Which industries should you bet on, in the current market sell-off?

In its monthly outlook report, Axis Securities said the direction of 10-year US bond yields should be watched closely in the near term as it will be a key market driver. “Furthermore, prevailing geopolitical developments are likely to continue to take center stage for some time before tapering off in a more tangible direction. The market will also continue to watch for rising Covid-19 cases, central bank action and the impact of the lockdown in China. Therefore, its performance should be limited in the short term," he said.

      

This is what the broker had to say about 13 sectors:

Automobile

While the Indian auto sector has witnessed a significant improvement in demand and most categories are seeing good traction, the current lockdowns are expected to negatively affect the demand scenario. In addition, rising input costs are taking a toll on automakers, with leading companies like Maruti reporting disappointing margins. The auto sector expects demand to pick up and many companies are posting decent profits from current levels. However, the sector remains mixed at the moment as lower than expected volume could lead to lower than expected margins. The brokerage downgraded the sector to "Equal Weight" from "Overweight."

Banking and financial services

BFSI outperformed the broader market from November 2020 to February 2021 as Covid-19 challenges were lower than expected and banks were better prepared. However, reimposing locks will have a negative impact on their performance. Although Axis Bank and ICICI Bank released a good set of numbers, economic challenges cannot be wished for and banks will have to bear the brunt of the current challenges. It remains to be seen whether demand for credit increases as the economy gradually recovers. Axis Securities has downgraded the sector to 'Equal Weight' and continues to monitor developments in the sector.

Equipment Goods

The sector returned to normal at the end of FY21, with the fourth quarter of FY21 supported by an increase in gross fixed capital formation. The government investment cycle continues to be strong and housing registrations in metropolitan cities continue to see strong traction. The private investment cycle should pick up soon, further supporting the capital goods sector. Axis Securities upgraded its position in the capital goods sector from underweight to equal weight

Cement

The cement sector had pricing power in the fourth quarter of FY21 and made it through tough times. Axis Securities maintained its equal weight position in the sector as it expects a better pricing scenario to evolve in the future. Demand is also picking up in several regions, which has come as a welcome surprise, he said. In general, Axis Securities believes that the cement sector has held up better than expected. Therefore, he kept his prospects at the same weight.

Basic Consumption

The consumer staples sector saw a good recovery in demand and posted strong revenue growth in the fourth quarter of fiscal 2021. However, gross margin pressure was clearly visible due to headwinds from raw Materials. While the sector has strong earnings visibility and best-in-class earnings ratios, high valuations relative to other sectors limit upside potential even as earnings visibility improves across the board, Axis Securities said. The broker maintained its Weight Equity in the sector.

Discretionary Consumption

While the consumer discretionary space is seeing a strong recovery and many categories are normalizing, the current lockdowns pose serious challenges to the rate of recovery. However, with the improving trajectory of COVID-19, the outlook for the sector is improving. Axis Securities continued its Equal Weight stance and kept an eye on developments in this space.

Information Technology
Large IT companies continued their growth momentum in the fourth quarter of FY21, buoyed by strong contract awards and online performance on the margin front. The sector is in a revaluation cycle and this trend should continue in the medium term. The IT space is marked by companies with strong balance sheets and playing to the prevailing digitization trend. Even at current levels, valuations in the IT sector are reasonable. Axis Securities recommended an overweight position in the sector.

Metals and Mining
The metals and mining sector experienced a significant upward trend in prices with an improved global scenario. This trend should persist in the medium term and metal stocks should perform well. Axis Securities has revised its position in the sector to Over Weight.

Oil and Gas
Oil trading companies benefited from the gain in inventories and better GRM in Q4FY21. Additionally, CMOs also performed better overall. The net profit of the sector is expected to remain stable due to higher crude oil prices and the probability of strong refining margins due to a better balance between supply and demand. Upstream companies could surprise positively in the scenario of higher-than-expected crude oil prices. With this in mind, Axis Securities moved the sector from underweight to equal weight.

Pharmaceuticals
Q4FY21 results for Pharma were mixed with a not-so-encouraging performance from US companies. While margins were strong, much of it has already been included in market prices. For home system providers, cost-cutting measures were the main driver of their performance in the fourth quarter of fiscal 2021. We believe a modest recovery in domestic pharmaceutical revenue should continue, while significant improvement is needed in operational metrics for a new rating. Axis Securities anticipates risks in this regard and continues with an equally weighted position in the sector.

Real Estate
The real estate sector is experiencing historic records in metropolitan cities. Demand has recovered due to low property prices and very attractive interest rates. The sector is expected to see more traction in 2021 and, as a result, Axis Securities has improved its position in real estate by the same weight.

Specialty Chemicals
The chemical specialty sector has been one of the country's emerging sectors. India has gained global market share in this space by leveraging its capabilities and supply chain realignment from China to India. The brokerage believes that Indian companies would gain more momentum as companies reduce their reliance on China after the COVID-19 pandemic and shift their supply chains to India. Lower commodity prices would support margins and further reduce working capital requirements. However, input costs are a shock to most businesses and the benefits may be limited. Overall, the specialty chemicals industry should continue to perform well in the medium term, Axis Securities said.

Telecommunications
Telecommunications has become the most critical sector in these difficult times to keep businesses running. The sector was experiencing an improving pricing environment even before the COVID-19 outbreak. The industry is highly consolidated with two strong players and one weak player in the wireless space. Axis Securities recommended an overweight position in the sector. 


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