Market up 48% from March lows; time to change strategy and rejig portfolio?

The thumb rule of investing is that one should often revisit the portfolio and take out the profit if the stock has reached its peak valuation.

A prudent investor cannot ignore the fact that the recent rally has brought many stocks near their peak valuation, experts say.

Investors can relook at their asset allocation and bring down the equity portion if it has exceeded the intended allocation.

"In case the equity portion has not been exceeded, investors can keep reshuffling their portfolio by part booking profits on stocks that have run up much more than the markets and parking that sum into sectors that are currently neglected and within that sector, look for the best one or two companies to invest," said Deepak Jasani, Head Retail Research, HDFC Securities.

"For investors who are woefully short of the intended asset allocation as far as equities are concerned, they can shortlist 3-5 stocks for staggered investing over the next 5-8 months."

As there is uncertainty over earnings and economic recovery, experts advise a defensive approach to portfolio.

"There is a sharp run-up in the market, primarily lead by Reliance Industries, FMCG and private banks. It would be advisable to have a bit defensive approach to the portfolio as the next few quarters' earnings may remain uncertain and cause volatility in the markets. Our model portfolio changes reflect a more defensive tilt to our portfolio positioning and a relatively better rural demand indicators against urban," said Hemang Jani, Head Equity Strategist, Broking & Distribution of Motilal Oswal Financial Services.

Sectors that can yield good gains

A great deal of how the market will look will depend on how the COVID-19 situation pans out. If the outbreak comes under control, investors will look at sectors that have fallen the most and not recovered as much to see whether they still offer value.

Auto, financials, oil & gas and metals are some sectors that could fall in this bracket, Jasani of HDFC Securities said.

"However, investors will have to be careful to check whether the pandemic has caused any structural damage to the stories of the companies in these sectors, and if yes, stay away from them," Jasani added.

Investors should stay away from aviation, hospitality, retail and other sectors that depend on higher mobility by people.

Jani of Motilal Oswal said he raised weightage on the IT and telecom sectors.

"We have raised the weights of IT and telecom further – 100bp addition each to Bharti Airtel and Infosys and 200bp addition to Tata Consultancy Services (TCS) and Hindustan Unilever (HUL)," Jani said.

"Bharti Airtel is now more than two times overweight against the benchmark in our model portfolio. We have also taken advantage of the recent sharp up-move in automobile stocks and replaced Maruti and Eicher Motors with Mahindra & Mahindra and Motherson Sumi, respectively. We have introduced Dabur into our model portfolio after our recent rating upgrade," said Jani.

Naveen Kulkarni, Chief Investment Officer, Axis Securities said his key investment themes included digital, staples, rural, large private banks and pharma.

Besides, export-based sectors may outperform the market.

"We continue to believe that these themes will still deliver consistent returns. The sectors that we do not like are capital goods, large-ticket discretionary, commercial vehicles, highly leveraged plays and microfinance," Kulkarni said.

Strategy for mid, small-caps

Mid and smallcaps have shown some decent gains. Analysts say if one compares the underperformance of the small and midcap indices with the Nifty since April 2018, then both these indices have scope to retrace even more.

"Midcaps and smallcaps are slowly coming back. Midcaps outperformed in the month of June, however, the July performance has been a mixed bag. As market volatility reduces and largecaps become more expensive, midcaps are likely to see improvement in the performance," said Kulkarni of Axis Securities.

"We do recommend increased allocation towards midcaps and smallcaps as valuations are reasonable and economic recovery will improve earnings visibility in small and mid-caps," Kulkarni added.

Even though there is momentum across midcap and smallcap basket, one needs to be selective while picking stocks.

"We continue to have a selective approach and continue to prefer companies in the consumption (Tata Consumer), non-lending financial companies like ICICI Securities, mid-cap pharma stocks like Laurus Lab, Ajanta Pharma, Alembic, etc. In mid-caps, we have added Coromandel and Gujarat Gas," said Jani.