Optimism is the only reality
No one can plan for the future – much less invest successfully in it – without believing in the future. We don’t advocate hope for the future despite present reality, but because of it. Indeed, we maintain that optimism is the only realism, in that is the only worldview which squares with the facts, and with the historical record of our vibrant economy and our stock markets.
The historical record and statistics show that a diverse economic engine like ours has delivered despite a variety of global and domestic challenges, including political shifts and uncertainty. And we continue to believe that the dynamism of our economy and our unique position in the global economy will allow us to achieve good relative economic growth among the larger economies while also producing above-average earnings growth.
Capital Markets
Markets demand clarity, and we expect market volatility to continue in the coming weeks until a stable functional government is created.
Going into the election season, there was some uncertainty regarding the prospect of capital gains tax changes, which is a major concern for the stock market. And once the general election results are announced, markets will eagerly await clarity on this in July when the next budget is likely to be announced.
Finally, stock prices ultimately reflect corporate earnings and are slaves to them. And India's earnings growth has been strong, with NSE 500 companies reporting a healthy 14% YoY growth. So far, net flows have been favourable, but hereon, market trajectory will be driven by continued good earnings performance.
Money on sidelines/dry-powder
As a house, we had encouraged investors to keep some dry powder (depending on their objectives) given the magnitude of the event risk that general elections pose, and we have avoided FOMO despite the markets' strong performance in recent months. Stock prices currently have both good and unattractive traits.
P/E ratios are moderate to slightly elevated, business profits are substantial, and balance sheets are solid. On the other hand, there are geopolitical concerns and worry over the continuation of the previous government's policies. As a result, we propose to negotiate the transition from a current cash position to a neutral (fully invested) position depending on current and changing market valuations.
This is the most objective way to deploy money in an unpredictable market environment owing to a strong causal relationship between valuations and future returns.
- If valuations remain stable, allocations can be spread over the next 3-4 months.
- If prices moderate, deployment can be accelerated.
- If weakness in markets persists this week, then we advise allocating 25% of dry powder and staggering the remaining.
Existing portfolio composition: equity allocation
As advisors, we focus on capital-preserving tactical shifts. In other words, when prices in certain sections of the market are significantly higher than typical, it is sensible to reduce the allocation.
Based on our analysis of the relative valuations of large versus mid/small caps, we continue to favor large caps. We propose making these tactical tilts inside the stated strategic ranges for each of these market sub-sectors, specifically in the upper and lower bands of the defined strategic ranges.
