InvestorQ : As an investor I am confused because the Nifty and Sensex are making new highs but GDP growth is making new lows. What is the justification for this?
Aditi Sharma made post

As an investor I am confused because the Nifty and Sensex are making new highs but GDP growth is making new lows. What is the justification for this?

Answer
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Aashna Tripathi answered.
7 months ago


You are absolutely right in your contention that just a handful of stocks like TCS, Infosys, HDFC Bank, Reliance Industries and Hindustan Unilever have driven the Nifty to the 12000 level. In the last 1 year, 90% of the Nifty bounce has been supported by just 4-5 stocks. The big question is what should investors do under these circumstances? Here is a 7 point charter for investors at a time when the markets are being driven by just a handful of stocks. Here is how you can handle this situation. Of course, there is not much you can do because it is not in your hands. Here are some interest ideas for you to ponder over.

· Keep an eye on the stock and sectors that are really likely to lead the growth from here on. The big story is obviously the consumer story. Rising income levels in urban and rural areas combined with higher inflation means that the consumer companies are likely to be the biggest beneficiaries. They are likely to do well irrespective of how much the Nifty fluctuates.

· Focus on the representatives of the India story. The India story is still about growth and with GDP likely to grow at around 7.5% in the next year, the big beneficiaries will be the India story stocks. Therefore, you can bet on the private banks which are proxy for private consumption as well as stocks like auto and FMCG which are direct beneficiaries of the India story.

· This is the time to restructure your portfolio. The current situation is a big churn in the market. Investors are willing to pay a premium for quality. So an HDFC Bank or IndusInd Bank at 5 times P/BV may still find buyers but a PNB at less than 1 time P/BV will not have too many ready buyers. It is time to churn your portfolio and focus more on long term quality sustainers.

· Don’t lose perspective. Markets are highs are normally vulnerable and that is where you core portfolio allocation must come into the picture. Keep a portfolio driven allocation plan for various asset classes. Use these highs to churn some of your profits out and reallocation to more liquid holdings. You will at least have liquidity on hand when the market corrects and better opportunities emerge.

· Clearly draw a line between your trading portfolio and your investment portfolio. You can chase long term stories with long term ideas. But there are a lot of stocks that show momentum. It can be metals today, pharma tomorrow and IT the day after. You need to have capital and risk appetite to ride these trends. A pure buy and hold strategy may not really work in these markets so a more proactive approach may serve you better.

· It is time to look at mid caps but you must keep some caveats clearly in mind. Avoid mid caps that are over leveraged or where the capital base is too huge. They will be the most vulnerable in these markets. Stick to the focused plays and make them count. Take a long term view on your mid caps as they may not be short term bets with so much of negative press that they are getting at this point of time.

· This is the opportunity to smartly use derivatives. It is one thing for Warren Buffett to call them Weapons of Mass Destruction and another thing for you to entirely keep your hands off derivatives. This is the market when you must seriously take a dip into these futures and options. You can use them to hedge the downside risk, you can play the time value better using options and they can also become revenue generators for you. The potential is huge and they are not as destructive as they are made out to be if you use them with a greater degree of discretion.

Bottom line is that these issues like market levels are not in your hand and you must stick to your investment objectives based on your long term financial plan. In the past, Indian markets have been always ahead of the growth curve and even this time around the argument is probably that GDP growth and IIP growth will eventually catch up with the stock markets. In that case, the market overvaluation may not really be a concern for you.