What stocks should you invest in?

'One can start accumulating economy driven stocks in the next few months with a two-three year view.'

"Since most of the economy driven sectors are prone to market correction, one should have an accumulation strategy in them rather than investing at one go," Ashish Nanda, executive vice president and business head -- PCG, Commodities and Currency Business at Kotak Securities Ltd, tells Rediff.com's Prasanna D Zore.

India is in the midst of its earnings season. Are you expecting any surprise on this front from the Nifty 50 universe?

The Q2 earnings season has started on a very strong note. Some 32 companies out of Nifty-50 have declared their results with no surprise on revenue front, but 23 per cent positive surprise in earnings.

The set of 32 companies have reported 10 per cent fall in revenues on a Y-o-Y (year-on-year) basis but a healthy 17.5 per cent growth in earnings on Y-o-Y basis.

Before the earnings season we had built in flattish earnings growth for Nifty-50 companies in Q2, but looking at the large upbeat in earnings, we could end up with single digit earnings growth.

Maximum surprise has been seen in industrials, cement, consumer discretionary and financials.

Sectors that have reported healthy earnings growth within Nifty-50 are energy, financials, telecom, and IT services.

What are the value plays you would advise one should look at, especially in the context of the COVID-19 pandemic?

We expect defensive sectors like IT, FMCG and Pharma to be resilient for the next few months till the time we don't get a proper vaccine.

As we advance towards getting the vaccine and economy starts going back to normalcy, we can expect the economy driven sectors to start out performing.

Banks, oil and gas, telecom, utilities, capital goods, metals and auto sector could come into focus next year and take the front seat.

Since most of the economy driven sectors are prone to market correction, one should have an accumulation strategy in them rather than investing at one go.

One can start accumulating economy driven stocks in the next few months with a two-three year view.

For the time being one should remain invested in defensives. As the market corrects they can slowly keep shifting part or more of these holdings into economy driven sectors.

Has the market topped out for 2020? What is your assessment of the bottom for this year?

On a calendar year to date basis the Nifty 50 is still down by 4.3 per cent.

After the sharp recovery from the March lows, the Nifty-50 is just 6 per cent away from its peak of 12,430.

However, between pre-Covid and now we have seen more than 25 per cent reduction in future estimates.

This has led to forward PE (price earning) multiples going up sharply. On our earnings estimates the Nifty-50 is trading at 22x on one-year forward basis and 19.3x on FY22E.

In fact, in January 2020 when Nifty-50 hit its peak of 12,430, it was trading at 17.5x on one year forward basis.

To summarise, valuations are not supportive at current levels and to that extent risk-reward matrix is not favourable.

The earnings yield (Nifty-50 yield) works just 4.5 per cent way below the 10-year G-Sec yield of 5.9 per cent.

However, the very low global bond yields is supporting flows into risky assets like equities that is keeping valuations at elevated levels.

The Nifty-50 could have already peaked at 12,000 levels or could at best hit its previous peak of 12,430 if the outcome of the US elections is very positive and we see a sharp rally in the US markets.

On the downside, we expect the Nifty-50 to take support at the 200 DMA/WMA (day moving average/week moving average) which are placed near 10,600-10,700 levels.