How Stock Leadership And Returns In The Markets Is Fast Changing?

Investors are fast re-positioning themselves into stocks that will not destroy capital. In fact, for at least two years now, returns came from the banking stocks, while pharma shares were the clear laggards.

Pricing pressures from the US and frequent US FDA warnings meant that pharma stocks barely moved. Things have changed quickly over the last one and half months.

Returns from pharma stocks

Company name	Stock price on March 23	Current market price, May 5
Aurobindo Pharma	Rs 288	Rs 655
Cipla	Rs 375	Rs 611
Cadilla	Rs 245	Rs 338
Sun Pharma	Rs 343	Rs 468

Investors moving away from banking into pharma

While stock markets have recovered significantly over the last 45-days from their lows, the returns from pharma stocks have been much better when compared to any other space. Most pharma stocks have surged as investors continue to bet big on the sector.

The question that now arises is: would the rally continue? With pharma stocks having rallied a fair bit in the last many trading sessions, they have become expensive. There maybe a little bit more of an upside left. However, as soon as covid-19 cases start abating, the trend might quickly reverse. What might happen is that investors could start dumping pharma stocks all over again.

Fundamentally, some of these stocks have got a little expensive now. Hence, there is a possibility that the tide might reverse.

Banks could be hit by rising NPAs

At the start of the year, many investors were optimistic on banks that lent to corporates. In fact, banks like ICICI Bank and Axis Bank were the favorites. The Covid-19 infections has changed things very fast. Investors and analysts now expect both retail and corporate banks to be hit.

In fact, we seldom see a stock like HDFC Bank being dumped. On Monday, the stock fell as much as 7 per cent. Investors are almost certain that banks would be hit hard and it would reflect in rising provisions in the next one year. Of course, despite the worries over that investors, both domestic institutions and Foreign Portfolio Investors are heavily tilted in favour of the big banks. So, a sharp fall in the banking stocks may lead to some accumulation from these large investors.

However, in the next one year the going for some of these banks is going to be tough. Investors who can invest in banking stocks from a 3-5 year perspective, may eventually come out as winners.

About the author:

Sunil Fernandes is the Managing Editor of GoodReturns.in with 25-years of experience. Prior to this, he has worked with frontline newspapers and magazines including Dalal Street Investment Journal, Deccan Herald, Hindustan Times, Oman Economic Review and Gulf Times.