Investing strategies for a range-bound market

US Fed rate hike, pick-up in consumption and growth in corporate earnings among key triggers

After a 23 per cent run since the presentation of the Union Budget in February 2016 till July-end, the markets entered into a consolidation phase in August with the Nifty50 index hovering at 8,550 levels in intra-day deals on Monday. Till date in August, the index has just lost 1 per cent as the markets digested the June quarter results of India Inc amid global developments.

Analysts say the next leg of the rally will be triggered by evidence of a pick-up in consumption and the progress of monsoon and growth in corporate earnings, all of which, will be visible over the next couple of months. In the absence of negative global cues - like the sudden rate hike in interest rates by the US Federal Reserve (US Fed) in its September policy meet, developments in China and Europe - the markets are likely to move in a narrow range.

Explains Tirthankar Patnaik, India Strategist at Japan-based Mizuho Bank: "The next trigger for the markets from a directional perspective, including for capital flows, will be the US Fed action on rate hike. The US central bank is sensitising the global markets to the possibility right now. However, the initial data from the US has not been too encouraging and there are concerns regarding growth. I feel that the rate hike could be deferred till December 2016. So till the time we see anything conclusive, the markets will trade sideways / range-bound."

Another cause for concern for analysts have been the rich valuations. However, they do maintain that the markets, from a long-term perspective, still look good and one should not sell out just yet.

"The Nifty is trading at a PER (price-to-earnings ratio) of 18.2x one year forward earnings. The last ten year average has been at 18.2x, which leaves very little upside for the market. The Indian stocks are also trading at 27 per cent premium to the MSCI Asia ex Japan valuations. However, we believe that India continues to remain relatively one of the better economies to invest in. We maintain the trading range for the market at 7,800 - 8,500 levels," says R Sreesankar, co-head for institutional equities at Prabhudas Lilladher.

Among the large-cap stocks, Sreesankar's top picks include HDFC Bank, Infosys, State Bank of India (SBI), Kotak Mahindra Bank, Larsen & Toubro (L&T), Indian Oil Corporation (IOC), Aurobindo Pharma, Britannia Industries, ACC, Glenmark Pharmaceuticals and Bharat Forge. Among the mid-caps, he likes Hexaware Technologies, Jubilant Life Sciences, Sadbhav Engineering, SpiceJet, VRL Logistics, NIIT Technologies and Navneet Education.

Given the good monsoon and the implementation of the 7th Pay Commission recommendations, analysts still suggest investing in the consumption-related theme. Patnaik, for instance, recommends buying consumer durable stocks, especially those with a rural focus.