Market stayed range-bound despite border tension…

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Political strategists believe that this geo-political tension between India and Pakistan can escalate further, market may remain watchful in the near-term with a mixed bias and assess announcements to evaluate further risk. This situation could be short-term in nature given the global diplomatic stand and strength of the country, not impacting the market on a real basis.

Investors have been risk-averse since the last one year. Today, due to price erosion many retail investors are considering to reduce exposure in equity and shift to fixed deposits or debt schemes. We believe that continuity in SIP, higher mix of mid and small caps stocks and schemes will provide better gain in the long-term. Interest rate in India is likely to reduce further by about 50bps in the coming two to three quarters which is negative for debt while positive for equity, fixed deposit is not a prudent advice today.

You can churn your portfolio over the next three to six months and increase the mix of mid and small caps. At the same time, you can reduce a few blue-chips which are very expensive today and may not continue in the long-term. A good way to identify a stock should be by categorizing them sector-wise with positive outlook since they will outperform the market in the future. Then sort stocks based on correction in price and valuation, as how much they have dipped from their peak and their five to seven year average. Stocks below or near its averages may be a good value stock currently. We have a positive view on sectors like banking, infra, cement, chemical, and oil and gas which can give above normal return in the long-term. It is possible that inflows in equity may remain muted for some more time given the current domestic and global headwinds.

Looking in-terms of valuation, a board index like Nifty500, about 60-65% of the stocks are currently below or in-line with seven years average valuations on trailing P/E basis, which is very attractive. Based on the above method develop a portfolio of high quality mid and small caps with a two to three years investment perspective. We can conclude that a majority of stocks have corrected well but a  few blue-chips and sectors like FMCG, consumer discretionary, chemicals and IT are on the higher side.

Currently, pledged stocks issue was highlighted due to two reasons; continued fall in mid and small prices due to which pledging has increased automatically and tightened finance situation of NBFC and banks. Specifically, stock issue increases when pledging goes beyond 50 percent. Currently we will have to be careful and take a call as per the leverage situation of the company in the future, if there is a possibility to moderate in the future with positive business outlook, this could be an opportunity to play accordingly with a risk.

Posted: 28 February, 2019

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