Ease off a bit in IT, invest in these 4 sectors in 2021

One would be relatively better off in other sectors going into 2021 than in IT even though it has very strong fundamentals, says Andrew Holland, CEO, Avendus Capital.

The UK has managed to win the vaccine race and come next week they will have a vaccine but I am not really seeing much enthusiasm across any of the world markets. Even European markets are sitting on the sidelines right now,
It has been much anticipated. In the UK or the US, the vaccine is going to be distributed sometime this month. But it is obviously going to be for those in need and probably health workers. It is not being rolled out fully to the public yet. The market has expected that and the market will now think that the world is getting vaccinated by the middle of summer.

Does it mean that people will still be a little cautious and keep their savings or will they spend more towards experiences, luxury goods, etc? That is still great for the global economy. Do not get me wrong and that is what we all want. But, of course, the next question is when will that feed into inflation ? Is it a reflation trade that you are going to see? What would the Federal Reserve and other central banks do if inflation ticks up a lot quicker than was expected?

I think these kinds of things will keep markets a little bit more volatile even though the news is great and this is what we all wanted. You got to look around the corner and say when would inflation pick up? What will that cause? When are interest rates likely to rise? Is it 2022 or could it be faster?

Where should one book profit right now? It seems profit booking has started in banks!
Listen it had a fantastic run in November, didn’t it? The rebalancing for a number of stocks helped the sentiment in most sectors. But whichever way I look at it, if the global economy and India’s economy is going to recover, then the sectors which you want to be owning in 2021 are going to be the banking sector, consumer discretionary, energy and industrials, Those are the sectors you want to be involved in going into 2021. The profit-taking is mainly to do with the great run it had last month.

We have been hearing a lot about the cyclical trade coming back on the back of the recovery. How is it going to strengthen going ahead from here?
If the economic recovery is real, then these types of industries will benefit. Globally, China is showing real GDP growth this year as well as accelerating next year mainly by government spending. It is not by domestic household consumption. So that leg will happen for a number of countries. While India has been helped by some government spending and domestic consumption, a combination of both will pick up in 2021 and that bodes well for economy-led recovery stocks like the banking sector, industrials, cyclicals as you mentioned.

In terms of profit-taking, maybe it is time, we move a little out of the safety sectors where we have been hiding in the last six-seven months including FMCG, pharma to a little less extent and possibly IT as well. It is all about having that barbell approach. One has to have defensive stocks to beat the volatility, but as you move to a full blown recovery globally and in India, you need to be shifting towards cyclicals and the banking sector.

How do you look at the Burger King IPO?
It is obviously a well known brand and the expansion plans are very aggressive and quite rightly. It has to be a cash generative business given it is fast food and so I think the market would warm to the IPO, valuations are still reasonable from what I have seen so far.

Consumption post Covid and vaccine era will be more towards luxury goods and experiences. The whole consumption story will continue for India and globally but I think India is still at a very nascent stage of this expansion which we are seeing across the board.

What are you making of this entire wave of action in PSUs like GAIL, ONGC and even some of the others like BEL, BEML and even BPCL for that matter?
Going into 2021, you should have energy shares because as the economy picks up, so do power consumption and everything else. The cycle goes this way -- commodity prices will start to rise first and then it will kind of move towards energy prices and then you will get the refining margins starting to increase as well as oil prices move. That is the normal cycle and it is going to be no different this time around.

The PSUs have been unloved for a long time and the valuations are compelling. There’s been a little bit of switching into the unloved or undervalued PSU companies and the PSU banks which had a reasonable run recently because the valuations compared to the private banks were compelling.

So it is not a surprise, it is more rotational in the short term in terms of momentum but the fundamentals for the energy sector remain very strong.

How are you looking at the overall IT sphere?
It remains very positive. The IT sector has a lot of tailwinds going forward as the global economy starts to recover and that will keep the margins improving going forward. My only reservation in the short to medium term is that the dollar will weaken against Asian currencies because we believe that Asia led by China will be the growth engine and the investors would look forward to the next five years at minimum and fund flows will continue to come and that will appreciate the rupee going forward against the dollar. That would be the only headwind that I see for the sector.

When you are looking further out, you are looking for those sectors which will have very strong growth. For IT, it is going to be reasonable growth but it is going to benefit from economic recovery. One would be relatively better off in other sectors going into 2021 than in IT even though it has very strong fundamentals and we still like it. IT could relatively underperform some of the other sectors going into 2021.