Equities look tempting, but stay guarded
Nov 04 2012 , New Delhi
Reorient your existing stock portfolio, diversify into debt assets, gold, realty
Stock investors tend to feel the pinch easily. After three years of slump in stocks, as regular market participants get desperate for good times with all sorts of bullish projections, there will be one class of investors ruing the missed opportunity of not having bought stocks at their lows and another class itching to load up on stocks at the first opportunity.
What makes it tempting is the fact that many stocks are going cheap after repeated bear hammerings. That is now the biggest argument in favour of buying stocks. Also, the fact that the interest rate cycle has shown visible signs of easing, overseas investors have returned to repose their faith on the India story and that the government has tried to address some of the macro-economic concerns give market analysts the raison d'être to declare better times ahead.
“The current situation presents a tactical opportunity in equities, not to be missed. With the improvement in business sentiment and big money flow into equities, there is a case for expansion of the trading multiple (read PE) from 13.5 to 14 times FY14E earnings to around 15. This would translate into Nifty and Sensex targets of 6,300 and 20,000, respectively,” says Amar Ambani, head of research at IIFL.
Ambani cites signs of abundant liquidity in the global market, comparatively low valuation of domestic equities versus their historical average, low risk of a bubble in commodities, improveme-nt in current account deficit, an eminent rate cut and the government’s new-found activism as reasons behind his bullishness.
Some other analysts, more grounded in their views, caution against going gung-ho on stocks yet, as they feel it will take a lot of time for the growth momentum to come back to the economy and a lot of situations or problems are still there with no signs of easing. India Inc’s bottomlines are being hit for all possible reasons — drop in demand, high outgo in interest costs, margin pressure, competition for market share and lack of capacity addition.
This means a 100 basis points rate cut or improvement in consumer confidence alone can’t change things overnight. The revival, from all indications, is going to be a long-drawn process.
And then, there is politics. With a series of state elections in the run-up to the 2014 general elections means political uncertainty will loom over policy moves, thus creating potential roadblocks for the economy.
Still, there is a case to raise your bet on equity. For, equities are the lead indicator of an economy, and some early signs of an economic revival are showing. But while doing so, you may need to look at overhauling your existing portfolio, instead of simply adding a few more stocks to it. For, the business matrix of the domestic economy has undergone a change over these years; set patterns have got altered, fortunes have changed for industries and industry leaders, and new heroes have emerged.
Overhauling would mean reviewing, reorienting and renewing your portfolio; review its recent performance if you have kept it dormant all this while, reorient it by taking into account the new dynamics of the economy, and renew it by getting rid of the non-performers and buying into ones that show more potential.
Also, one must look at not just sectoral trends, but also at key business fundamentals like existing debt and cash flow patterns of specific companies before investing in them. For, within a sector, while one basket of stocks may be showing good prospects, another could be smarting under pressure due to factors like high interest cost, loss of market share or other reasons.
Concentrated bets in a specific sector can be risky. Diversification is key. For, it will take a while for sectoral leaders to emerge and till then several sectors may run up together. “I think the time is to adopt a barbell strategy, which has a mix of defensives and cyclicals. Moreover, one can maintain a stock-specific approach as individual stocks may behave differently from the broader market,” said Ravi Malani, head of equities at Barclays.
Following set patterns can take you the wrong way in a market that itself is trying to find its feet. When the talk of the town is cyclicals, you would still find money flowing into defensive sectors. Investors are ready to overlook stretched valuations as long as the cash flow situation looks promising.
“Valuations in the defensive space, especially in the consumer staples sectors, are quite rich. However, the growth prospects, especially in pharma and consumption-oriented sectors, continue to be strong. These sectors have strong balance sheets and healthy cash flows. Hence, they continue to command premium valuations,” Malani points out.
Don’t go too heavy on stocks. The stock market’s fortunes are tied to too many factors beyond the domestic economy. In fact, the market rally we have seen since June has been attributed entirely to the global liquidity, which means any disturbance in the fund flow dynamics can play havoc with your stocks here. So, it makes better sense to have equal weight on risky and risk-free assets. A little exposure to gold and even real estate would keep you in good stead.
Lastly, plan for the long term and don’t expect too much return. Whatever be the projections for the equity benchmarks, the fact is that the equity market is unlikely to go back to those good old days of 30 per cent-plus returns. Also, volatility is going to remain a part and parcel of equity play, which means a goal-based investment in equity might potentially leave you exposed to pain instead of gains. zz