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As Nifty approaches 9000, what should be your investment strategy?


Posted on 09-Sep-2016 Comments  3

The weak labour data coming from the US has reinforced the view that the US Fed will not raise Fed Fund rates in September. Most likely, the rate hike may happen in December or, perhaps, in the early part of next year. That has resulted in a sudden love for risk among the Foreign Portfolio Investors (FPIs). Typically, whenever the US decides to hike rates most global investors tend to go risk-off. That means; they prefer to sell out of emerging markets like India and invest in safe havens like the US and Europe. With rate hikes being put off, the strategy will stay risk on; meaning FPIs will continue to invest in India. That shift was obvious as FPIs pumped in a whopping Rs.1440 crore into Indian equities on 06th September.

The important question is; how should investors approach this market with the Nifty just about 2% short of its life-time high. The easiest answer may be to sell out and sit on cash, but that would mean missing out on a variety of opportunities. Here is a rundown on 5 things that investors must focus on at these levels.


Indian equities still looks a good bet in the long run…


From a 2-3 year perspective, Indian equities still looks the most likely asset class to out perform. There are 3 basic reasons for this.Firstly, India is the only large economy in the world (GDP over $2 trillion) that is growing in the range of 7.5-8%. Secondly, oil prices are likely to stay low in the foreseeable future and that will continue to result in a massive transfer of wealth from oil producing countries to oil consuming countries. This will continue to positively impact operating profits margins and growth of Indian companies. Lastly, India has historically grown corporate earnings at around 13% CAGR over the last 25 years. But this has happened in phases of 5 years each. Since 2009, Indian corporate profits have been growing at under 3% and a combination of favorable factors is pointing to a mean reversion. Undoubtedly, quality stocks will continue to outperform in the coming years.


Be cautious on mid-caps, their valuations are getting edgy…


Mid-caps,by themselves, have a lot going for them. They are low debt companies, they are focused on their core competence and they are the first to get benefit of cheap commodity prices. However, the mid-caps have outperformed and given positive returns in a year like 2015 when large caps were rank under performers. The valuation gap between mid-caps and small caps is at a historic high. We cannot forget that mid-caps are much more prone to risks of cyclicality when global commodity prices start moving up. Also, we have seen in the case of auto ancillaries that mid-caps are over-exposed to few clients and this concentration puts their entire business model at risk. It is time to be cautious on mid-caps at current levels.


Have a mix of defensive and cyclical in your portfolio…


Cyclical sectors like auto, banking, infrastructure and metals are the sectors that carry all the excitement. Since the lows of February 2016, these are the cyclical sectors that have really outperformed the index.However after this 30% rally in 6 months, it is time to shift some part of your profits from cyclical into defensives. Remember, sectors like two wheelers, FMCGs, consumer durables are likely to benefit from the concentric growth triggered by greater rural spending,infrastructure investments, OROP, 7CPC etc. The current level of the Nifty is the right time for investors to seriously look at including more defensive stories in their portfolio.


Focus on domestic consumption rather than on global consumption…


Another theme for investors to focus on is whether the companies in question are focused on domestic consumption or global demand. Sectors like automobiles, FMCG, retail and banking are largely domestic India-specific stories. On the other hand, sectors like Information Technology, Pharmaceuticals and auto ancillaries are essentially global stories. We are likely to see the dichotomy between global and domestic plays widen in the coming months to the advantage of domestic consumption stories. Factors like a slowdown in China, weak economic growth in Japan, outcome of BREXIT and strong dollar are likely to keep global markets in a state of churn. Let your portfolio tilt more towards domestic consumption stories.


Lastly,don’t forget hedging and gold diversification…


A lot of traders and investors wonder why they should hedge. Remember,hedging not only protects your investment value, but also helps you make money in the process. Assume you are holding Reliance shares and you hedge by buying put options. When the price of Reliance falls,you can book profit on the put option. Most investors are so committed to holding on to their stocks that they ignore these moneymaking opportunities. Hedging helps you to protect your portfolio and also make money when the markets move the other way. At current Nifty levels, hedging can be extra profitable.


Lastly,do not ignore the power of gold. One can argue that gold has moved up sharply in the last 8 months. But that is not the point! Gold is a safe haven in a volatile world. Today there is geopolitical unrest in West Asia, Middle East, Central Europe, South Asia and Russia. With many of these areas being oil rich, any strife in these areas can be a boon for gold prices. Over the last 8 years, central banks the world over have been printing money aggressively. This has made many currencies worth a lot less than what their exchange rates reflect.Under these circumstances, gold as a currency assumes a lot of importance and deserves an allocation of at least 10% of your overall portfolio allocation.

The moral of the story is to spread your risk at these levels. That is not to take away from the fact that Indian equities will continue to be an attractive asset class in the coming years.

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Praveen Kumar

Posted on 9/10/2016 12:47:15 PM

Nifty almost trading near all time high levels so investors should cautious at this levels nifty is trading at over bought levels. Its time to book profits at current levels. But i should invest in some sectors like consumer durable and FMCG for better returns. Once nifty breaks all time high of 9100 levels should go for fresh buying in other sectors.

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Thangarasu

Posted on 9/10/2016 1:39:38 PM

Good info. Better to Hedge 50% of the portfolio.

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sukanya

Posted on 9/10/2016 1:53:43 PM

As it is said, fundamentals coincide with technicals. Techically Nifty is at the stage of completing its long formed inverted head and shoulders pattern and hence it looks better to diversify as suggested above

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