The Indian market has had a good run but there is worry if the rally would continue. The market had some anxious moments ahead of the Budget, leading to a correction of about 8 percent. From that level, the Nifty50 is up by about 12 percent. This performance is a notch above the past Budget rallies.
Based on the previous Budget announcements, this time hopes were high of the government spending more. In the Budget 2021-22, the government proposes to spend big on infrastructure, healthcare and other segments and has complemented it with revolutionary measures.
The market’s impressive performance, not see in recent years, has triggered caution, assuming that the market is in an overbought region on technical analysis basis. It is also presumed that high buying was initiated by covering the shorts, which had built-up in the system assuming weakness post the Budget.
Today, caution is again the byword, with suggestions to shift funds from growth stocks and sectors to defensive themes, presuming that the cyclicals themes may not be able to sustain their performance.
Our understanding is that this sharp upside is not just due to short covering. It is supported by fundamental improvements in the country’s outlook due to upgrade in the government’s policy with reformist agenda, which will create sustained capital expenditure in the domestic economy along with FDI & FII inflows.
We see pockets that are very expensive and at the same time very inexpensive compared to the broader market. We also assume that this premium valuation is bound to stay during the year. Hence focusing only on valuations could lead to an incorrect concept of equity performance and impact the effective management of your portfolio.
So, it will be more about moving funds from expensive stocks and sectors to value-buying and into segments that are capable to benefit from the higher capital expenditure to be undertaken in the domestic economy.
To shift heavily to defensive sectors may not be the best way to perform in this highly growth economic phase. Yes, they can outperform the broad market during a period of correction. But this time, they are also exposed to correction if the broader market can face a change in momentum due to peak valuation and global uncertainties.
As of today, defensive stocks, like FMCG stocks, are also very expensive, so too much exposure is not suggested in the portfolio. Defensive is vulnerable to corrections but IT and pharma can do better on a medium-term basis because their global outlook has improved, increasing chances of further re-rating in valuation. Having said that, please note that based on their two to three years trend, their valuations, too, are on the higher side.
Profit-booking is also being suggested to increase cash in the portfolio and reduce the beta of your basket, assuming short-term correction. This is also based on the strategy of buying at dips.
During a correction, you can increase your exposure to cyclical sectors like insurance, PSUs, PSUBs, infrastructure, capital goods and consumer durables. The Budget has provided an upper hand to India, to perform well by lowering the risk of a K-shaped recovery, as foreseen in European Union. The theme going forward will be to buy companies that will benefit from a revamp in domestic economy and export opportunity.
The market may undergo some consolidation after the sharp gains made after the Budget. Even then, the change in momentum could be on a near-term basis because the long-end transitory benefit from reform will happen on a medium to long-term basis.
The broad undercurrent of the market may remain constructive, especially in the small and midcapsbbut global market will play an important role in deciding the short-term trend, which is getting mixed due to weakness in the European market and modest gains in the US market on hope of another fiscal stimulus.
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