When economies reopen after lock down which sectors could see speedy recovery and why?

When economies reopen after lock down which sectors could see speedy recovery and why When economies reopen after lock down which sectors could see speedy recovery and why?

It is still not clear when the economy will get back to its normal pace. The various activities have started on a much smaller scale and it may take another couple of months before normal activity resumes. The big question is which are the sectors and stocks to benefit when the normal activity resumes in the economy. In fact, it is going to be broadly positive for the economy as a whole but a handful of sectors could see some real positive traction in the post lockdown days.

Oil sector could benefit from hardening crude prices

In the month of April, we saw Brent crude fall as low as $16/bbl. However, the price of crude has since picked up and is quoting above $30/bbl. Oil prices are still low compared to 2019 because there is a sharp contraction in demand and that has made successive supply cuts pointless. Also, the world is gradually running out of storage space and that is also threatening to force panic selling in oil. When normal activity resumes, the upstream companies in oil extraction and the downstream companies in oil refining could benefit. While upstream will gain from better price realizations, the downstream will benefit from better gross refining margins (GRM) and better inventory valuations.

Nothing succeeds like the consumer staples in India

In the lockdown period, FMCG companies are estimated to have seen a fall in sales to the tune of 30-35%. That is understandable. However, the pandemic has created fresh demand for hygiene products. Also, there is a lot off pent up demand for consumer staples and Indian FMCG companies could be the real beneficiaries.

Paints sector could see revival at multiple levels

Crude prices are still quoting at half the peak level of 2019 and that would mean lower input costs for paint companies. But the real push could be demand driven. For example, the commencement of production will result in a boost to construction activities and also production of automobiles. Both these sectors are major market segments for the paints industry. This will help in improving the profit margins of paint companies and also their top line. Paints could see a spurt in demand for the OEM market and also for the renewal demand market. That would work in favour of paints companies.

Higher data consumption is likely to benefit telecom companies

The Government order to stay at home and social distancing has given a major boost to the telecom sector. It is expected that even after the lockdown is lifted two changes could happen. Firstly, the lockdown and the WFH model will lead to a long term increase in the consumption of data. Secondly, most businesses are likely to incorporate a WFH model into their redundancy plan going ahead and that would entail higher per capita consumption of data. More importantly, customers are likely to be willing more for quality networks.

Expect pent up demand for retail

It is very likely that we could see a sharp pick up in the retail businesses because of an increase in footfalls post lockdown. While there is likely to be some initial scepticism about social distance in malls, that could get back to normal pretty soon. There would be a lot of pent up demand for retail products and a slew of movie releases could favour multiple stocks. Most of the multiplex stocks are down nearly 50% from their peaks and that could also help in price performance.

Hospitality sector could also get a boost

As business picks up and travel restrictions are loosened, one will get to see the return of demand for hotels; both premium and budget hotels. Demand for dining out activities will increase immediately and that could benefit the hotels and the restaurant sector. More that the activity of eating out, the real thrust will come from the need for social interaction and family outings. The Make in India could also lead to a stream of global business visitors to India giving a boost to the hospitality industry.

Banks and financials could drive the recovery

If there is one sector that can drive the recovery, it has to be the heavyweight financials. PSU banks may have their own issues with asset quality but quality NBFCs and private banks should be the first to take off. The focus will shift to high quality banks with low asset quality issues. That could be the sector to drive the alpha in the markets.

 

Disclaimer

The content in the above article is compiled from the publicly available sources and views and opinion expressed are for indicative purpose only and it should not be construed as an investment advice. Readers are advised to check with experts before taking investment decisions.

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