Dinesh Rohira of 5nance.com said as we approach the general election of 2019, the volatility in a market is expected to trigger frequently and thus keeping investors on a knee-jerk reaction.
The need of a strategy to construct a portfolio is a prerequisite for any type investors, and it becomes essential traits during a volatile market as was seen in the last six month and especially when the market touched a fresh record high.
Indian equity market during the first half of CY2018 remained under pressure post imposition of tax on equity asset-class coupled with geopolitical concerns over trade war between two giant economy nations.
The major market indexes consolidated more than 10 percent from initial higher levels and continued with a subdued momentum for over 2 months.
The broader index also witnessed a prolong consolidation even at current phase with over 14 percent decline in the last 6 months. Further, a broad range of stock triggered a headline as several small & mid-cap companies declined over 40-70 percent, and correspondingly recalled margin to further deepen the sentiment.
Although, the headline index recouped from the lower level to gain about 6 percent in the recent period, however, the upward rally came from select-stocks, which didn’t vindicate broad-based rally.
The broader companies still continued to trade below their high levels despite the positive market momentum. Thus, given the current market trend and few important events lined up, investors should frame a strategy and approach as mentioned below –
Accumulate on a staggered basis:
A major concern during 2017-rally circled around higher valuation regime despite subdued earnings and thus keeping investor with cash rich.
Given a historical trend, higher valuation is unsustainable on the long-term basis, but the recent consolidation phase offers a few selective quality companies at a reasonable price.
Despite a revival and positive earnings growth, the price momentum remained muted for an extended period. Therefore, investors should deploy cash on a staggered basis to accumulate quality companies at discount and practice buy on dip strategy.
Higher Exposure to Large Cap:
As the market is expected to continue on a volatile trade setup until the 2019 general election, it will be prudent for investors to shift towards large cap companies to reduce huge swing in the portfolio.
Remain selective within large-cap companies with robust earnings growth in past and sustainable business model. With large-cap companies expected to do well in a current trend which is replicated by major index, large-cap companies should be a preferred investment.
Value buying opportunities:
The mid-and-small cap companies witnessed a staggering momentum during last year’s rally which took their valuation to an extreme level, making it substantially expensive for investors to buy.
However, this category of companies witnessed sharp correction ranging from 40-70 percent on the backdrop of reclassification of mutual funds followed by global selloff among others.
With this price correction coupled with a robust business moat of selective companies, investors should frame a strategy to chase for value companies with the sustainable business model on a long-term basis.
Event-based tactic:
As we approach the general election of 2019, the volatility in a market is expected to trigger frequently and thus keeping investors on a knee-jerk reaction.
On a contrary, a section of specific companies is likely to beat volatility without causing major damage to a portfolio. Investors should approach on building a portfolio with selective companies which is under the limelight of the government spending or reform agenda.
Choose a defensive sector:
The current rally in a major market index is contributed by few specific companies or sector rather than a broad-based momentum. With lack of immediate trigger auguring the upward momentum on a general level, an investor should add exposure towards defensive sectors or sector favoring the current market cycle to contain downside risk.
Apart from this, an investor should avoid falling prey for companies on the basis of short-term momentum, especially in mid-and-small cap companies. It is imperative for an investor to examine company ranging from corporate governance, past financial trend to sustainability in future.
