The recent upmove in the domestic equity market is unlikely to sustain and can be deemed as a bear market rally as the street has not fully factored in the impact of COVID-19 induced lockdown, analysts said.

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The surge in the equity market is seen more as a bear market rally and not a resumption of the bull market, according to a report by HDFC Securities Institutional Research.

“Proactive and co-ordinated moves of global central bankers and governments have helped to mend financial market sentiments, but the impact on the real economy and corporate earnings seem to be underestimated after current rally,” said Varun Lohchab, Head - Institutional Research, HDFC Securities.

After a brutal sell-off in March and slumping over 23 percent during the month, a sharp rebound was followed in April. Nifty gained around 20 percent in April and is up 30 percent from the lows of March 23.

HDFC Securities Institutional Research believes that the street has not yet fully factored the impact of COVID-19 on corporate earnings.

“March volume and earnings disappointment from large index stocks and rising CoVid-19 provisioning for banks are precursors to greater systemic earnings weakness in the coming months,” the report added.

It earlier estimated a hit of around 30 percent on FY21 aggregate PAT of companies under its coverage in a scenario of protracted lockdown and slower return-to-normalcy trajectory.

However, till date consensus FY21 Nifty EPS has been cut by around 15 percent and for FY21 consensus is still building in a growth of 13 percent, YoY. “This is optimistic - given the intensity and extent of lockdown FY21 will be a negative earnings growth year. In contrast, we have already cut FY21 aggregate PAT est by 26 percent and we currently expect -5 percent YoY FY21 PAT growth,” it said.

The brokerage house expects more disappointments in Q4 corporate earnings than surprises, implying a continuation of cuts in May 2020 and a likely pronounced negative price reaction given the recent run-up. A continuation of negative management commentary w.r.t. COVID-19 impact on FY21 earnings is also expected to go ahead.

Meanwhile, given prevalent risk aversion among banks, analysts said that RBI needs to embark on even more unconventional monetary toolkit such as TARP, first loss assurance, etc. to normalize frozen credit markets.

Similarly, fiscal measures need to ramp up materially with more incentives or transfers targeted at smaller businesses, exporters, and discretionary services impacted by Covid-19, the report added.

The model portfolio of HDFC Securities Institutional Research largely leans on a mix of quality, value and defensive stocks/sectors to navigate the expected environment of uncertain Covid-19 outcomes and heightened market volatility. It recommends a 4 percent cash position.

The brokerage house is overweight on defensive Utilities (NTPC, PowerGrid Corporation of India) and Telecom (Bharti Airtel and 9 percent weightage in Reliance Industries to play telecom story).

Within BFSI, it prefers insurance, SBI Life and ICICI Prudential Life Insurance, more than lenders. Within lenders, it prefers to position only into large sector leaders such as ICICI Bank, Axis Bank which would be a key beneficiary of polarization in deposits.

“We have mild overweight on Pharmaceuticals – recent runup prevent us from taking aggressive overweight in pharma, despite the strong sectoral tailwinds in a post-COVID-19 world. Cement is also a mild overweight in our portfolio,” the report said.

Key underweight includes autos, consumer staples, consumer discretionary, Metals & Mining, and Energy.

“Within energy, we prefer gas over oil, and IGL is a key pick. Given the recent uptick we prefer to have a mildly underweight stance on IT Services,” it said.

First Published:May 6, 2020 2:35 PM IST