Time to build a good portfolio

Bar chart made by hand from toy blocks on white background isolated on white background.

The message in my previous letter was to ‘invest cautiously’. The need for caution remains; but market valuations, particularly in some pockets, have turned attractive. This warrants a change in investment strategy. The time is now favourable for accumulating high-quality stocks with a medium to long-term perspective.

It is important to keep in mind the fact that the global macro context continues to remain highly uncertain. The war in Ukraine continues and consequently the prices of crude, natural gas and commodities like edible oil remain elevated. Inflation and monetary tightening by central banks continue to be the major macro headwind for equity markets, globally. The fact that central banks are tightening in the time of global growth slowdown is the most worrying part. The Fed hiked rates by 50 and 75 bp in the last two policy meets. Another 75 bp rate hike is expected in July. RBI followed the 40 bp rate hike in May with another 50 bp rate hike in June. More rate hikes are on the cards.  

Globally markets have corrected. Nasdaq and S&P 500 corrected 35 percent and 21 percent respectively from their peaks. Nifty corrected 18 percent from its peak. Corrections in the broader market have been steeper and a lot of froth have been removed. Corrections have made valuations reasonable and in certain pockets attractive.  

It is not difficult to identify the sectors to invest. Relentless FII selling have depressed the prices of financials even when their fundamentals are improving. So, financials particularly leading banks should be the top pick. But returns from financials might take time. They will stage a smart recovery only when FIIs stop selling. So, investors will have to wait with patience. But handsome rewards are certain.

Other sectors that look promising are IT after the recent sharp correction, telecom, autos, pharmaceuticals and other export segments. In fact, blue chips across sectors can be bought for the long-term. FMCG will be a good hedge in these difficult times.

In July, the market movements will be influenced by the Q1 results. Metals will report poor earnings on the back of crash in prices. Cement, consumer durables and pockets of FMCG are expected to face margin pressure. Financials and IT will report good numbers.  The Q1 results of cement, consumer durables and metals are likely to disappoint.

Uncertain and difficult times are the best to build a good portfolio. History tells us that wealth is created by buying high-quality stocks and remaining invested for a long period. Since there are too many headwinds and uncertainties now, it is possible that markets may again correct. But this is the time to build a good portfolio of high-quality stocks through calibrated buying. Investment in the mid and small-cap segment may be made, ideally, through SIPs in mutual funds.