Cautious optimism as stocks race to new peaks

November was a festive month for Indian equities, with the benchmark Sensex/ Nifty both hitting new record highs, led by multiple factors. A rally in banking and financial stocks, strong macro-economic indicators, better-than-expected Q2 earnings, record FII inflows and positive news flow around the COVID-19 vaccine all contributed to the good cheer.  In all, the Sensex/ Nifty soared by 11-11.5% during the month.

The party continues this month too. Benchmark indices continue to show lot of strength even when the global cues aren’t favourable. Markets seem to be in a mood to end the year on a happy note. However, the mood has not been so upbeat among the retail investors lately.

The sharp rally has taken everyone by surprise. Most investors could not effectively participate in the rally. Either investors did not invest fully at all or bailed out early and missed the last 100-1500 points rally in the Nifty. Generally, investors have cut their positions and are sitting on substantial levels of cash -- waiting on the side lines for a correction.

The rising outflows from the equity mutual funds also reflect the underlying cautious approach by adopted by the retail investors. The trend is similar across many portfolio management services (PMS) too. In addition to the sharp rally, the retail investor outflows can be partially explained by the fact that returns in many investment products have turned positive after going through a deep cut early this year. So the general tendency is to take the money off the table.

But the dilemma facing retail investors today is lack of investment opportunities. Equity markets appear overheated while the returns in the fixed income space (especially bank term deposits), gold and real estate are not attractive at all.

Given the lack of investment opportunities with reasonable returns, it might not be prudent to completely exit equities as an asset class. A better action plan could be just to skim the profits from the equity investments and let the capital remain in equities. Moreover, the existing portfolios would also require some fine-tuning if not complete restructuring at the current level. The strategy could be to partially shift some of the exposure to value picks – stocks with reasonable valuation and decent margin of safety. In addition, some individual companies that are not among the early gainers of the economic revival cycle could also be considered. We see comfortable valuations in many of the public sector companies in energy, engineering, power and among banks.

Second, the focus should be on gradually accumulating evergreen companies that have a proven growth track record and given consistent returns to investors. The consistent compounding stocks that we like are: Asian Paints, Kotak Bank, Divi’s Labs, Infosys, Titan, SRF.

In short, adapting to market conditions is better than exiting completely and trying to time the markets. Time and again, we have seen that it is very difficult to time the markets. A case in point is the huge rally since April this year--many investors missed out on the bulk of the rally. Second, it is not easy to deploy cash during corrections due to all the negativity and fear around. So the mantra to success could be to take home some profits, restructure your exiting portfolios and accumulate evergreen stocks systematically.