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Time to shift part of portfolio from outperforming stocks to some defensive ones

Given the sharp run-up and premium valuations along with multiple global concerns, we would suggest investors to remain cautious, said Siddhartha Khemka of Motilal Oswal Financial Services

October 30, 2021 / 03:14 PM IST

Indian market has risen almost 26 percent so far in this calendar year – sharply outperforming several emerging markets. The rally has been driven by strong liquidity, healthy corporate earnings and upbeat commentaries, falling Covid-19 cases leading to opening up of economies. Also, several government reform policies like production-linked incentive (PLI) schemes, relief for telecom sector, privatisation of Air India have been supporting market sentiment.

The broader markets have also staged a smart comeback with Nifty Midcap 100/Nifty Smallcap 100 gaining 46 percent/52 percent, respectively, in CY21. Lot of sector rotation was witnessed from outperforming sectors/stocks to undervalued/defensive plays.

Most of the indicators that we analyse on a monthly basis to track the progress in economic growth paint a robust picture for economic recovery. The e-way registrations, toll collections, mobility indices, and power generation have increased at a faster rate. India's Real GDP grew at a record 20.1 percent YoY in Q1FY22. The IMF has projected India’s GDP to grow at 9.5 percent in 2021 followed by 8.5 percent growth in 2022 – this would be the fastest growth among developed and emerging markets.

Compared to this, it expects global economic growth at 6.0 percent in 2021 and 4.9 percent in 2022. Given this high growth and large domestic demand driven economy, there is a strong interest among global investors to participate in the country’s long-term growth prospects. This is well reflected in strong FII inflows, which stood at around Rs 60,000 crore (including primary market activity) in CY21 so far.

Currently, the valuations are at elevated levels, which along with growing global concerns would keep markets in a consolidation mode. It would demand consistent delivery on earnings expectations. We expect corporate earnings to recover along with the underlying economy and progressively higher vaccination trends. Demand across sectors is coming back to normalcy faster than initially expected.

Also, balance sheets and cash flows have improved in FY21 as corporates tightened costs and deleveraged. We are at the first phase of the economic growth upcycle which we believe can last for at least next 2-3 years.

Given the sharp run-up and premium valuations along with multiple global concerns, we would suggest investors to remain cautious. However, as we expect stock/sector-specific momentum to continue, we are suggesting to shift part of portfolio from outperforming stocks to some of the undervalued stocks and sectors.

IT, Consumer, Cement, Capital Goods, real estate are some of the sectors which would continue to report strong numbers. Also with the opening up of the economy, we expect the travel, tourism and leisure segments to also perform well in times to come. The market performance has been driven by select large sectors which have done well so far. However now with valuations at premium levels, there is a scope for some of the undervalued sectors which can see some recovery in business as well as market interest. Banking and Auto are 2 such sectors that have underperformed the market so far – but have the potential to turn out the dark horse in the rest of FY22.

Investors should focus on asset allocation and build a diversified portfolio to navigate through any volatility or correction phase. The best strategy would be to accumulate good fundamental and quality stocks gradually, whenever market gives correction. The long term fundamentals remain intact and thus one should adopt bottom-up strategy. One should keep on reviewing his portfolio from time to time and churn it from overheated stocks to more comfortable names as per his investment style.

Disclaimer: The views and investment tips expressed by investment expert on are his own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.

Siddhartha Khemka
Siddhartha Khemka
first published: Oct 30, 2021 03:14 pm