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Equity Strategy For June 2020

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Equity Strategy For June 2020
Deepika Asthana - 03 June 2020

Markets constantly surprise us and remind us that even the best investors can find it challenging to accurately forecast short-term market movements. Much like the year so far, the month of May has also been anomalous in terms of equity market behaviours. Stock markets in India and globally defied the old adage, ‘Sell in May and go Away’ to notch up significant gains during the month. The market move has been particularly confounding considering the prevailing economic environment and the near-term uncertainty around economic recovery as well as a resurgence of the virus.

As we enter into June, there are a host of factors that market participants can evaluate to position themselves for the month.

Volatility to stay at elevated levels – uncertainty continues to prevail and global developments are likely to contribute to volatility in the markets.
Unlock 1.0 and the phased opening up of the economy could have a positive impact on investor sentiment.
If domestic flows increase and foreign portfolio investors (FPIs) do not turn aggressive sellers, then the March levels are likely to provide a strong support to the markets.
The resumption of economic activity and the various economic stimulus packages could have a positive impact on numbers.
Participants should also keep an eye on quarterly numbers and position their trades in-line with management commentary.
News of any progress around the development of a vaccine could be considered as a major positive for the markets.
US – China trade tensions have resurfaced. Any exacerbation of the same could destabilise the short-term recovery in the markets.

In the current environment, investors have an opportunity to invest in quality companies that are better positioned to weather the coming economic storm and are available at compelling valuations. Investors can look for quality mid-cap or small-cap companies that have the potential to garner decent market share and a strong balance sheet with high cash/minimal debt. However, investors must understand that this strategy will accrue benefits only in the long-term. In the short-term, markets will remain volatile and equity participation should be minimal and limited to large caps. Since the current rally is not really standing on fundamental legs, it is highly likely that a small blow could dislodge the entire up-move. Investors should try to avoid getting trapped and take investment decisions cautiously.

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