With more Covid jabs around, will the rally in cyclicals come roaring back?

MUMBAI: While the second wave of Covid-19 may have stalled the rally in equities, shares of companies in the cyclical sectors may come roaring back going ahead as the availability of more vaccines is going to improve the visibility on when the economy can return to normalcy, analysts say.

The government last week allowed fast-track approval for the Covid-19 vaccines of Pfizer, Johnson & Johnson and Moderna under the emergency use authorisation route, which will allow India to accelerate its vaccine drive that has got bogged down in shortages.

The breathtaking rally seen in the cyclical stocks since earlier this year halted in the past few sessions, as investors shifted money to defensive sectors such as pharma and IT. Their concern was that the rapidly spreading virus and vaccine shortage could result in the return of tough lockdowns across states, which would have dented economic and earnings recovery in 2021-22.

Cyclical sectors benefit during phases of strong economic growth, and any dent to the economic outlook is directly proportional to their performance. In the steep selloff seen on a few occasions last week, cyclical sectors such as banks, metals and real estate bore the brunt of the selling pressure while pharma and IT stocks outperformed.

“We would use the ongoing correction in the market to buy more of the cyclical names over time. We hope the Indian market escapes with a ‘shallow’ correction, as the market looks ahead to the post-pandemic recovery and reasonable medium-term prospects,” Sanjiv Prasad of Kotak Institutional Equities said in a note on Tuesday.

Prasad bought more weightage to Axis Bank and ICICI Bank in his model portfolio even as he cut it for HUL.

He believes news flow over the coming weeks may turn grim and test the market’s sanguine view of the pandemic and the economic recovery. While the current situation is not expected to get any better in the coming weeks, as a typical Covid wave takes around six-eight weeks to subside, investors may take comfort in the fact that rapid vaccination will ensure that a third wave can be avoided.

Brokerage Nomura Financial Advisory and Securities believes even at its current underwhelming rate, India’s vaccination drive can inoculate over 40 per cent of the population by the end of the year.

Nomura’s forecast does not take into account the approvals given by the government to vaccines produced outside of India. The entry of Pfizer and Moderna’s vaccines, which are based on a new technology and have proved highly effective in the US, the UK and Israel, could become a game changer.

The new vaccines could comfort investors about the prospects of economic recovery remaining steadfast this financial year.

The steady drop in the volatility index during the week following last Monday’s market crash suggests investors may indeed be shedding their nerves about the economy.

“We will buy. We will buy consistently,” Saurabh Mukherjea, Founder of Marcellus Investment Managers, told ETNow in a recent interview. He said high quality financial and auto stocks would be able to look past the short-term disruption caused by Covid-19.