2019 was “a year of dissonance” with the economy and equities sharing an inverse relationship. Nifty50 hit an all-time high while GDP growth clearly witnessed a slowdown. Interestingly, broader markets witnessed a dry spell while a few large caps pulled the market upwards. Government reforms in the form of the corporate tax cut and IBC did set the tone for the future but failed to rule the markets in the medium-term.
ICICI Direct Research in its report pointed out four vital market strategies that an investor needs to keep in mind before building a portfolio for the next year.
1. Keep an eye on quality, which commands a premium valuation
The brokerage in its report said that it expects the Nifty constituent additions such as insurance, AMC etc to drive up the overall multiples of the index. It believes that quality stocks will command premium valuations pursuant to their consistent growth and high return ratios matrix, justifying the higher P/E multiples at index level sustaining, going forward.
In the case of Nifty rally, the report said, “Nifty looks expensive on both trailing as well as one-year forward basis. Thus, it is being observed that forward P/E multiple at the Nifty is inversely proportional to interest rate trajectory and directly proportional to earnings growth. With both levers at play, we expect P/E multiples of the Nifty to sustain amid an earnings recovery along with a downward sloping interest rate cycle.”
2. Don’t keep an index specific approach
The report very clearly indicated that the large caps this year outperformed broader markets amid liquidity issues with the IL&FS crisis and other corporate defaults over the past 18 months. Only quality companies in midcaps and large caps have outperformed the markets, which will continue to stay. Thus, believe in the quality stock selection approach rather than an index specific approach.
3. Avoid bottom fishing in beaten-down stocks
According to the firm’s research, most companies do not suffer from only one of the weakness traits but rather witnessed a combination of two or more of the below-mentioned fundamental weakness signals.
“Empirical evidence on stock price recovery post a significant decline leads us to the believe that bargain hunting in such beaten-down stocks would not be a credible strategy as the recovery of such stocks to earlier levels is rare. During the last eight years, correction of 60 percent or more has hardly resulted in those stocks regaining their previous life-time highs”, the report added.
4. Buy PSUs only if they dominate their sector
The brokerage firm in its report advised that the investment in PSU stocks should be made selectively and not via a basket approach as the broader PSU index has underperformed the BSE Sensex over a period of time.
According to the report, PSU companies with dominance and a strategic moat in sectors like banking, logistics, gas, defence, etc. can create value over the medium to long term.
Historically, PSU companies with a turnaround in business cycles and with stable business growth have created value for investors.
A successful strategic disinvestment/privatization of a large PSU company may lead to a re-rating of dominant PSU companies with strategic moats and should be watched carefully, added the report.