The year 2018 started with the mid and small cap reigning only to lose ground to large caps as the year progressed. We believe the year 2019 too will be very interesting given that general elections are just around the corner. Currently, we believe, that markets are neither expensive nor cheap but fairly valued. We believe there is plenty of opportunity through stocks that are available at attractive valuations and hence focus is on individual stick picking for better returns.
Quite a few uplifting factors are keeping the markets upbeat. First, crude oil has dropped significantly, greatly reducing pressure on the current account and fiscal deficits. The rupee has turned around from Rs 74 to the dollar to Rs 70.4 now. Bond yields are coming off, lowering the interest burden on the economy. Macro figures are once again showing signs of financial stability.
We believe the equity markets are likely to be volatile in near to medium term. This is based on historical data which shows that election years tend to be volatile for markets in general. In the past, during all the key election years (2004, 2009 and 2014), markets have provided investors with intermittent opportunities to invest. In such phases, the best investment strategy has been to use the systematic investment route to accumulate equities.
Once again, we believe 2019 is the year to systematically accumulate through SIP and STPs. This is the time when investors should stay put, and systematically invest through the year, keeping emotional undertones at bay. Across market cycles, it is seen that an accumulation phase comes as a precursor to a bull run. Therefore, it is important to be patient and stay invested throughout this phase to make outsized gains in the likely ensuing market uptick. For instance, from 2010 to 2013, stock markets were largely range-bound and even meandered lower. But, for those investors who held their ground and stayed invested based on conviction, the best returns came in the years 2014-17 when stock markets entered a bull phase.
Amidst all these there are a few factors that investors need to watch for; one would be the US Fed’s stance on interest rates. We believe that a meaningful rally in Indian equities is likely only when the US Fed will be done with its tightening. Also, that is when the accumulation cycle is likely to end, as well.
Hence, the current investing climate is conducive for investors to initiate or continue with their systematic investing into equity assets such as small-caps, mid-caps and value funds. Yet, again when making lump sum investments, balanced advantage funds and equity savings funds should be the preferred vehicles. This is because such categories of fund have exposure to both equity and debt and hence provide a margin of safety if things get choppier. In terms of themes, special situation and benefitting out of volatility are the themes we are positive on.
In debt, we are positive on low duration funds (investing in instruments with maturity in the range of 1-3 years) which can mitigate interest rate volatility and accrual schemes which can capture the current elevated yields and dynamic duration schemes which can benefit from volatility.
S Naren is ED and CIO, ICICI Prudential Asset Management Company.