Consumer staples and telecom stocks will stand out in the short term: Jigar Shah

How are you analysing this market right now? What are you recommending your clients and what kind of queries are they posting to you?
At this point of time, the market is poised in a very delicate manner and we have seen some amount of bounceback from the lower levels. But as we begin to get a lot of data, especially on corporate earnings and other general macro data, a whole new situation is unfolding; not only for us but even globally. As we are all connected, the markets are going to go through a lot of volatility.

The only thing I want to say at this point of time is that companies with no or little leverage will do much better. Companies where disruption in business is less or the management is agile to counter that kind of disruption is something where I would put my bets on. There are very few businesses which will have very little impact but most businesses will have some adjustment time but good businesses will be able to overcome this and do better.

So it is a perfect time for a bottom up stock picking but obviously there is no rush and there is going to be a good amount of time available before this whole thing corrects itself. So in my view if you ask in particular, the telecom sector looks to be standing out even in the short term. If they are able to take care of their balance sheet and cash flow situation, even in the medium- to long-term, it can be a big wealth creator from here.

Consumer staples are definitely standing out and they are typically the ones which are generating the free cash flows and pay large amounts of dividends. So these are two sectors in particular where I feel very strongly that they will do better going forward. But the consumer discretionary sector and various other sectors are going to have a tough time.

Pharmaceuticals and healthcare overall should do better because of the higher allocations and higher requirement for hygiene but again, I think we have to wait and watch exactly how the trend develops and what kind of macro stabilisation actions are taken by our government and elsewhere. So there is a lot of uncertainty as of now. We are not sure how exactly some of the businesses will pan out but a lot of pain is in the price and now is the time where a lot of patience is required. But obviously, the good companies with good management and balance sheets will do much better.

This is a very unique time in our careers where we are seeing the entire index megacaps correcting like midcaps. If one were to look at slightly beyond the horizon of six months or even a year, if we are taking one-year forward earnings to be flat or perhaps a little more negative, which are the areas which have corrected in a way that it is giving you comfort and their valuations on quality of management will navigate through this slowdown and hence are best suited for portfolio building?
At this point of time, if you just look at the data, the maximum correction took place in oil and gas, metals, banks and financial services and the ones which are less affected are telecom, healthcare, consumer staples, etc. So my sense is that the good companies within the financial services or banks where capital is not an issue and their level of trust amongst their customers and depositors is high, those are ones where a lot of money can be made. Obviously it will take time but this is where a lot of money can be made.

Similarly, the commodity companies which will survive this particular situation and which have low leverage will also do very well because they can have a better control over pricing and the industry would consolidate. In fact, many industries where a lot of consolidation will happen as a result of the small and medium-sized companies disappearing or breaking down, something which is going to be globally a big phenomenon, will help the larger companies become even large and that is something which is going to be evident in that phase.

I would like your opinion on two areas of the market which right now traders, momentum guys or perhaps mid-term investors as well are very interested in hiding behind: the consumer space. The likes of HUL, Britannia, there are big moves coming in, though the medium-term outlook on volume front has become hazy. The second one is pharma space which is coming out of six years of underperformance and again rising nicely. What are your thoughts in these two classic defensive historically but structurally pretty different sectors?
If you look at the consumer stocks from the peak levels as somewhere in January or early February, some of the stocks have corrected by 30-40%; maybe Unilever and Nestle are an exception but a lot of other stocks have corrected substantially and the visibility of business of demand is much higher in case of those companies than any other at this point of time. The only next business will be the data business or the telecom data.

If you look at the pharma side, I would be positive but cautiously because the important thing is that the demand in pharma cannot change overnight and the other issue is, it is still very early phase to judge whether the Indian pharma companies will benefit at the expense of the Chinese companies. There is a lot of talk that the supply chain change will happen after this COVID situation stabilizes and Indian companies would gain at the expense of Chinese companies. That is something which is a core assumption behind the rally, as I see it.

If that is the case, then it needs to play out. I think we need more evidence of that. Also, it would be difficult to believe that the USFDA restrictions and actions on some of the companies or some of the plants or processes would be short lived or would be done away with. It is something which is not clear to me. So therefore, again I would say, the best would be to bet on companies which have very strong domestic positions and have a good export and outsourcing base as well.