With the Sensex again nearing 28,000 points, investors can make good returns with a one-two year horizon.
Retail investors in stock markets can take solace from Brexit.
Before the event, S&P Sensex’s one-year returns stood at -4.8 per cent. Since Brexit, the Sensex has surged five per cent.
Though the returns, on an annualised basis, are still in the red (-2.46 per cent), losses for investors have come down substantially.
The rally has been broad-based. Except for telecommunication and information technology (IT) indices, all sectoral indices are up.
Among these, S&P BSE Metal Index, S&P BSE Realty and S&P BSE Basic Materials have been the best performers and were up 15.20 per cent, 12.53 per cent and 12.18 per cent returns, respectively.
With the Sensex fast approaching 28,000, a level reached almost a year back, retail investors would be wondering if it is a good time to buy into this rally, be aggressive or wait.
Experts, however, have a word of caution.
“Yields have collapsed globally and there’s excess liquidity. Part of this money is flowing into India. There are also expectations that earnings will pick up in the last two quarter of the current financial year. However, the fundamentals have not changed. At the current levels, the valuations are above average and if the rally continues, stocks can become very expensive,” says Anup Maheshwari, executive vice president, head (equities and corporate strategy), DSP BlackRock Mutual Fund.
India’s growth story, however, remains strong and data indicate things can improve from here.
“Petrol and diesel volumes on an average are up seven-10 per cent in the past five-six months. Cement volumes have started improving in the period. The number of power units consumed has started to show improvement,” says Sailesh Bhan, deputy chief investment officer, equity investments, Reliance Mutual Fund.
He feels that investors can make good returns with a one-two year horizon.
Corporate numbers should improve in the last two quarters.
“Companies should see an increase in demand during the festival period, and as the base was low last year, earnings should improve,” says Bhan.
For equity investors, therefore, the core of the portfolio should have companies that focus on domestic demand, except for telecommunication and aviation.
Many of these companies fall under defensive bets. Most funds are reducing exposure to companies that are dependent on foreign markets for earnings, such as IT firms.
Fund managers suggest that right now, investors should continue to avoid cyclical stocks.
With the markets expected to remain volatile in the short term, keeping an aggressive portfolio could hurt. Opt for large-caps and market leaders, they say.
As India’s economic growth picks up, investors can look at a mix of sectors driven by consumption and those that do well when an economy grows.
Most fund managers are excited about domestic consumption.
Sonam Udasi, fund manager at Tata Asset Management, says that the fund house is also looking at building products, cement, sanitary ware makers and tile companies.
Maheshwari feels that there are also good opportunities in select public sector units and utility companies.
In addition, DSP BlackRock is also looking at oil marketing companies and pharma. Reliance Mutual Fund is betting on transmission and distribution companies in power, banking (including corporate and retail players), road construction and businesses in defence space.
“As the monsoon has been normal until now and the Seventh Pay Commission would boost demand, we are currently looking at private banks, non-banking financial companies, and auto and auto ancillary,” says Jinesh Gopani, fund manager at Axis mutual fund. In addition, other fund managers are also looking at companies dealing in high end plywood.
In the current market scenario, investors need to increase their allocation to large-cap stocks.
Diversified funds, which change allocation between mid-caps and large-caps depending on market conditions, have also increased allocation to bigger businesses.
“We have increased large-cap exposure to 65 per cent of our portfolio. At present, large-caps offer better value than mid-cap stocks,” says Gopani.
Fund managers say that mid-cap valuations look more expensive and one has to be very selective when investing in these.
Many of the sectors that fund managers have suggested are defensives - which include consumer, pharma, and utilities.
These will not only give you growth but also help protect your portfolio from volatility, as these are generally considered more stable. Investors can keep these companies as the core portfolio and can invest up to 50 per cent. The remaining can be a mix of other sectors.
Currently, money is chasing companies that have the potential to grow faster, and you might feel that valuations of some stocks are stretched.
But, the volatility also offers opportunities to buy. On market corrections, start adding them to your portfolio.
When buying stocks, especially ones that tend to do well during economic growth, opt for those that don’t have high debt on books.
Within these sectors, there are companies that earn majority of their revenues from international markets - those in pharmaceutical and automobile ancillary, for example.
Focus on the ones that earn a majority of their income from domestic markets.
As foreign investors are significant buyers in Indian stock markets, global events are increasingly playing an important role in its rallies and corrections.
This has been evident during China’s economic slowdown and the Brexit. How these will affect Indian markets is difficult to predict.
Investors’ focus, therefore, should be on parameters that they can gauge - companies’ performance and their growth potential.