Benchmark indices have recovered almost 20 per cent from 52-week lows hit in the month of March. It is futile hazarding a guess on when coronvirus infections will abate. Investors will have to work on two scenarios, before they decide on buying a stock for their portfolio.
Scenario 1: Infections will abate and new medicine will be found quickly
There are already reports that Gilead's remdesivir is seeing coronavirus patients seeing speedy recovery and this has lifted global markets. One must admit that nothing is conclusive at the moment.
If things like that start materializing and there are hopes of a quick cure, investors should not be buying defensive stocks. If investors remain optimistic, they should be buying into banking, infrastructure and auto stocks. It is worth mentioning that investors should have a 3-5 year perspective.
Banking and auto may take time to recover, hence a 3-5 year perspective is a must. There would be no point in buying the more defensive stocks like Pharma and FMCG. Be rest assured that these stocks would unable to match the returns from the sectors mentioned above, if a quick solution is found for the covid-19.
Scenario 2: Prolonged battle with Covid 19
While it would be foolhardy to predict, one can surely analyze data. As we see currently, infections seem to have tapered, especially in India. Nobody can predict whether the trend would change.
However, if the pain remains, it would be best to buy into pharma stocks. We have seen a solid recovery already in almost all of the big pharma names including the likes of Sun Pharma and Aurobindo Pharma. If the covid-19 battle remains prolonged, it is highly probable that we would see a further upside in pharma stocks.
It is important for investors to invest in only the high quality names and larger companies.
Look for debt free companies
Apart from defensives, one can also look at debt free companies, which are cash rich. A classic example is Coal India.
Some of the debt free companies include Sun TV, TV Today Network, NMDC etc. This is only if scenario 2 is playing out.
All in all, at this stage it is extremely difficult to predict what to buy and when. Investors will have to use their intuition and data. Be rest assured, if the covid-19 infections vanish, like SARS and Ebola did, you are not going to get stocks at these levels. Afterall, good news and good stock prices, do not go hand-in-hand.