Time to be cautious
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I have consistently remained bullish on the Indian markets over the last few years. The overall macroeconomy and socio-political environment favours India at this time. But all this needs to be taken into context of overall growth prospects, market sentiment and valuations.
For the medium-to-long term, I continue to be bullish about Indian markets. But it seems to me a time to be cautious. When everyone around you is making easy money, the urge to surrender yourself to FOMO and buy whatever is running hard is very real. But what experience has taught me is that when everything is too easy, it is perhaps the time to take a hard look at reality with a sensible and rational eye.
Avoid the Stasis Stocks
The current trend in the market is to buy whatever has not run up till now. Investors are sacrificing the quality of business, growth prospects etc at the altar of mean reversion.
Focus on buying good quality businesses instead. Because when the tide turns, even if it is for a short time, the poor-quality businesses find no takers and will give a sharp nosedive downwards, from which recovery becomes difficult. Remember if you lose 50% in a stock, it takes a 100% return just to get even.
Avoid the Market-Cap Trap
There is a lot of chatter about the market rally shifting from the SMIDs (small and mid-caps) to the large caps. Ignore this.
A business doesn't really care if it is a large, mid or smallcap. Keep your eyes on the key things - profits, growth, valuations, future prospects etc.
Be careful of IPOs
IPOs in the SME and now the main board are in a state of exuberance. WhatsApp groups are replete with GMPs of IPOs. And investors are applying to IPOs for the sole reason of flipping. The performance of a few good ones is blinding them to the fact that IPOs on the whole make less money than the market average over the long term.
The logic is simple. In an IPO, you are buying from an eager seller. And that is never a good idea.
SME IPOs are in a space now that to my mind is a bubble territory. I will not be surprised if we see some kind of policy intervention from SEBI or the exchanges that are put in place to curb malpractices in this space.
What to do now?
I do not expect the market to crash. I have zero forecasting ability and absolutely no clue what will happen in the near future.
As a strategy, periods like this are actually a great time to do and maybe even increase your SIP strategy. Invest more in small increments. Spread it over time. Maybe do a weekly or a fortnightly SIP in stocks of your own portfolio. Do it mechanically. Spread out your capital in all the portfolio stocks. Or rebalance where the allocations have fallen due to relative performance.
The other important thing to do is to weed out the poor businesses in your portfolio. Get into stocks which you understand, with a good management track record and strong earnings visibility.
Sectors I like
Even while we raise our cautionary stance, we need to be open to stronger business and market trends. I continue to like infra, cap goods, railways, banking & financials, select pharma and IT. Even though most of the stocks have run up a lot and are also fairly and more probably richly valued, they could provide reasonable returns over the next two to three years.
India is at the cusp of a transition to a stronger manufacturing economy and if that theme plays out, some of the stronger businesses in these sectors could have multi-year bull runs.
In Summary
Keep calm, avoid social media chatter and, most importantly, lower your return expectations for the near term and keep building your portfolio.