Portfolio Strategy: Focus on a bottom-up approach for superior portfolio returns


Domestic equities rallied around 12-13% from the March 22 low, supported by diminishing global geopolitical issues, cooling crude oil prices from highs and substantiated slowing REIT outflows through entries from national institutions. The focus will likely be on the upcoming Q4 FY22 earnings season and how domestic demand trends will shape with the ensuing wedding party season.

We believe investors should focus on a bottom-up approach for superior portfolio returns. India Inc. is expected to face significant headwinds in terms of margin pressures and potential near-term demand disruptions. Therefore, range-bound movement in the index is expected, providing an opportunity to identify emerging leaders within the sectors.

Strong exports of information technology and engineering, a normal monsoon, an upcoming festive season, and improved farm incomes due to better achievements can improve the ability to absorb macroeconomic shocks (due to rising crude oil prices) in the short term.

Stock valuations are now trading at reasonable levels (close to the five-year average P/E ratio for Nifty50). We prefer companies that have the ability to be more resilient in managing their gross margins alongside industry-leading growth. Consensus EPS estimates for Nifty50 have remained unchanged in recent years as downward revisions to consumer company earnings due to gross margin compression are likely to be offset by increases in commodity producers’ earnings. in sectors such as metals, oil and gas.

We remain positive on large private sector banks within the financial space as much of the asset quality issues are behind us while the focus on credit growth takes center stage. We also prefer life insurance companies given the longevity of premium growth in India. Other favored sectors are healthcare companies which are increasingly focused on specialty drugs, telecommunications for their better pricing power and chemicals with strong export tailwinds. We are neutral on IT given high valuations, Autos due to rising input cost pressures and Industrials & Infrastructure where we expect investment activity to lag. private.

We recently downgraded the consumer goods sector to an underweight with a negative bias on consumer staples, food and paints. FMCG companies are likely to face headwinds in terms of slow rural growth, sharply rising raw material costs and consumer downgrading.

We remain bullish on India’s long-term story as fundamental fundamentals continue to improve. Intermediate volatilities may provide better opportunities for investors to increase equity exposure or realign portfolio positioning. However, holding crude oil above the $100/barrel mark could present a challenge to fight inflation and act as a risk to fiscal calculations and the acceleration of rate hikes by the Fed is likely. to pose a risk to equities in global emerging markets, including India.

(The author, Mitesh Dalal is Director and Chief Investment Strategist, Standard Chartered Securities (India) Limited)


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Don F. Davis