Markets might be overstretched but their strength can’t be ignored, IT stocks may continue facing resistance

In the recent weeks stock market investors followed the buy on rumour and sell on news strategy when it comes to information technology sector stocks. Tier-1 IT stocks like Wipro, TCS, and Infosys have slipped after posting their quarterly results. IT stocks might continue to face resistance, said Vishal Wagh, Head of Research, Bonanza Portfolio in an interview with Kshitij Bhargava of Financial Express Online. Wagh, further discussed the strength in Nifty which might be overstretched at this point and also discussed valuations. Here are the edited excerpts.

We have seen investors sell IT stocks post results, despite a better than expected performance by companies. Despite the outlook being healthy for IT firms, why are people selling IT stocks right now?

The IT results are above expectations but the stock rallied far before it comes to the declaration and post results are out there is profit booking as the participants are booking profits. This is a very short term scenario. But on the higher side, these IT stocks will face resistance till the time buy-back process does not end. So, there will be sideways consolidation in the IT sector. 

India has been outperforming the emerging markets for a few months now, are markets overstretched?

Yes, markets are overstretched but further strength in it can not be ignored as many businesses are coming back to pre-covid status. The actual strength will be seen once things get normal. Till that time the rally may continue.

Private sector banks are done with the moratorium overhang now, the interest case is still on going but the government will step in, what are your views on the sector now?

The Interest case is still ongoing and the government has also shown intent to step in. As financials have major weightage in index too so, there will be impacts on indices too. Technically speaking, Bank Nifty is holding above 200EMA since the last four trading sessions which are bullish. The market is seeing strength in this sector, and fundamentals will develop with time.

What are your views on valuations right now?

At the historical highest PE, one can not say that valuations are cheap but at the same time Covid-19 shock has changed the perspective of the business. Cost cutting has taken place in the last six months, in terms of reduction in the workforce, work from home, virtual meetings, all this has had an impact on profit margin positively. To factor in all those things will take some more time to market till the time valuation may remain stretched. 

If stock markets are to fall dramatically in the near future, where should investors invest to dodge a bear attack?

To hedge one should prefer to shift in gold and uncertainty may continue due to the US election and geopolitical tensions with neighbouring countries. The correction in IT stocks is also creating an opportunity to go into the defensive sector. The pharma sector is looking attractive too.