While markets have significantly corrected, investors need to exercise patience and focus on asset allocation and on stocks of companies that generate free cash flow, says B Gopkumar of Reliance Securities.
Diwali is a festival of hope and cheer for the people of India. It is a good time to make judicious investments. This Diwali is presented with a wonderful opportunity to invest in the equity markets.
The market has significantly corrected from its all-time high, valuations have come down and the major challenges on the macro front are abating.
While all these factors suggest that one should go all-in into equity market, but the reality is stock picking and sector allocation will be a very key factor in this environment.
There are a lot of stocks that have been beaten down severely and seem very attractive may not be the right ones as the current bounce could be ephemeral.
Political environment ahead is uncertain with three major state elections and general elections will grip the Indian market with high volatility in the medium-term.
Higher volatility means that the market may not see any significant re-rating from the current levels and valuation multiples are likely to persist or even decrease from the current level.
However, such market conditions provide great opportunity to accumulate high-quality stocks at reasonable valuations which in normalised conditions are perceived to be expensive that too with limited upside.
While the flight to quality is a consensus trade, the market is seeing an interesting trend reversal with value investing seeing a certain degree of a comeback.
Thus, exploiting the best of both worlds which is “quality backed by value” or “value backed by quality” seems to be the most apt strategy at this juncture. Asset allocation holds the key for retail investors.
Value metrics can be defined by simple PE multiples relative to the sector, while quality parameters can be defined by the financial strength of earnings over the last five years, management bandwidth and return ratios.
Our Samvat 2075 picks based on the following parameters:
• Strong earnings visibility over the next one year.
• Reasonable valuations.
• Sectors, which are set to turn the current macro situation to their advantage.
• High-quality management with healthy corporate governance.
Our largecap picks have a higher allocation towards the banking sector, as we believe they are well-placed to cash in the current liquidity challenges and going ahead gain pricing power to their advantage. The large banks with solid retail franchise will be the biggest beneficiaries.
The stock selection in IT, consumer and pharmaceutical sectors is based on “value backed by quality” theme. Our mid-cap picks are also based on a similar framework.
Our top five large-cap and five mid-cap companies which fit into the themes are:
Large Cap Picks:
Infosys, ICICI Bank, HDFC Bank, ITC and Sun Pharmaceutical Industries
Mid- and Small-cap picks:
Escorts, DCB Bank, NBCC India, Sonata Software and Engineers IndiaDisclaimer: The author is ED & CEO, Reliance Securities. The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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