portfolio vis-à-vis a benchmark index.
In fact, changing consumer preferences will be key to the revival of sectors relatively quicker. Retailing, and travel and tourism are expected to take longer to recover, as consumers are likely to avoid such expenses. Sectors involving discretionary spending such as multiplexes, theme parks, automobiles, malls, real estate, hotels and aviation may take longer to recover.
“There are clear behavioural changes happening because of covid-19. So, some sectors will be less affected, or may see a faster recovery than the GDP growth. Others may get hit because the underlying businesses are hit, which will mean their recovery will be longer," said Sanjeev Hota, head (research) at Sharekhan by BNP Paribas.
Note, growth in some segments of discretionary items, and oil and gas could parallel economic growth. Of course, growth rates will depend on how fast the economy grows post-covid-19.
Others, such as logistics, could be affected for longer because export-import trade, and movement of capital goods and auto are expected to shrink. While cement demand can be shored up by retail buying for pre-monsoon repairs, industrial demand is expected to shrink. Hence, these sectors may see slow and gradual growth.
Pharma, consumer staples and utilities will be necessary even in bad times. But for investors, the key is to find the ones that are under-owned and undervalued.
Valuations of consumer staples are already sky-high, although there are opportunities in consumer discretionary and healthcare, said Morgan Stanley analysts. “India’s long-term fundamental stories for discretionary and consumption are both looking strong, and those sectors could be the new leaders given the starting point of valuations, ownership, and performance," they added.
The markets have already hammered segments such as non-banking financial companies, metals, real estate, autos and logistics, with a higher erosion in market cap since the peak on 20 February. And, that may not change in the near term.