Is there a market rotation in favour of IT, pharma and auto? Dhananjay Sinha answers
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CEO & Co-Head– Institutional Equities,, says the IT sector is showing signs of recovery as US-China relations improve, easing investor concerns about order book uncertainty. Potential US tax cuts could further boost the sector. Significant corrections in IT stocks have created attractive valuations, leading to a possible rotation of investments into IT. Pharma and auto sectors may also benefit from this rotation.If you look at the market profile, there has been a good rebound, I would say, after the initial correction. If you look at the market capitalisation of NSE, it had actually shrunk by almost like Rs 90 lakh crore to the lows in February or end of February and from there on, the market cap erosion has actually narrowed quite substantially because of the recovery that has happened. We have recovered almost like Rs 70 lakh crore out of that.So, the balance is only Rs 20 lakh crore from the peak level that we saw in September last year. So, I would say what has happened is that sectors have taken turns to rebound. We had RBI also infusing liquidity substantially, so that has also played out. What is happening now is the IT sector which is actually gradually coming back and the fact that there was an overhang on the sector with the recession risk being priced into the US economy and it was a spillover effect of the US-China conflict, the engagement that is happening between US and China in thawing the lock jam is something that can be seen as positive for the IT sector because a lot of investors were concerned about the order book uncertainty that it had created.I would say the overhang is actually receding. There is also a possibility that the market might start pricing in tax cuts in the US as well. These are the two things that are moving in favour of the IT sector. IT stocks have seen significant correction and there is a certain amount of valuation that people might be looking at. All put together, there does seem to be this whole rotation across sectors moving in favour of IT now. So, IT is one sector. There are other sectors like pharma where there is a possibility of rotation in favour of them. Auto is another one, maybe.This news will have an effect on the alco-beverage companies. What the Maharashtra government has announced may create a certain amount of suspicion that other states might actually also announce. This could be because state governments are also struggling on the revenue side. There is a likelihood that people might expect or extrapolate this kind of a scenario in other states as well.I would say people will need to wait to see whether they get more clarity on this and whether this can create a trend. While we are positive fundamentally on space, we do have Allied Blenders in our list, but this is a regulatory risk that will need to settle down before we take a decisive view.
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