The market recovered sharply in April largely due to short covering or some amount of value buying after liquidity and fiscal measures were announced by global central banks to support economies from destruction.
HDFC Securities Institutional Research is not convinced about the gains though.
"We are not fully convinced of the durability of the market up move (Nifty up 30 percent since March 23) and believe that Street has not fully factored in the impact of COVID-19 induced lockdown. March-20 volume/earnings disappointment from large index stocks such as HUL, RIL and rising COVID-19 provisioning for banks are precursors to greater systemic earnings weakness in coming months," HDFC Securities said in its latest strategy note.
The brokerage said it would deem recent market surge more as a bear market rally and not a resumption of bull market. "Proactive and co-ordinated moves of global central bankers and governments have helped to mend financial market sentiments, but the impact on real economy and corporate earnings seem to be underestimated after current rally."
As far as May is concerned, HDFC Securities feels more Q4 earnings disappointments are likely to strain the market during the month.
"HUL earnings clearly pointed to an underestimation bias, which is likely to unravel as we move through the chunky part of earnings season in May," said the brokerage which expects more disappointments than surprises, implying a continuation of cuts in May and a likely pronounced negative price reaction given the recent run-up.
It also expects a continuation of negative management commentary w.r.t. COVID-19 impact on FY21 earnings.
Till date, consensus FY21 Nifty EPS estimates have been cut by around 15 percent and for FY21 consensus is still building in a growth of 13 percent YoY, which is optimistic.
Given the intensity and extent of lockdown FY21 will be a negative earnings growth year, HDFC Securities feels. Hence, the brokerage has already cut FY21 aggregate PAT estimates by 26 percent and it currently expects negative 5 percent YoY growth in FY21 PAT for its coverage universe.
Hence, its model portfolio largely leaned 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 also recommended 4 percent cash position.
Its key picks are Bharti Airtel, ITC, United Spirits, UltraTech Cement, SBI Life Insurance, ICICI Bank, Axis Bank, Indraprastha Gas and CDSL.
On the sectoral front, HDFC Securities has overweight call on utilities, telecom, insurance and banks, whereas underweight on auto, consumer staples, consumer discretionary, and metals & mining and energy.
Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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