Tread with care amid negative cues

After three weeks of negative returns, markets posted strong gains during the last week as it was backed by positive global cues, renewed buying from FIIs and rally in banking and financials.

Benchmark indices, the NSE Nifty and the BSE Sensex, settled the week at 9,580 and 32,424 with gains nearly 5.99 per cent and 5.47 per cent respectively.

Mirroring the caution in broader markets both the Nifty Midcap and the BSE Small-cap indices underperformed the benchmark indices. Net FII inflows including the Bharti Airtel stake sale deal were at over Rs 8,000 crore.

With the number of Covid-19 cases on rise, caution will be the watchword in the market till the Covid-19 infections in India cross the peak and there is a full re-opening of the economy.

On a day, when country registered its highest single-day spike of 8,380 coronavirus cases, Prime Minister Narendra Modi in his radio show 'Mann ki Baat' cautioned that it would be a long battle against the pandemic and asked people of the country to remain even more vigilant now as major chunk of the economy has opened up.

GDP growth tumbled to 3.1 per cent in the March quarter -- the slowest pace since the global financial crisis more than a decade back; and for 2019-20, the Indian economy grew by 4.2 per cent, the slowest in 11 years.

Observers say that the reduced revenue numbers for 2019-20 will make those targets even more difficult to achieve. With the impact of Covid-19 and the lockdown on the economy, the budgetary projections for 2020-21 look very ambitious, even unrealistic.

All the Budget projections were made on the premise of 10 per cent nominal growth in the economy. With much lower nominal economic growth, the revenue projections for 2020-21 will go awry.

Revised realistic Union Budget for 2020-21 should be presented in coming parliament session say experts. The nationwide lockdown, now termed 'Unlock 1', has been extended till June 30 in containment zones.

The Ministry of Home Affairs (MHA) has said all activities outside containment zones will be reopened in a phased manner starting from June 8.

In the week ahead, at the start of the week, markets will react to Q4FY20 Gross Domestic Product (GDP) data, downward revision of data of the last three quarters, and the lockdown extension.

Near term direction of markets will be dictated by Monsoon spread, developments on the global coronavirus virus pandemic, US-China trade war, movement of currency, inflow and out flow of FIIs, macroeconomic data and crude oil prices.

Monsoon will be the key factor to focus on in the coming weeks as it is critical for agricultural production.

Quote of the week: "The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn't changed."-Peter Lynch.

F&O/ sector watch

Supported by renewed buying from FIIs and short covering, the settlement week witnessed brisk trading in derivative segment. Rollovers in Nifty futures were at 75 per cent (last month 71%).

However, in value terms it was flat at 9564 Cr. versus 9474 crore (Nifty was down 4%. in last series). On other hand, market wide rollovers stood at 93% (last month was 92% and prior to that 85%) in value terms Rs81,251 cr which is higher than last month Rs75,894 Cr. Cost of carry is at -0.53.

Also, Nifty/Stock Fut. has declined at 0.11 (last month 0.12), implies market participants increasing bets more on individual stocks than on Nifty. Aggressive put writing was seen at 9200 strike which should act as strong support for the markets moving forward.

On higher side, however, 9700 levels will remain crucial resistance for the markets. The Implied Volatility (IV) of calls closed at 26.38 per cent, while that for Put options closed at 29.63 per cent.

The Nifty VIX for the week closed at 30.02 per cent and is expected to remain volatile. PCR OI for the week closed at 1.48 flat as compared to last week. Techies say Nifty has managed to move above short term moving averages and has managed to give breakout above the key resistance level of 9,400.

Punters expect markets to remain in bullish mode in near term and dips should be used to create fresh longs. Market's leadership has shifted over the week, and the latest leg of the rebound has been underpinned by shares of financials that were considered laggards just week ago.

Investors have turned to shares of financial companies and cooled toward the pharma giants, for now. Old timers think it will be awhile before markets recover fully but think markets have hit bottom between 8500-9000 for present.

Sectors that can outperform in June series are auto, private banks, pharma, FMCG and cement. PSU stocks are back on the radar of punters. Market players expect major disinvestment and strategic partnership announcements in coming days. Buy on declines BHEL, BEL and IOC.

Buy Hero Motocorp and Bajaj Auto. Results of the large caps such as the SBI, L&T, Britannia, Aurobindo Pharma and BPCL are expected to be in line with expectations.

Stocks looking good are BEL, Pidilite Inds, Piramal Enterprises, Ramco Cement, Tata Steel and Zee Entertainment.

Stock picks

Bharat Electronics (BEL), a Navratna Defence PSU, posted a turnover in excess of Rs12,500 crores (provisional & unaudited) during the 2019-20.

Order Book as on April 1, 2020, is Rs 51,800 crore. The year saw BEL securing significant orders worth Rs 13,000 crore. Some of the major orders acquired during the year are Akash (7 Sqdn), Coastal Surveillance Systems (CSS), Upgrade for EW system, Radars, AMCs for Radars & Weapon systems, Software Defined Radio (SDR), Sonars, Advanced Communication Systems, etc.

BEL remained focused on enhancement of its capabilities and competitiveness through diversification, continuous modernisation, indigenisation and outsourcing to Indian industries with increased thrust on MSME sector.

With GoI decision to be 'Vocal for local', bulging order book and reports of divestment of equity, the stock appears poised for big surge in coming months. Buy at current levels for medium term target of Rs125.

(The author is a stock market expert. He is former vice chairman of AP Planning Board)