Invest in equities in tranches in FY 2018-19

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Published: April 6, 2018 12:04:30 AM

The most frequent question these days is whether we are in a bull market or in a bear market. It is natural to hear this question after the spectacular market fall towards the end of financial year 2017-18, bringing back unpleasant memories of 2013 or 2008.

equity, equities, markets, finance, fiscal deficitThe most frequent question these days is whether we are in a bull market or in a bear market. It is natural to hear this question after the spectacular market fall towards the end of financial year 2017-18, bringing back unpleasant memories of 2013 or 2008.

The most frequent question these days is whether we are in a bull market or in a bear market. It is natural to hear this question after the spectacular market fall towards the end of financial year 2017-18, bringing back unpleasant memories of 2013 or 2008.

2018 vs 2013

But, count on us… the current Indian market macro is far superior in comparison to 2013. Currently, India has reasonably healthy balance-of-payments dynamics (11 months forex reserves vs just six months in 2013); inflation is well under control, even after factoring-in the possibility of up-tick in FY19; positive real rates (Indian 10-year bond yield at 7.5% in comparison to inflation at 5%) unlike 2013 when India had negative real rates with inflation surpassing bond yields. Moreover, current Indian market valuations are at comfortable levels (close to long-term averages), in comparison to 2007 when valuations were elevated.

Our View

In that backdrop, we believe that India is much better placed now in comparison to 2007 and 2013. Headwinds have been building up in terms of slowing FDIs, widening trade deficit, tightening global liquidity with global central banks coming off their accommodative stance, concerns over fiscal slippage (indicating fiscal deficit at 3.5% of GDP for FY18) and political uncertainty. At this juncture, macros are precariously poised. One of the key foundations of the 2014-17 Indian bull market was political stability in India with single party majority after 30 years. However, uneasiness has been building up on this front, as some of the allies of ruling party are turning restless; and a few bypoll election results are keeping the markets guessing about 2019 (or earlier) election outcome.

Portfolio strategy

Equity: Equity markets, when weighed down by near term uncertainties and non-fundamental factors (e.g. politics), offer opportunities to build long-term robust portfolios at reasonable valuations. From an asset allocation perspective, remain within the strategic asset allocation. Break your investments into three stages where in the first tranche can be invested now; and remaining two tranches can be deployed as things unfold with several events lined-up such as elections, monsoons, and election results. Keep the dry powder ready as markets will offer opportunities to build equity exposures. We suggest investor portfolios to be re-assessed for misalignments from this perspective and investment horizon (along with return expectations) necessarily to be elongated to three years-plus. From a broader perspective, follow a portfolio approach:

– Core (large/large midcap ideas: 50- 60%)

– Satellite (mid/small/microcap: 30- 40%)

-Ancillaries (thematic plays: 10-20%)

Fixed Income

The US Fed has forecasted a steeper path for rates into 2019 and a stronger economic outlook and rising inflation have implied a more hawkish Fed. Two more rate hikes in 2018 is now a given (i.e. Fed rate @ 2-2.25% by end 2018). On domestic policy we do not expect any rate hikes until Q2FY19, unless growth picks up sharply. Focus remains on accrual strategies (high yield portfolios across MFs, PMS and AIF platforms) by way of capitalising on the current buoyancy in G-Secs to lighten legacy duration portfolios.

Extracted from Centrum Broking Report

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