With inflation looking to get under control and the fears of subprime crises melting there is a buzz amongst investors. The belief is that the stock market will take a surge again, especially after being range bound and negative for the past couple of months. But even when the markets have been range bound and even negative, the long-term optimism has been extremely strong. In such a situation, experts reckon that the stock market-related investments should dominate the portfolio construct.
The India situation will always remain positive, the fundamental factors are in place and one can expect strong returns in the next three to four years, says Bharat Shah, managing partner and CEO of ASK Investment Managers. Obviously, there will be dips during the journey, but the movement will be positive. ?The stock market has brought in $8 billion of investments from the overseas markets this year. The market holds well at a forward P/E in the range of 18(x) and 20(x), considering a 20% growth,? adds Rajagopal, head-equity, DBS Chola Mutual Fund.
Keeping this in mind, FE Investor asked experts in the business, including fund managers, brokers, financial planners and economists on what could be the ideal equity portfolio construct in this situation. The assumption was that a sum of Rs 50 lakh (reason to leave out real-estate) could be the amount that could be invested by a person who has a medium risk profile (ready to take a 30% loss on capital at worst) and would want returns over the next three years.
Growth drivers
Clearly, the focus most of experts had was on growth. And the philosophy is that sectors with strong growth rate will be the ones to win. Five years ago, when the wave began, there was a movement which was driven by value and growth. There was a re-rating on the valuations that further drove stocks up in the massive bull charge. Now, there is little value left, valuations are near high and growth will drive the market, reckons a research head with a foreign institutional investor, who prefers anonymity.
And the growth here would directly emanate from sectors that piggy-back on the growing economy. Infrastructure related sectors especially telecommunications, capital goods, real estate and construction seem to be the pick of most experts. However, a fund manager with one of India?s largest fund houses points out that while it is prudent to have 60% of the total portfolio in equity, there should also be 40% diversification in the equity portfolio.
And the Indian stock market offers the opportunity for diversification. Real estate stocks for one, are throwing up interesting opportunities. Though they have run up a lot in the past one year, simple numbers suggest that there is a lot of steam left. A report compiled by Enam Securities, a Mumbai-based stock broking firm estimates that earnings from the real estate sector are slated to grow at 33% on a compounded basis till 2010. The fact that the $12 billion market will end up being $50 billion, says a lot about the opportunity.
A significant exposure to real estate and construction is a must. ?According to us we would recommend telecom and infrastructure shares to be invested? says Kairav Shah, vice president, SRE Financial Planners. He adds, ?India is on its way to becoming a telecom superpower. Telecom subscribers have grown at a compounded rate of 31% from 1997 to 2006. The share of telecom in India?s FDI has also risen from 3-4 % to 12-15 % in the past 12months.?
There are others who believe that the telecom growth will now stagnate after the rapid growth and the sector does not offer too many opportunities. Capital goods sector is also seen to be amongst the obvious favourites.
However, the sector that shows tremendous promise and will also provide several opportunities for investing is the banking and finance sector. ?There is a relation between banking and infrastructure. The infrastructure companies require funds to grow and this will come from banks,? says Jaydeep Mehta, director, RJ Stock Broking. More than that, the banking and financial services sector has seen strong demand for funds.
Credit growth has been high at around 30% and, even if it slows down to 20%, there are huge earnings to be made. Then again, India has around 53 banks and the global trend is towards consolidation. Fund managers believe that there will be great opportunities coming in from banking consolidation. However, at the moment, the preferential skew is towards large sized banks. Though premature yet, clarity on holding companies for banks with subsidiaries in the insurance and mutual fund business, will unlock a lot of value for the banks.
Even the financial services sector is gaining rapid attention. Companies like Mahindra Financial Services, Reliance Capital have ambitious plans and have definite value to offer their customers. Even broking houses have built fundamental strengths in their operations.
Caring attention
While the growth sectors will whip the cream and will form the top layer, there needs to be a second layer that generates steady returns. And the pharmaceutical sector is one such. And there are others, who were top-rung and have now slipped a bit – the cement and technology sector.
Nothing wrong with these sectors; they remain buoyant and will keep prospering, says a fund manager. The concerns are over meeting the previously maintained earnings momentum. This is what makes us want to reduce our weightages on these sectors, he adds. Even in the retail sector, though there are not many opportunities here, clear earnings visibility is still a concern, hence it would be better to play it safe here, is the larger belief.
While building an equity portfolio, many experts mentioned the need of not going out and investing at one go, a mistake which many make. ?If you give me Rs 50 lakh now, I will keep it in a debt instrument that gives me assured returns. And I will move on to stocks only when I see value emerging,? says Parag Parikh author, stock broker and expert on behavioural finance. ?I am not saying that the market is overvalued, neither am I saying that it is not. One must invest only when ?value? in investing is evident,? he adds.
In a similar vein thinks Kairav Jhaveri, director Transcend Consulting. He says, ?Investors should buy in lots and not in lumpsum. For instance, investors can buy 10% of the target every month like an SIP. This will average the buy price in this volatile market and then the chances of upside potential are high.?
Small yet important
A small yet important portion of the portfolio should also be allocated to cyclical commodity stocks, especially in the metal sector. These companies bring in the zest while on a roll. Right now, there are positive trends emerging in the steel sector. With growth in automobiles and consumer durables being maintained, steel will find a lot of demand. And players have started hiking prices and will see a strong price momentum in times to come. There are opportunities in the ferrous metal segment also where zinc prices are expected to be strong over the next couple of years.
Similarly, a small yet important portion must be allocated to emerging sectors that have the potential to catch large investor fancy and provide strong returns. The agricultural sector has such a potential. Investments in the agri-sector are expected to run into several billion dollars as the nation with a rising population would require to be fed.
And then we have the contrarian sectors. These sectors typically perform when least expected and the portfolio could well prosper with a dose of these sectors. Here, fund managers point to the textile sector. While languishing in the ebbs for a long time, many companies have started shaping up, gearing to meet the challenge of the quotas system being abolished. ?The Indian textile sector has tremendous potential and it can beat China in this field,? said Akhil Gupta, senior managing director and chairman of Blackstone India, a part of one of the world?s largest private equity firms, when they bought out stake in Gokaldas Exports.
The real contrarians are the oil sector companies, especially the public sector units. These have been taking a beating on the basis of high crude prices in an administered price regime.
However, they have a long-term plan to reduce dependence on oil revenues and are extremely well managed outfits. Once oil prices ease or the government eases regulations, the sector will bounce back, believe many analysts.
So while this broadly looks what experts have to say, the fact remains that the world of equity investing is dynamic and equations keep changing all the time. Most experts FE Investor spoke with recommend a quarterly review of the dynamics to check if anything fundamental has changed. As they say, keep an eye on the ball.